Double entry accounting PDF

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Week 2: notes. Double entry accounting

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There are at least 2 accounts in every transaction

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Equation must always balance!!

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Debits = Credits

What does double entry mean?

Double entry means that every transaction will involve at least two accounts. For example, if your company borrows money from the bank, the company's asset Cash is increased and the company's liability Notes Payable is increased. If your company pays the six-month insurance premium, your company's asset Cash is decreased and its asset Prepaid Insurance is increased. If an employee works for hourly wages, the company's account Wages Expense is increased and its liability account Wages Payable is increased. When the employee is paid, the account Wages Payable is decreased and Cash is decreased. Double entry also requires that one account be debited and the other account be credited. Accounting software might record the effect on one account automatically and only require information on the other account. For example, if you are preparing a check, the software will automatically reduce the Cash account. Therefore, the accounting software needs only to prompt you for information on the other account involved in the payment being processed.

Definition of Double-Entry System The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits. Example of a Double-Entry System To illustrate double entry, let's assume that a company borrows $10,000 from its bank. The company's Cash account must be increased by $10,000 and a liability account must be increased by $10,000. To increase an asset, a debit entry is required. To increase a liability, a credit entry is required. Hence, the account Cash will be debited for $10,000 and the liability Loans Payable will be credited for $10,000. Double Entry Keeps the Accounting Equation in Balance Double entry also means that the accounting equation (assets = liabilities + owner's equity) will always be in balance. In our example, the accounting equation remained in balance because both assets and liabilities were each increased by $10,000.

What is the bookkeeping equation? The bookkeeping equation for a sole proprietorship is assets = liabilities + owner's equity. The bookkeeping equation for a corporation is assets = liabilities + stockholders' equity. The bookkeeping equation is also referred to as the accounting equation. In the bookkeeping equation:

Week 2: notes. 

assets are the resources owned by the business

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liabilities are the amounts the business owes

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owner's equity is the amount the owner invested plus the net income of the business minus the amounts the owner withdrew for personal use (all since the business began) Often it is said that the liabilities and owner's equity are the claims against the assets. It can also be said that the liabilities and the owner's equity are the sources of the assets.

What are debits and credits? Definition of Debits and Credits Debits and credits are terms used in accounting and bookkeeping systems for the past five centuries. They are part of the double entry system which results in every business transaction affecting at least two accounts. At least one of the accounts will receive a debit entry and at least one other account will receive a credit entry. Further, the amounts entered as debits must be equal to the amounts entered as credits. You should think of a debit as an entry on the left side of an account, and a credit as an entry on the right side of another account. Accountants often use T-accounts to visualize the debit and credit effects on the accounts' balances. It may take some time to learn which general ledger accounts will be debited and credited, but here are some general rules:  Expense accounts generally have debit entries and have debit balances  Revenue accounts generally have credit entries and have credit balances  Assets generally have both debit and credit entries, but usually have debit balances 

Liabilities generally have debit and credit entries, but usually have credit balances  Stockholders' equity accounts could have debit and credit entries, but profitable corporations usually have credit balances Examples of Debits and Credits To illustrate, let's assume that a company borrows $10,000 from its bank. The company will enter $10,000 as a debit in its Cash account and a credit of $10,000 in its Notes Payable account. If the company pays $300 for an ad to air on the radio, the company will enter $300 as a debit in the Advertising Expense account and will enter $300 as a credit in its Cash account.

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Other terms: o

Transaction – item that fulfils the definition & recognition criteria of an element so it can be recorded in the accounting information system

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Account – record of the $ amount comprising of a particular asset, liability, equity revenue or expense item

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Account balance – net effect of amounts Dr & Cr to the account.

Note if accounts become negative they may change classification, i.e positive bank a/c = asset, negative bank a/c is an o/draft = liability

Week 2: notes.

Recording in the general journal……..

Week 2: notes.

Define terms: Ledger: Ledger or General Ledger is a company's main account of accounting records, a complete record of all financial transactions over the life of an entity. It is used to sort and store balance sheet and income statement transactions. -

A ledger account – used to record & summarise what has happened to a particular account over time. Accounts are summaries of the recorded transactions, i.e. like a filing system.

Trial balance: A trial balance is a list of all the general ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of each nominal ledger account and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance. Financial statement: Financial statements are reports prepared by a company's management to present the financial performance and position at a point in time. A general-purpose set of financial statements usually includes a balance sheet, income statements, statement of owner's equity, and statement of cash flows. Transaction: An accounting transaction is a business event having a monetary impact on the financial statements of a business. It is recorded in the accounting records of the business. Examples of accounting transactions are: Sale in cash to a customer. Sale on credit to a customer. Source document: Some common examples of source documents include sales receipts, checks, purchase orders, invoices, bank statements, and payroll reports. These are all original documents that were created from a transaction and the first component in an accounting system. Journal: In accounting and bookkeeping, a journal is a record of financial transactions in order by date. ... The definition was more appropriate when transactions were written in a journal prior to manually posting them to the accounts in the general ledger or subsidiary ledger.

Week 2: notes.

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Book of original entry, first place that a transaction is recorded in the accounting information system. First step to internal control:

General journal recording steps:  Step 1 – identify two or more accounts involved in the transaction.  Step 2 – identify if the accounts are  or .  Step 3 – apply the rules of debit & credit or “PALER”.  Step 4 – record the transaction in the GJ.  Step 5 – check to make sure that the DR = CR.

Week 2: notes.

Posting the journal to a ledger step:  Step 1 - From the General Journal, post the debit entry amount to debit side of particular ledger a/c  Step 2 - post credit entry amount to credit side of particular ledger a/c  Step 3 - cross referencing / swap corresponding a/c titles in each ledger

Balancing “T” ledger accounts steps:

 Columnar accounts maintain a running balance  “T” accounts:  necessary to find the difference between the two amounts on each side of the account.

Week 2: notes.  Step 1 – identify the type & nature of account i.e. assets  Step 2 – add up DR side  Step 3 – add up CR side & deduct from DR side to determine final balance...