Double entry bookkeeping Flashcards
What three principles are double-entry bookkeeping based on?
Dual effect principle
Separate entity principle
Accounting equation
What is the dual effect principle?
every transaction
two effects
debit/ credit entry
two equal and opposite effects
What is the separate entity concept?
separate from owner
personal money = Captial owed
money taken out = drawings reduce capital
What is the accounting equation?
assets = liabilities + capital
assets - liabilities = captial
What would increase the owner’s capital in the accounting equation?
profit
What would decrease the owner’s capital in the accounting equation?
drawings
What would the accounting equation be when taking profits and drawings into consideration?
assets - liabiltiies = capital + profit - drawings
What is an asset?
value controlled by business
tangible physical items
intangible items
What is a liability?
obligation to something of value
result of past transactions
What is equity?
residual interest
after wound up + assets sold + liabilities paid
paid back when ceases
What is income?
the inflow of economic benefit
e.g. sales revenue
What is an expense?
The outflow of economic benefits
purchasing goods/services
How does a business keep track of sales earned, purchases and expenses incurred?
records in an accounting system
What is the order of recording the transactions of a business?
business transactions business document books of prime entry ledger accounts trial balance
What is a trial balance?
list of ledger accounts
What are the books of prime entry?
day books
What is a sales day book?
sales invoices - given period
What is a sales returns day book?
credit notes - given period
What is a purchase day book?
purchase invoices - given period
What is a purchase returns day book?
supplier credit notes - given period
What is a cash book?
cash receipts and payments
bookkeeping system
prime entry
What are the discounts allowed day book?
not deducted from the invoice
conditional basis
What are the discounts received day book?
not deducted from the invoice
purchases daybook
What is the petty cash book?
petty or small payments
systematically
What is in the general ledger?
ledger accounts - transactions
What is the subsidiary ledger?
details behind entries
individual receivables/payables
What is the golden rule in double-entry bookkeeping?
debit = opposite credit
What are the steps for balancing off a ledger account?
step 1 - higher total - both debit and credit columns
Step 2 - Balance carried down
Step 3 - Balance brought down
What must the trial balance show?
debit balance total = credit balance total
Steps for preparing a trial balance?
Step 1 - balance off each ledger account
Step 2 - balance - debit/ credit balance
Step 3 - Total debit and credit balance
What is the purpose of a trial balance?
check on double entry
basis:
extended trial balance
financial statements
