Week 2 - Double entry system

Question 1

What is debit?

Answer 1

‘place on the left of the account called…..’

Question 2

What is credit?

Answer 2

‘place on the right of the account called……’

Question 3

Why is debit and credit important?

Answer 3

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.

Question 4

What is the main rule regarding debit and credit?

Answer 4

Debit ALWAYS equals Credit

Question 5

What is the main principle of double-entry book keeping?

Answer 5

• 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

Question 6

What are the double-entry rules?

Answer 6

Increase in: Assets = Debit
Decrease in: Assets = Credit
Increase in: Liabilities = Credit
Decrease in: Liabilities = Debit
Increase in: Capital = Credit
Decrease in: Capital = Debit

Question 7

What is a way to remember this?

Answer 7

• Debit the receiver
• Credit the giver

Question 8

What happens when the form of settlement is an IOU?

Answer 8

• 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

Question 9

How do you know when a debt is credit?

Answer 9

The debt due to the seller is a credit

Question 10

How do you know when a debt is debit?

Answer 10

The debt due from a customer is a debit

Question 11

How do you find balance?

Answer 11

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

Question 12

Example of double entry

Answer 12

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)

Question 13

Example of double entry 2

Answer 13

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)

Question 14

What is the difference between expenses and assets?

Answer 14

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

Question 14

What about expenses and double entry?

Answer 14

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

Question 14

Purchases accounts and sales accounts

Answer 14

Instead of recording purchases and sales in an account for the item exchanged, many businesses use accounts for purchases and accounts for sales.

Question 15

What happens with purchases and sales?

Answer 15

Purchases and sales are kept apart
This is done because the balances on both these accounts are needed when you prepare an income statement

Question 16

What are purchases in the double entry system?

Answer 16

Purchases are possessions, so when they increase, the entry is a debit

Question 17

What are sales in the double entry system?

Answer 17

Sales are also possessions, when your possessions decrease, the entry is a credit

Question 18

What are drawings?

Answer 18

In accounting, ‘drawings is the term for what sole traders take out of their business for their personal use

Question 19

How to drawings affect capital?

Answer 19

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

Question 20

How do drawings affect the double-entry system?

Answer 20

If the owner takes money for themselves, the double entry is:
- Debit drawings accounts
- Credit bank or cash account

Question 21

What is DEADCLIC?

Answer 21

D ebit entries record increases in
E xpenses
A ssets
D rawings
C redit entries record increases in
L iabilites
I ncome
C apital