Introduction to Double Entry Book-keeping. The functions of book-keeping and accounting are subject...
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Transcript of Introduction to Double Entry Book-keeping. The functions of book-keeping and accounting are subject...
Introduction to Double Entry Book-keeping
• The functions of book-keeping and accounting are subject to a set of rules and principles, commonly referred to as accounting concepts.
The following accounting concepts are particularly relevant to book-keeping:
1. Business Entity Concept
2. Money Measurement Concept
3. Historic Cost Concept
4. Dual Aspect Concept
The Accounting Equation
Assets - Liabilities = Capital
(Own) (Owe)
Introduce £10,000 to the business
£10,000 - 0 = £10,000
Arrange a loan of £10,000
£20,000 - £10,000 = £10,000
Pay £5,000 off the loan
£15,000 - £5,000 = £10,000
(Worth)
The Accounting Equation
So every transaction has a Dual Effect.
So in the accounts every transaction is recorded with two entries. (Hence Double Entry Book-Keeping)
Let’s have a go at an activity
The Book-Keeping System
Source Documents
Primary Accounting Records
Double Entry Book-keeping
Final Accounts
Trial Balance
(Level 2)
(Level 2)
(Level 2)
(Level 2)
(Level 3)
The Book-Keeping System
A summary of all the accounts is compiled on a Trial Balance
This is a mathematical check that the double entries have been recorded accurately
The Book-Keeping System
Information from the Trial Balance is analysed to prepare the Final Accounts
Profit and Loss Account
Balance Sheet
• Double-entry involves two entries for each transaction – a debit entry and a credit entry
• The two entries are for the same amount but are made in separate accounts
The accounts are normally grouped together in books known as ‘ledgers’
•Sales Ledger
•Purchases Ledger
•General (Nominal) Ledger
See page 140 regarding a further break down of the general ledger
Debits and Credits – which side of the account?
A way of working out which side the debit or credit should go – except for Bank Account, which has its own rules - is to remember the following diagram:
An easy way to remember these words are by remembering the first letters PEARLS:PEA (for the debit side) RLS (for the credit side)
Debit CreditPurchases
Expenses
Assets
Revenue (Sales)Liabilities
Sources of Funds (Capital)
Payment of insurance through the bank involves entries in two accounts – Insurance Account and Bank Account
Sales Transactions
Date Details £ Date Details £
Bank Account
Date Details £ Date Details £
Sales Account
10.01.10 50.00Bank
10.01.10 50.00Sales
Let us suppose that on 10 Jan. 2010 you sell goods worth £50.00 to a customer who pays by cheque.
As we are using Double Entry, we will need two accounts.
These will be the Sales Account and the Bank Account.
Sales Transactions
All Cash Sales, i.e. where payment is received, will be recorded this way.
Debit Bank, Credit Sales.
Unfortunately, business transactions are a little more complicated.
Business transactions are usually carried out on a credit basis i.e. payment is made at a later date.
Business transactions usually involve VAT.
Let us suppose, on 10 Jan. 2010, we sell goods worth £100.00 + VAT (£20.00) on credit to Petersons Ltd.
This transaction would be recorded as follows.
Date Details £ Date Details £
Sales Account
Date Details £ Date Details £
VAT Account
Date Details £ Date Details £
Petersons Ltd Account
10.01.10 Petersons Ltd 100.00
10.01.10 120.00Sales
10.01.10 20.00Petersons Ltd
Sales Returns Transactions
Occasionally, goods that have been sold and delivered to a customer may not be the correct items or may be faulty.
If this is the case, the goods will be returned.
This is a normal business transactions and needs to be recorded in the accounts.
Let us suppose, on 15 Jan. 2010, goods worth £20.00 + VAT (£4.00) are returned by Petersons Ltd.
This transaction would be recorded as follows.
Date Details £ Date Details £
Sales Returns Account
Date Details £ Date Details £
VAT Account
Date Details £ Date Details £
Petersons Ltd Account
15.01.10 Petersons Ltd 20.00
10.01.10 120.00Sales
10.01.10 20.00Petersons Ltd
15.01.10
15.01.10
24.00
4.00
Sales Returns
Petersons Ltd
Purchases Transactions
Date Details £ Date Details £
Bank Account
Date Details £ Date Details £
Purchases Account
10.01.10
50.00
Bank
10.01.10
50.00
Purchases
Let us suppose that on 10 Jan. 2010 you purchase goods worth £50.00 and pay by cheque.
As we are using Double Entry, we will need two accounts.
These will be the Purchases Account and the Bank Account.
Purchases Transactions
All Cash Purchases, i.e. where payment is made, will be recorded this way.
Credit Bank, Debit Purchases.
Unfortunately, business transactions are a little more complicated.
Business transactions are usually carried out on a credit basis i.e. payment is made at a later date.
Business transactions usually involve VAT.
Let us suppose, on 10 Jan. 2010, we purchase goods worth £100.00 + VAT (£20.00) on credit from Wentworth Ltd.
This transaction would be recorded as follows.
Date Details £ Date Details £
Purchases Account
Date Details £ Date Details £
VAT Account
Date Details £ Date Details £
Wentworth Ltd Account
10.01.10 Wentworth Ltd 100.00
10.01.10 120.00Purchases
10.01.10 20.00Wentworth Ltd
Purchases Returns Transactions
Occasionally, goods that have been purchased and delivered to us may not be the correct items or may be faulty.
If this is the case, the goods will be returned.
This is a normal business transaction and needs to be recorded in the accounts.
Let us suppose, on 15 Jan. 2010, goods worth £20.00 + VAT (£4.00) are returned to Wentworth Ltd.
This transaction would be recorded as follows.
Date Details £ Date Details £
Purchases Returns Account
Date Details £ Date Details £
VAT Account
Date Details £ Date Details £
Wentworth Ltd Account
15.01.10 Wentworth Ltd 20.00
10.01.10 120.00Purchases
10.01.10 20.00Wentworth Ltd
15.01.10
15.01.10
Purchases Returns
Wentworth Ltd
24.00
4.00
