Recording and summarizing transactions Flashcards
The double entry system
-System of keeping accounting records that recognizes the dual nature of every financial transaction expressed by the basic accounting equation.
(Assets = Liabilities + Owners’ Equity).
-In this system, every transaction is entered twice in the account books—first, to record a change in the assets’ side (called a ‘debit’) and, second, to mirror that change in the equities’ side (called a ‘credit’).
-All increases in asset accounts are typically shown as debits whilst all increases in liabilities and owners capital accounts are shown as credits.
-Revenue items will also have credit balances since
revenue transactions result in increases in owner’s
capital (or equity).
-Conversely, expense items normally have debit balances since these transaction result in decreases
to owners’ capital (or equity).
The extended accounting equation
and debits and credits
Debits and credits
Assets + Expenses= Equity + Revenue + Liabilities
Debit items Credit items
The accounts for double entry
Each account should be shown on a separate page in the accounting books. This is the layout of a page of an accounts book:,
(look for it in slide)
Rules for double entry book-keeping
when Assets increases we debit account
when Assets decreases we credit account
When Liabilities increases we credit account
When Liabilities decreases we debit account
when Capital increases we credit account
when Capital decreases we debit account
Balancing off accounts
-Balancing of accounts is the process by which we ascertain the net balances attributable to each account at the end of an accounting period.
-The objective is to prepare final accounts for the period that has just ended.
STEPS
-Add up both sides to find out the totals.
-Deduct the smaller total from the larger total to find the balance.
-Enter the balance on the side with the smallest total. This now means the totals will be equal.
-Enter totals on a level with each other and double-underline the amounts.
-Enter the amount obtained at stage (2) under the totals on the side opposite to the balance entered in stage
Trial Balance
-The trial balance is prepared to check the arithmetical
accuracy of the ledger.
-If the trial balance ‘balances’, that is, the debit side total is equal to the credit side total, it means that there is no arithmetical error.
Stages in the accounting process
- Business transaction
- Source documents (e.g receipts, invoices etc)
- Books of prime entry
- Ledgers (Sales ledger, purchases ledger, general ledger)
- Trial Balance
- Final Accounts
Source documents
- Quotation
- Purchase order
- Sales order
- Delivery notes
- Goods received notes
- Purchase invoice
- Statement
- Credit note
- Debit note
- Remittance advice
- Receipt
Books of prime entry
- Books in which details from source documents are first recorded
- They are outside the double-entry model
- Exception to rule is the cash book and the petty cash book
Books of prime entry and their use
-Sales day book (Sales journal): To record all sales made on credit
-Sales return book (Sales returns journal or return inwards journal): To record all goods returned from
customers
-Purchases day book (Purchases journal): To record all purchases of stock in trade made on credit
-Purchases return book ( Purchases returns journal or
return outwards journal): To record all goods returned to suppliers
-Cash book: To record all cash/bank transactions
-Petty cash book: To record all small cash transactions
-Journal (or general journal): To record all transactions for which there is no other book of prime entry
Using more than one ledger
Entries are made in books of original entry. They are then summarized and the summary information is entered, using double entry, to accounts kept in the various ledgers of the business.
Types of ledgers
- Sales ledger- For customers personal accounts
- Purchases ledger- Suppliers personal accounts
- General ledger- Contains remaining double entry accounts, e.g. expenses, fixed assets and capital, sales account, purchases account.
