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Double-entry bookkeeping underpins accounting. •A way of systematically recording the financial transactions of a company so that each transaction is recorded ...
Typology: Lecture notes
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Assets = Liabilities + Equity + Profit (Income-Expenses)Assets + Expenses = Liabilities + Equity+ Income
For every transaction there will be a
debit
and
credit entry
These debits and credits will be
equal and opposite
E.g. in bank account all records are
paid in
on
debit side
and
paid
out
on
credit side
The choice of the right account sideis the core of the art of bookkeeping
-^
debiting an account
make an entry on the left-hand side of an
account
-^
crediting an account
make an entry on the right-hand side of an
account
Recall that owner‘s investments and revenues increase owner‘sequity, while owner‘s withdrawals and expenses decrease owner‘sequity.
-^
Frequently separate accounts are kept for these items.(a)
Owner‘s Capital
. This account is affected by, for example,
owner‘s investment.
-^
Increases in owner‘s capital are credited. Decreases in owner‘scapital are debited.
Owner's Capital Debit
Credit
for
for
Decrease
Increase
(b)
Owner‘s Withdrawals
-^
The owner may, for example, withdraw cash for personal use. Itcould be debited directly to Owner‘s Capital but a separate accountis kept to determine total withdrawals.
-^
Increases in owner‘s withdrawals are debited. Decreases in owner‘swithdrawals are credited.
Owner's Withdrawal^ Debit
Credit
for
for
Increase
Decrease
All Income Statement items will be closed off
-^
All Balance Sheet items brought forward
-^
Balancing off enables us to:1.
Prepare a trial balance
Close down income and expense accounts
Bring forward assets, liabilities and equity
Sum the entries on the larger side below the line
repeat the sum below the line on the other side
strike the balance: insert the amount missing such that the sums ofentries on both sides are equal (i.e. solving the account equation)
enter the counter item to the appropriate account e.g. Trial Balance Beginning balance 100Inflows
400200300
Outflows
400
Cash 1.^1000
4.^
Cash 600
Trial Balance
2.^
1000
3.^
Balance 600
appropriate account need not be the trial balance–
could be a hierarchically superior closing account, e.g. “cash and cashequivalents”– this could be closed to the balance sheet– in order to reopen accounts for the next period the line item cash andcash equivalents in the balance sheet could be counterbooked to anaccount which is closed by booking out the individual items to therespective accounts, e.g. the cash account for the next period
-^
This is not the practical procedure, this theoretically possibleprocedure shall only make clear the mechanics of double entrybookkeeping
A small company named ZiscoSys. The transactions are stated inchronological order: (1) € 8.000 Owner‘s Investment to start up the business(2) Purchase of equipment for € 4.000 paid in cash(3) Purchase of supplies on credit for € 500(4) € 400 payment of a liability (accounts payable resulting from
delivery of supplies) (5) € 5.000 revenues earned on credit(6) € 3.000 collection of accounts receivable(7) Incurring expenses of € 500 for rent (cash) and € 200 (on credit) for
utility and prepaid insurance of € 1. (8) reception of a down payment of € 2.400 for services to be
performed (unearned revenue or deferred revenue), and (9) Owner‘s withdrawal of € 800.
Accounts Receivable
Revenues
Transaction 5 – services rendered on credit
Increase in accounts receivable is debited; incr. in revenues is credited.
Prepaid Insurance
Cash
Transaction 7 – insurance policy bought
Increase in prepaid insurance is debited; decrease in cash is credited.
Asset Accounts
Cash
Accounts Receivable
Equipment
Supplies
Prepaid Insurance
500
400
(^500) 1.200 800
6.
2.
4.
500
1.
Liability Accounts^ Accounts Payable
Unearned Revenue
400
500
200 300
2.
Owner's Equity Accounts Owner's Investment
Owner's Withdrawal
800
8.
800
Revenues
Expenses
500200
5.
700
Assets
Liabilities
Revenues
Cash
111
Notes Payable
211
Sales
411
Notes Receivable
112
Accounts Payable
212
Commissions Earned
412
Accounts Receivable
113
Wages Payable
213
Fees Receivable
114
Unearned Revenues
231
Expenses
Office Supplies
115
Prepaid Rent
116
Owner's Equity
Wages Expense
511
Prepaid Insurance
117
Utility Expense
512
Land
141
Capital
311
Telephone Expense
513
Building
142
Withdrawal
312
Insurance Expense
514
Equipment
148
Income Summary
313
Depreciation Expense,
521
EquipmentDepreciation Expense,
522
Building
The journal is a complete and chronological list of all transactionsthat occurred.
journal is the book of original entry!
common to have more than one kind of journal
special purpose
journals, e.g. cash receipts journal or sales journal
-^
general journal: all transactions are recorded in this journal
-^
a complete entry provides the following information–
date of recording– date of transaction– accounts and amounts to be debited and credited– short explanation of the transaction– number of account (if posted)
The journal contains the complete information on transactions thatenter the accounting system–
it is the basic documentation and serves as instrument of evidence inlitigation– it is not allowed to cancel journal entries
-^
mistaken entries have to be reversed by a contra-entry
In electronic accounting systems the journal is the only data base ontransactions–
the system has to assure that once an entry is made, it can no longer beinfluenced or altered by anyone– ledger accounts are „views“ of the data base that are generated online,they are not records in their own right (Principle of data integrity: anyinformation is only stored once)
-^
the system of ledger accounts can thus be altered at any timeaccording to new needs for analysis
-^
A sufficient number of safety copies (mirror images) of the journal haveto be kept up-to-date.
all accounts taken together in one file
the ledger
process of transferring journal entries to the ledger accounts
posting
-^
as with journals, there may be more than one kind of ledger
-^
general ledger contains all accounts
general ledger
asset accounts
owner‘s equity accounts
liability accounts
accounts receivable^ prepaid expenses
equipment cash
accounts payable^ unearned revenues
bonds notes payable
owner‘s withdrawal^ expenses
revenues owner‘s capital
