Introduction To Double Entry PDF

Birmingham International Academy Introduction To Financial & Management Accounting Week 2 Lecture Introduction To Double Entry Presented by: Shelton Mhlanga  Aim: To enable learners to record transactions using double entry. At the end...

Birmingham International Academy Introduction To Financial & Management Accounting Week 2 Lecture Introduction To Double Entry Presented by: Shelton Mhlanga  Aim: To enable learners to record transactions using double entry. At the end of the session learners should be able to: 1. Record cash transactions 2. Record credit transactions 3. Record transactions involving return of goods 4. Balance accounts 5. Post account balances to the trial balance  What Are The Elements of Financial Statements Assets Liabilities Things owned by the Money owed by the business business (They belong to the (They belong to others outside the business) business) Income Expenditure Money coming in Money going out Capital Drawings Money invested by the Money taken out of the owner into the business business by the owner for  The Accounting Equation Assets = Liabilities + Capital Everything Owned Was Money Borrowed Money Invested By & Controlled By A Paid From & The Owners Business For External Lenders Using = Total Assets – Total Liabilities = Ordinary Share Capital Share Premium Retained Earnings (Profits) Reserves Preference Shares (Debatable)  The Double Entry Golden Rule Assets - Liabilities= Capital Assets - Liabilities= Capital + Profit -Drawing Assets - Liabilities= Capital +Income-Expenses-Drawing Expenses+Assets+Drawings=Liabilities+ Income +Capital Left Side (Debit) Right Side (Credit) Debit Credit E xpenses L iabilities Assets n I come Drawings Capital  - - 0 +&- 0 0 + + 0 + 0 + + + 0 +&- 0 0 - - 0 + 0 +  Transaction AssetsLiabilities Capital Example The 1:business buys a motor vehicle on credit + + 0 Example The 2:business sells an old computer on credit +&- 0 0 1. business pays for the motor vehicle which was bought on credit- The - 0 The 2. business receives a payment for the old computer which was +&- 0 0 bought on credit 3. A business receives a loan from the bank + + 0 The4.business buys goods (inventory) and pays with cash +&- 0 0 A customer 5. buys goods (inventory) using a cheque +&- 0 0 The 6. owner invests more cash into the business + 0 + Identify the accounts to debit or credit for the table below from the list below: Bank, Cash, Motor Vehicle, Payable, Receivable, computer, Purchases, Loan, Sales, Capital, Drawings. Debit (DR) Cr (CR) Motor V Payable (+ A) (+L) Receivables Computer (- Payables (+A) Cash/Bank A) (- (-L) A) Cash/Bank Receivables (+ A) (- A) Bank Loan (+A) (+L) Purchases Cash The business sells goods (inventory), customer (+Exp) (-A) Bank Sales pay by cheque (+A) (+Inc) Cash Capital (+A) (+C)  Every Transaction Affects Accounting Equation (A – L = C) Income & Expenses Are Also Part Of The Accounting Equation Assets - Liabilities= Capital Assets - Liabilities= Equity Increase in Capital Negative Capital Assets -Liabilities =Capital+ Profit - Drawings / Dividends (Income - Expenses) Return On Investment The “T Account”/Ledger Account Account Name The left side is called the debit side The right side is called the credit side Dr - is short for Debit Cr-is short for credit  The Double Entry Golden Rule (DEAD CLIC) Debit: Expenses, Assets & Drawings – DEAD (when they increase) Credit: Liabilities, Income and Capital – CLIC (when they increase) And Credit: Expenses, Assets & Drawings when they decrease Debit: Liabilities, Income and Capital when they decrease  The Double Entry Golden Rule DEAD CLIC Debit Credit Credit Debit Expenses Liabilities Liabilities Expenses Assets Income Income Assets Drawings Capital Capital Drawings  The Double Entry Golden Rule DEAD CLIC DEAD Debit Debit Credit The usual Expenses these these balance Assets accounts accounts on the T/Bal Drawings whenthey increase whenthey decrease is a debit CLIC Credit Credit Debit The usual Liabilities these these balance Income accounts accounts on the T/Bal Capital whenthey increase whenthey decrease is a credit  The Double Entry Golden Rule DEAD CLIC DEAD Debit Debit Credit The usual Expenses these these balance Assets accounts accounts on the T/Bal Drawings whenthey increase whenthey decrease is a debit CLIC Credit Credit Debit The usual Liabilities these these balance Income accounts accounts on the T/Bal Capital whenthey increase whenthey decrease is a credit Another Double Entry Acronym To Increase / When They Increase Debit Credit CreditCredit Debit A L I C E AssetsLiabilities IncomeCapitalExpenses Credit Debit Debit Debit Credit To Decrease / When They Decrease Identifying Account Types Trial Balance for Jones LTD for The Year Ending 31 Amount Account Account Name Debit Credit DEAD Type CLIC Land £4,000 A £4,000 Furniture £2,000 A £2,000 VAT owing £900 L £900 Sales £1,200 I £1,200 Purchases £500 E £500 Inventory (Stock) £250 A £250 Bank Overdraft £700 L £700 Returns Outwards £500 I £500 Cash £475 A £475 Accounts Payable £700 L £700 Discounts Allowed £225 E £225 Wages £800 E £800 Discounts Received £200 I £200 Vehicles £1,500 A £1,500 Mortgage £500 L £500 Capital £8,330 C £8,330 Rent £1,600 E £1,600 Vehicle Expenses £280 E £280 Accounts Receivable £800 A £800 Drawings £600 D £600 Total £13,030£13,030  (Trade Receivables) (Trade Payables) Explain the meaning of the following key words: Financial Transaction An event/activity that affects the accounts or financial position of a business. Cash Transactions A customers pays for goods and receives them on the same day. (The customer can pay using notes, coins, a cheque, debit card or credit card) Credit Transactions A customer receives goods or services and pays at a later date. (Business customers usually pay by cheque/bank transfer)  Cash Transactions Goods are paid for and collected on the same day 01-Oct Started the business withcapital capitalofof £7000 paidpaid into A/C bank A/C Capital Account (↓) 01-Oct Started the business with £7000 into bank 02-Oct Bought goods for £5000, paying by bank transfer 02-Oct Bought goods for £5000, paying by bank transfer 01-Oct Bank £7,000 03-Oct Sold 03-Oct goods Sold goodsfor for£3000 thecustomer £3000 the customerpaidpaid by cheque by cheque 05-Oct Bought 05-Oct Boughtaa computer computer for £700and for £700 and paid paid by bank by bank transfer transfer Purchases Account 10-Oct Bought goods for £2800, paying by bank transfer 10-Oct Bought goods for £2800, paying by bank transfer 02-OctBank £5,000 12-Oct Sold some goods for £5000, the customer paid by bank transfer 12-Oct Sold some goods for £5000, the customer paid by bank transfer 10-OctBank £2,800 15-Oct Paid Rent £150 by cheque 15-Oct Paid Rent £150 by cheque Sales Account 03-OctBank £3,000 12-OctBank £5,000 Bank Account (Asset) Computer Account (Asset) 01-Oct Capital (↑) £7,000 02-Oct Purchases (↓) £5,000 05-OctBank £700 03-Oct Sales (↑) £3,000 05-OctComputer (↓) £700 12-Oct Sales (↑) £5,000 10-OctPurchases (↓)£2,800 15-Oct Rent Paid (↓) £150 Rent Account 15-OctBank £150 Credit Transactions (customer collects goods and pays at a later date) 18-Sep Bought goods on credit for £250 from Melvin Manufacturing company 20-Sep Sold goods on credit for £175 to Strensham Stores 18-Oct Paid £250 by bank transfer to Melvin Manufacturing Company 20-Oct Received a bank transfer for £175 from Strensham Stores Purchases Account 18-Sep Melvin £250 Sales Account 20-SepStrensham £175 Melvin / Payables (Liability) 18-Oct Bank £250 18-SepPurchases £250 Strensham / Receivables (Asset) 20-SepSales £175 20-OctBank £175 Bank Account 20-OctStrensham £175 18-Oct Melvin £250  Sales Returns & Purchases Returns Returns Inwards & Returns Outwards 07-Oct Bought goods for £280 on credit from B Lewis LTD 10-Oct Returned faulty goods for £30 to B Lewis LTD 11-Oct Sold Goods on credit for 125 to A Holmes 17-Oct A Holmes returned faulty goods for £25 26-Oct Paid amount owing to B Lewis by bank transfer 29-Oct A Holmes paid the amount owing in cash Purchases Account A Holmes / Receivables 07-Oct B Lewis £280 11-Oct Sales £125 17-Oct Sales Returns £25 29-Oct Cash £100 B Lewis LTD / Payables Sales Returns Account 10-Oct P/Returns £30 07-Oct Purchases £280 17-Oct A Holmes £25 26-OctBank £250 Purchases Returns Account Bank Account 10-Oct B Lewis £30 26-Oct B Lewis LTD £250 Sales Account Cash Account 11-Oct A Holmes £125 29-Oct A Holmes £100