Week 2 - Double entry system Flashcards
What is debit?
‘place on the left of the account called…..’
What is credit?
‘place on the right of the account called……’
Why is debit and credit important?
They are central to understanding double entry bookkeeping. Every time you record a transaction, you debit one account and credit another account - this is why double-entry bookkeeping has its name.
What is the main rule regarding debit and credit?
Debit ALWAYS equals Credit
What is the main principle of double-entry book keeping?
- The form of settlement given is always a credit
- The form of settlement received is always a debit
- The entry for the item exchanged is always the opposite to the entry for the form of settlement
What are the double-entry rules?
Increase in: Assets = Debit
Decrease in: Assets = Credit
Increase in: Liabilities = Credit
Decrease in: Liabilities = Debit
Increase in: Capital = Credit
Decrease in: Capital = Debit
What is a way to remember this?
- Debit the receiver
- Credit the giver
What happens when the form of settlement is an IOU?
- An ‘IOU’ is a debt
- A debt is created whenever a seller agrees to wait for the payment until sometime in the future
- In the accounts of the seller, whenever a new debt is created, it is the form of settlement in the transaction
How do you know when a debt is credit?
The debt due to the seller is a credit
How do you know when a debt is debit?
The debt due from a customer is a debit
How do you find balance?
You do this by calculating the difference between the totals of the debits and the total of the credits entered in that account
This difference is the balance
Example of double entry
On 1st July 20x2 Meg starts a business, transferring 8,000 of her own money into a new business bank account.
Therefore,
i) The asset of the cash at bank has increased (debit)
ii) Meg’s capital has increased (Credit)
Example of double entry 2
On 2nd July 20x2, Meg buys a laptop for the business for 1,000, paying in full immediately by bank transfer.
Therefore,
i) The asset of the computer equipment has increased (debit)
ii) The asset of cash at bank has decreased (credit)
What is the difference between expenses and assets?
The difference is that an expense is used up immediately whereas an asset is used for a long time
We call possessions that you keep for some time assets. We call possessions that are used up immediately expenses
What about expenses and double entry?
When you incur an expense, it belongs to the business in the same way that a computer, a machine, or a building belongs to the business
Purchases accounts and sales accounts
Instead of recording purchases and sales in an account for the item exchanged, many businesses use accounts for purchases and accounts for sales.
What happens with purchases and sales?
Purchases and sales are kept apart
This is done because the balances on both these accounts are needed when you prepare an income statement
What are purchases in the double entry system?
Purchases are possessions, so when they increase, the entry is a debit
What are sales in the double entry system?
Sales are also possessions, when your possessions decrease, the entry is a credit
What are drawings?
In accounting, ‘drawings is the term for what sole traders take out of their business for their personal use
How to drawings affect capital?
When the owner puts money into their business, it increases their capital, so when they take it out, it must reduce capital
So, drawings are a reduction of the owners capital, NOT a business expense
How do drawings affect the double-entry system?
If the owner takes money for themselves, the double entry is:
- Debit drawings accounts
- Credit bank or cash account
What is DEADCLIC?
D ebit entries record increases in
E xpenses
A ssets
D rawings
C redit entries record increases in
L iabilites
I ncome
C apital
