Scribd
Upload
118 views22 pages

Module 2 - The Use of Double-Entry and Accounting Systems

This document provides an overview of accounting concepts including double-entry accounting, the accounting equation, and the recording process. It discusses how business transactions are recorded in journals and posted to ledger accounts. Key points covered include the double-entry rules where debits must equal credits, and assets increases are debited while expenses and drawings are debited and liabilities, revenues, and capital are credited. Examples of transactions are provided to demonstrate how the accounting equation and double-entry system works.

Uploaded by

Jewel Philip
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
118 views22 pages

Module 2 - The Use of Double-Entry and Accounting Systems

This document provides an overview of accounting concepts including double-entry accounting, the accounting equation, and the recording process. It discusses how business transactions are recorded in journals and posted to ledger accounts. Key points covered include the double-entry rules where debits must equal credits, and assets increases are debited while expenses and drawings are debited and liabilities, revenues, and capital are credited. Examples of transactions are provided to demonstrate how the accounting equation and double-entry system works.

Uploaded by

Jewel Philip
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 22

Module 2:

The use of double-entry and accounting systems


Course Coordinator: Dr. Noor Rizvi
Introduction
• A business enters into many transactions during the year.
• All these need to be recorded and summarized to produce the entity’s
financial statements.
• These business transactions are recorded on source documents.
• These documents are the source of all the information recorded by a
business.
• Examples include sales and purchase orders, invoices and credit notes.
• Any event which involves exchange of money or money’s worth between
the firm and any other person is known as a Business Transaction.

2
Business Transactions…..
ILLUSTRATIONS:-
a) Capital introduced into the business by the proprietor
b) Sending of price list
c) Purchase of goods for cash
d) Receiving of a price list
e) Purchase of goods on credit
f) Placing of an order
g) Sale of goods on credit

3
Documents used to record business transactions

• Quotation
• Sales Order
• Purchase Order
• Goods received note
• Goods despatched note
• Invoice
• Statement
• Credit note
• Debit note
• Remittance advice
• Receipt
4
Accounting Equation

The equation is based on the principle that accounting deals with


property & rights to property & the sum of the properties owned is
equal to the sum of the rights to the properties. The properties owned
by a business are called assets & the rights to properties are known as
liabilities or equities of the business.

Assets = Liabilities + Capital


TRANSACTION (1). INVESTMENT BY OWNER Ray Neal starts a smartphone app
development company which he names Softbyte. On September 1, 2019, he
invests $15,000 cash in the business. This transaction results in an equal increase in
assets and owner’s equity.
TRANSACTION (2). PURCHASE OF EQUIPMENT FOR CASH
Softbyte purchases computer equipment for $7,000 cash.
This transaction results in an equal increase and decrease in total assets, though the
composition of assets changes.
TRANSACTION (3). PURCHASE OF SUPPLIES ON CREDIT
Softbyte purchases for $1,600 from Mobile Solutions headsets and other computer
accessories expected to last several months. Mobile Solutions agrees to allow Softbyte
to pay this bill in October. This transaction is a purchase on account (a credit purchase).
Assets increase because of the expected future benefits of using the headsets and
computer accessories, and liabilities increase by the amount due to Mobile Solutions.
TRANSACTION (4). SERVICES PERFORMED FOR CASH
Softbyte receives $1,200 cash from customers for app development services it has
performed. This transaction represents Softbyte’s principal revenue-producing activity.
Recall that revenue increases owner’s equity.
Recording Process
Double entry system of recording
The double-entry system of accounting or bookkeeping means that for
every business transaction, amounts must be recorded in a minimum of
two accounts.

Examples

In all the above transactions each party receives something;


and simultaneously gives something.
11
Double-entry rules
Rule 1: - The duality rule
Every transaction has two effects, one of which will be recorded as a
debit in one account and the other which will be recorded as a credit in
another account. If this rule is broken, the trial balance will not agree
and a suspense account is opened. This will be discussed later in
“Correction of Errors”.

TOTAL DEBITS = TOTAL CREDITS

Rule 2: - Debit is on the left and credit is on the right


Double-entry rules
Rule 3: - The when to DR and CR rule
The rules as to when to debit a T account and when to credit a T
account can be summarized in the following table.

The Debit/Credit Table:


Increase Decrease
Asset, Expense Debit Credit
Purchases, Drawings

Liability, Income Credit Debit


Sales, Capital
Types of accounts
Accounts

Real accounts Personal accounts Nominal accounts

Do not really exist in physical form

Accounts which are related


to expenses, losses, incomes
or gains
Natural person

14
Assets Artificial person
Types of accounts
Accounts

Real accounts Personal accounts Nominal accounts

Debit what comes in Debit the receiver Debit all expenses & losses
Credit what goes out Credit the giver Credit all incomes & gains

15
Recording a transaction
Purchased furniture for 10,000 in cash Furniture a/c Dr. 10,000
To cash a/c 10,000

Step1: Identify the accounts involved


Purchased furniture for 10,000 in cash

Step 2: Identify which type of account is each of them


Furniture: Real a/c
Cash: Real a/c
More
Step 3: Apply the Golden rule transactions on
Debit what comes in Whiteboard
Credit what goes out 16
Journal
Journal means a daily record of business transactions. Journal is a book of
original entry because transaction is first written in the Journal from which
it is posted to the ledger
Date Particular LF Debit ($) Credit ($)
Year Name of account to be
Month debited.
Date To, Name of account to
be credited.
[Narration]

Ledger Folio which means page of the ledger. This column is used to record the page
numbers on which the various accounts appear in the ledger.
Journal…..
The journal makes several significant contributions to the recording
process:
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit
amounts for
each entry can be easily compared.
Main books of prime entry
1. Cash Book
2. Sales Day Book
3. Sales Returns Day Book
4. Purchase Day Book
5. Purchase Returns Day Book
6. Petty Cash Book

19
Ledger: balance and close
Example 1:
In the books of Cows Co:
Year 2020
Jan 1 - Paid $50,000 into a business bank account
Jan 9 - Bought goods for $2,000
Jan 11 - Cash Sales $5,000
Required
Balance off a ledger account (Bank a/c & Cash a/c only) as at 31 Jan
2020.

20
Ledger: balance and close

21
References and Reading Material

1. Jawahar Lal- Financial Accounting (Principles and practices)


2. Gupta R.L- Advanced Accounting
3. ACCA F3 Financial Accounting - Kaplan's publishing
4. Reference video:
https://www.youtube.com/watch?v=RPkBmOYCGSM

22

You might also like