Chapter 3 The Double entry system of book- keeping AccountingGrade 9 Aim of study • • • • • outline the double entry system of book-keeping process accounting data using the double entry system prepare ledger accounts post transactions to the ledger accounts balance ledger accounts as required and make transfers to financial statements • interpret ledger accounts and their balances • recognise the division of the ledger into the sales ledger, the purchases ledger and the nominal (general) ledger. The Basic Accounting Equation • Accounting data is represented by the following relationship among the assets, liabilities and owners’ equity of a business: Assets = Liabilities + Owners’ Equity • The equation must be in balance after every recorded transaction in the system. The Double Entry System • • Accounting information is based on the double entry system. An account is an arrangement of transactions affecting a given asset, liability or other element. • Under this system, the two-sided effect of a transaction is recorded in the appropriate accounts. • The recording is done by means of a “debit-credit” convention (set of rules) applying to all accounts. The Double Entry System The system records the two-sided effect of transactions Transaction Bought furniture for cash Took a loan in cash Two-sided effect Decrease in one asset Increase in another asset Increase in an asset Increase in a liability The Double Entry System Note that the accounting equation equality is maintained after recording each transaction. Normal balance in account Expanded Basic Equation and Debit/Credit Rules and Effects The Debit-Credit Convention • • • • • Balance increases Debit entries in an asset account Debit entries in an expense account Credit entries in a liability account Credit entries in equity account Credit entries in a revenue account Balance decreases • Credit entries in an asset account • Credit entries in an expense account • Debit entries in a liability account • Debit entries in equity account • Debit entries in a revenue account Statement of financial position • Assets = Capital + liabilities • • • • • • assets = resources of value that a business owns, non- current assets ( exp: machinery) current ( exp : inventory) liabilities = debts that a business owes non - current ( exp: long-term loan) current ( exp: trade payables) • • • • • current assets : inventory trade receivables (TR) cash at bank cash in hand Assets • • • • • current asset = < 1 year inventories ( stock/goods) Trade Receivable (TR) (less provision for doubtful debts) prepaid expenses ( biaya di bayar di muka) accrued revenues ( pendapatan yang masih harus di bayar) • loan to employee • • • • Fix Assets / non current assets / > 1 year land/premises building (less provision for depreciation building) motor vehicle ( less provision for depreciation motor vehicle) • machine ( less provision for depreciation machine) Liabilities • • • • current liabilities / < 1 year bank overdraft trade payable prepaid revenue ( pendapatan diterima dimuka)/ revenue received in advance ( biaya yang masih harus dibayar) • non - current liabilities > 1 year • bank loan • mortage loan owner's equity ( capital) • • • • • • • capital + retained profit + revenue - expenses - dividend - drawing - capital ending • total assets = total liabilities + total owner equity • assets nominal debit, increase (+) in debit ; decrease (-) credit • liabilities nominal in Credit, increase (+) in credit ; decrease (-) in debit • owners equity nominal in credit, increase (+) in credit ; decrease (-) in debit • • • • Purchased Expenses Drawing Assets • DEBIT (+) • • • • • Receivable/revenue Income Sales Owner equity/capital Liabilities CREDIT (+) • Double entry records for expenses and income 2018 Transactions Account to be debited nominal ($) account to be credited nominal ($) Jun 1 paid salaries $5000 by cheque salary expense 5000 Bank 5000 Jun 6 Paid insurance $ 400 in cash Insurance 400 Cash 400 Jun 10 Received interest $ 3900 by cheque Bank 3900 interest receivable 3900 Jun 29 Received rent in cash $50 000 for rooms rented out Jun 30 Paid motor expenses in cash $30 Account linked to inventory When inventory increases when inventory decreases purchases account is debited with the cost of sales account goods bought for resale sales returns/ returns inwards account this account is debited with the value of goods returned to the business by customers is credited with the selling prices of goods bought Purchases returns/ is credited with the value returns outwards account of goods returned to suppliers A business purchases of goods for resale date transactions account to be debited nominal ($) account to be credited nominal ($) Aug 1 bought inventory paying by cash $ 400 purchases $400 cash $ 400 Aug 10 bought inventory paying by cheque $300 purchases $300 Bank $300 Aug 28 Bought inventory on credit from Bombastic Ltd $670 Purchases $670 Bombastic Ltd $670 Aug 30 Paid Bombastic Ltd $670 Cash Bombastic $670 Cash $670 Sep1 bought inventory on credit from Jason Ltd $ 400 Sep 2 bought inventory on cash from Ferio $ 5000 2018 Sale of goods purchased for resale 2018 transactions account to be debited nominal account to be credited nominal sept 2 sold inventory for cash $4 000 cash $4 000 Sales $ 4000 sept 10 sold inventory $300 receiving a cheque payment bank $300 Sales $ 300 sept 20 sold inventory to Mark Mark Garments Garments on credit $280 $280 Sales $ 280 sold inventory to Susan on credit $ 400 sold inventory to Rani for cash $ 3000 Returns of Inventory 2018 Transactions Account to be debited nominal Account to be credited nominal oct 7 the business sold goods to Conventry traders $5 600 on credit Coventry Traders 5600 Sales 5600 oct 13 purchased goods from Govinda Ltd $500 on credit Purchases 500 Govinda Ltd 500 oct 19 Coventry traders returned goods $900, full allowance given sales returns/return inwards 900 Coventry Traders 900 oct 23 The business returned goods to Govinda Ltd $80, full allowance given Govinda Ltd 80 Purchases returns/return outwards 80 • transaction 1 • april 1. Abdul starts business as a trader by paying $10.000 into a bank account which he opens for the business • transaction 2 • april 2, abdul buys a motor vehicle for the business and pays $ 2000 from the business bank account. A motor vehicles account must be opened • transaction 3 • april 3 . Abdul buys stock (goods which he will re-sell n the normal course of trade) for $3000 and pays by cheque • transaction 4 • april 4. abdul sells a quantity of stock for $800 and banks the cash • transaction 5 • April 7 , a customer returns some goods and received a refund of $40 • transaction 6 • april 8 abdul return some good costing $100 to a supplier and receives a refund • transaction 7 • april 10. abdul buys another motor vehicle for the business and pays $4000 by cheque • transaction 8 • april 11. Tania lends the business $5000 • transaction 9 • april 12. abdul pays rent on a warehouse by cheque $1000 • transaction 10 • april 14 abdul sublets part of the warehouse and receives $300 rent • transaction 11 • april 15 abdul pays wages by cheque, $1200. • transaction 12 • april 16 abdul withdraws $600 from the business bank account for personal use • May 1 Martine started business as a florist by paying $ 3000 into a business Bank account. • May 2 charline lent the business $ 1000 Martine then had the following transactions : • 3.Paid rent, $ 100 • 4.Purchased shop fittings, $ 400 • Purchased stock of flowers $3000 • 5 Received refund of 20 for flowers returned to supplier • 6 sold some flowers and received $40 • 7 paid wages, $60 • 8 withdrew $ 100 for personal use how to record credit transaction • in a seller's books • TR ( customer account) (debit) • sales (Credit) • in a customer's books • purchases (debit) • Trade payable ( supplier account) (credit) Double entry 1. Ann began business with cash on hand $100, cash at bank $ 10.000 car $ 20.000 Dr. Cash in hand $ 1000 Bank $10.000 premises $ 20.000 Capital • $31.000 2. purchased good $ 100 in cash/ cash purchasess $ 100 • Dr Inventory/purchases 100 Cr. cash 100 • 3. purchased/bought goods/stock $ 150 by check • Dr. inventory/purchases • Cr. bank 150 150 • 4. purchased goods $200 from Ben on credit • Dr. Inventory/purchases 200 • Cr. Trade payable (TP). Ben 200 • 5. Return goods $ 50 to ben Dr. TP. Ben 50 Cr. inventory/purchase return 50 6. Paid Ben by cheque for full settlement Dr. TP. Ben 150 Cr. Bank 150 50 • 7. bought motor vehicle $1000 on credit from toyota • Dr. Motor vehicle 1000 • Cr. TP. Toyota 1000 8. paid wages $100, rent $200 on cash Dr. Wages 100 Dr. rent 200 Cr. cash 300 • 1. cash sales $ 500/sold goods $ 500 in cash • Dr. cash 500 • Cr. inventory/sales 500 • 2. sold goods $ 100 and received cheque • Dr. bank 100 • Cr. inventory/sales 100 • 3. Sold goods to Charlie on credit $300 • Dr. TR- charlie 300 • Cr. inventory/sales 3000 • 4. charlie return goods $50 • Dr. Inventory/ sales return 50 • Cr. TR. charlie 50 • 5. received payment by cheque fom charlie • Dr. bank 250 • Cr. TR- charlie 250 • 6. sold surplus equipment $ 50 on cash • Dr. cash 50 • Cr. equipment 50 • 7. Ann withdrew cash $ 100 for personal use • Dr. Drawing 100 • Cr. cash 100 • 8. withdrew cashfrom bank $ 175 for business use • Dr. cash 175 • Cr. bank 175 • 9. withdraw goods $50 for personal use • Dr. Drawing 50 • Cr. inventory/purchases 50 example • lai sells good to Chin for 500 on 31 may and gives Chin untill 30 june to pay • in lai's book credit the sale to sales account and debit it to an account for chin • • in Chin's books debit the purchase to purchases account and credit it to an account for Lai • on 2 January 2019 Anita opened a bank account for the business named Anita Goswell Trading. she deposited $56000 cash into this account. • on 5 January 2019, Anita purchased inventory for $ 5000, paying by cheque. • on 6 January 2019, Anita trading bought a motor vehicle costing $6000 from salient motors on credit. salient motors is now a creditor and must be paid back at some later date. • on 25 January 2019, Anita paid salient Motors $5000 by cheque in part payment of debt owing. • on 29 January 2019, Anita sold inventory for cash $8000. • on 30 January 2019, Anita withdrew $3000 from the bank for her own personal use. • on 31 January 2019, Anita paid salient motors $ 1000 cash from her own personal funds.
