Week 3 - Recording transactions, double-entry bookkeeping and the trial balance Flashcards
What are ledger accounts?
they summarise all the individual entries from the books of prime entry. These summary records are used to prepare the trial balance and the financial statements
usually called ‘the accounts’
What is the nominal (general) ledger
the accounting record which contains the main ledger accounts. This will include separate ledger accounts for asses, liabilities, capital, income and expenses
How do you transfer entries to the ledger accounts from the books of original entry?
Eg get the total sales and total returns, now we have two accounts, then bring the sales figure into the sales account and then the sales return
What are T accounts
ledger accounts kept manually,
Draw a big T then have two sides, left side called debit and right, credit
Are ledger accounts computerised or manual?
computerised but if kept manually then T accounts
What is the dual aspect/ accounting concept of duality
each transaction affects the accounting records twice, double entry bookkeeping is the method or technique used to record the business’ transactions
What is the main purpose of double-entry bookkeeping?
to allow the business to assess its income, expenses, assets and liabilities and be able to prepare its financial statements using this information
What is the accounting equation at the beginning of the period
OB/ opening balance
OB Asses = OB Liabilities + OB Equity
What is the accounting equation over of the period (eg over one year)?
The company makes profit, this goes to equity
The company issues new share capital or repurchase (reduce) capital, these changes in share capital goes to equity
What is the accounting equation at the end of the period
CB / closing balance
CB Assets = CB Liabilities + OB Equity + Profit + Change Equity Capital
What is the fully rearranged accounting equation?
Assets + Expenses = OB Equity + Liabilities + Revenue + Change in Equity Capital
Why are assets and expenses on the left side of the equation
this shows if we have some money, where we spend the money
we can spend it on purchases of new assets like new machines, equipment, property
also pay bills, salary
debits left hand side
Where do we get the money from on the right hand side of the equation?
Sales/ Revenue from the customers
money from the owners (equity from owners) or new share capital/ owners/ shareholders contribute money
borrow money (liabilities)
credits right hand side
What do you say instead of increasing assets or increasing expenses
we debit the asset or debit the expense
What do you say instead of increasing revenue, liabilities or equity capital?
we credit the revenue
we credit the liabilities
we credit the equity capital
What do you say instead of decreasing assets or decreasing expenses
we credit the asset or credit the expense
What do you say instead of decreasing revenue, liabilities or equity capital?
we debit the revenue
we debit the liabilities
we debit the equity capital
What can you put in the left side (debit) on the T account?
increases in assets
increases in expenses
decreases in liabilities
decreases in revenues
decreases in equity
What can you put in the right side (credit) on the T account?
decreases in assets
decreases in expenses
increases in liabilities
increases in revenues
increases in equity
What are always equal across all the accounts in total (not in each individual ledger account)
the debit and credit affect
What do debit entries (left hand side of T account) increase?
assets and expenses
What do debit entries (left hand side of T account) decrease?
liabilities, equity and revenue/ income
What do credit entries (right hand side of T account) increase?
liabilities, equity and revenue/ income
What do credit entries (right hand side of T account) decrease?
assets and expenses
How much does each T account recall?
only recalls one item of the transaction
What do we need to show within T accounts?
the date, description and the amount
What are the 3 steps in recording a transaction in the double entry accounts
- Identify whether it affects assets, liabilities and equity (as well as income and expense)
- Identify whether the asset, liability or equity is increasing or decreasing (as well as income and expense)
- Look at the financial amount
What does a journal record when a transaction is made?
it records the double entry for the transaction, the bookkeeper uses the journal to enter the transaction in the accounts. T accounts are a simplified version of these accounts
How do we use double entry book keeping to record transactions?
journals and T accounts
What happens with balancing off ledger (T) accounts at the end of the accounting period?
all the companys transactions will have been entered in the ledger accounts
ledger accounts are then balanced off. This means they are closed for that period and a new account is started for the next period
a lis of balances is taken from the ledger accounts to prepare the trial balance which is used to prepare the financial statements
What is the time period/ periodicity concept
the life of the entity can be divided into specific periods to allow for the preparation of financial statements
How to balance off an an account?
a closing entry is made, this makes both sides in the T account equal.
You calculate the balancing figure as the difference between two sides of the T account
The type of closing entry differs with the type of account
How to close off an accounts for revenue and expenses (Statement of profit/ loss)?
the ledger is closed off to zero and a new account is opened next period with no opening balance
How to close off an accounts for assets, liability and equity accounts (Statement of Financial position)?
the closing balance is carried down to the next period and becomes the balance brought forward, or the opening balance in the next period
What is it called when the total amount of money on the debit side of an account is greater than that on the credit side
a debit balance
(reverse is credit balance)
What is the balance when debits = £70,000 and credits £6,000
a debit balance of £64,000
What does a debit balance mean?
that the debit total is greater than the credit total in the T account
How to balance the T account when you have a debit balance?
a balancing figure is added to the credit side to make them equal
called a balance figure carried forward (bal c/f)
What is weight balance?
action of the T account, manually inserting some numbers into a T account to make sure that both sides of the T account equals
What do you put on the opposite side of the Bal c/f?
the Bal b/f which is the same amount as the Balance c/f (it is also a balancing line)
What is bal b/f
Balance bring forward
What do balance b/f show?
true or real side of the account balance
What are debit balances usually recorded for?
assets (eg machines), expenses (eg rent) and any drawings/dividends
What are credit balances usually recorded for?
revenues, liabilities and capital/equity
What does the closing balance become for the next period for debit balance?
the opening balance, with a debit balance being on the debit side for the start of the period (the balance b/f)
How do we balance liabilities (eg bank loan and trade payables) and equity?
balance the T accounts with Bal c/f, then take these numbers (Bal c/f 3 figures) to a trial balance, they will go to the opposite side of the Bal c/f figure to the true balance side. Then also need to show them to the credit side
What does the closing balance become for the next period for credit balance?
the opening balance, with a credit balance being on the creit side for the start of the period (the balance b/f)
What do we do instead of balancing the revenue and expense accounts?
we close off these two accounts
(both in income statement), we dont carry or bring forward to the next period
How to close off revenue and expense accounts (related to revenue)?
take the revenue out of the system for this period, for the next period the revenue figure will be zero
What do we manually insert in the revenue and expense accounts when closing them off?
manually insert a value on the debit side called SOPL, instead of bringing forward we just put them into the income statement directly
How do we close off revenue and expense accounts?
the balancing amount is transferred (moved put of T account) first to the trial balance (use the real side of balance, which is opposite to the Jan SOPL) to check that the balances are correct and then to the Statement of Profit or Loss
What is a trial balance
a list of the balances in the ledger at the end of an accounting period, divided between those accounts with debit balances and those with credit balances
What are the three columns in the trial balance
1st column - all the items of the accounts that we have balanced/ closed off (inventory, machines, trade receivables, cash payables, loans, share capital, revenue, cost of sales)
2nd column - debit balances
3rd column - credit balances
columns, left to right
How do we fill out the trial balance table?
eg machine, £6000 Bal c/f on the credit side, when we transfer it to the trial balance we need to show the true side of this machines balance which is the debit side
so number from the bal c/f in the T accounts we need to put them to the opposite side which is the same side as the bal b/f
How do we fill out the trial balance table for sales revenue and cost of sales (SOPL)?
the numbers from the SOPL in the T account, put it to the opposite side (which is the actual debit or credit balance)
What do you do after filling in the trial balance?
add the debit and credit columns individually to get a total and they should be equal
What is our starting point to prepare for the income statement/ balance sheet?
the trial balance
What does every transaction in the ledger contain?
a matching debit and credit entry so the total of accounts in the rial balance with debit balances should equal the total with credit balances
What is the trial balance a method of?
of internal control that provides a check on the arithmetic accuracy of the ledger and that the double entry has been correctly completed - so it helps spot errors
What is the trial balance used to prepare for?
the final financial statements (income/ balance sheet)
What is the full process of a trial balance?
- transfer T accounts to the trial balance
- list debit balances on the debit side of the trial balance and credit balances on the credit side of the trial balance
- for the trial balance to balance, the debits must equal the credits
- if the trial balance doesnt balance, check whether any accounts have been miscalulated
