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Wk02-DoubleEntrySystem(Part1)

The document covers the double entry accounting system, explaining key concepts such as business transactions, T-accounts, and the rules of debits and credits. It details how transactions affect accounts, the classification of accounts, and the impact of inventory changes. Additionally, it illustrates these concepts through practical examples of transactions involving cash, credit, purchases, and returns.

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2 views

Wk02-DoubleEntrySystem(Part1)

The document covers the double entry accounting system, explaining key concepts such as business transactions, T-accounts, and the rules of debits and credits. It details how transactions affect accounts, the classification of accounts, and the impact of inventory changes. Additionally, it illustrates these concepts through practical examples of transactions involving cash, credit, purchases, and returns.

Uploaded by

Happy Every Day
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 34

BUS10250

WEEK 2 LECTURE

THE DOUBLE ENTRY SYSTEM


(PART 1)
CHAPTER 2 AND CHAPTER 3

1
LEARNING OBJECTIVES
After you have studied this topic, you should be able to:
(1) Explain what is meant by ‘double entry’
(2) Explain how the double entry system follows the rules
of the accounting equation
(3) Describe the layout of a ‘T-account’
(4) Enter a series of transactions into T-accounts
(5) Describe the two causes of inventory increasing and
decreasing
(6) Explain the difference between a purchase account and
a return inwards account
(7) Explain the difference between a sales account and a
return outwards account

2
BUSINESS TRANSACTIONS

Business transaction is an exchange of


property, goods, or services for cash or a
promise to pay.
External transactions---transactions involving
outside parties, e.g. purchase of equipment,
inventory, sales of goods etc.,
Internal transactions---activities within the
company, e.g. inventory issuing, allocation of
costs through depreciation etc.
Transactions are the raw material of the
accounting process.

3
THE DOUBLE ENTRY SYSTEM

✓ Every transaction affects two items.


✓ These effects need to be shown in the
accounting books.
✓ Associating the items (accounts) with their
classifications
✓ Determining the increase / decrease effect on
the items (accounts)
✓ This is double entry bookkeeping.

4
A DOUBLE ENTRY ACCOUNT

A simplified version of a ledger account is called the T-


account because it takes the form of the capital letter T.
✓ A vertical line separates the left side from the right side.
✓ The horizontal line is for the account title.

Debit (dr.) - an entry or balance on the left side of an account


Credit (cr.) - an entry or balance on the right side of an account

5
MAJOR ACCOUNT CLASSIFICATIONS

Five major classifications

1) Asset Accounts
2) Liability Accounts Balance Sheet Accounts
3) Equity Accounts (Statement of Financial Position)

4) Revenue Accounts
Income Statement Accounts
5) Expense Accounts

6
BASIC RULES OF DEBITS AND CREDITS
Account Rule of Increase Rule of Decrease
• Asset Debit Credit
• Liability Credit Debit
• Equity Credit Debit
• Revenue Credit Debit
• Expense Debit Credit

Normal Balance position


✓ Use a debit to increase an asset or expense
account
✓ Use a credit to increase a liability, equity, or
revenue account
OR, TO SEE THIS IN THE ACCOUNTS

FORMAT OF JOURNAL PAGE ( Reproduced from Week 5 note )

8
RELATIONSHIP OF DEBITS / CREDITS
TO ACCOUNTING EQUATION

Assets = Liabilities + Owners’ equity


+ - - + - +

Revenues - Expenses

- + + -

9
ACTIVITY
The owner starts the business with £10,000 in cash
on 1 August 2012.

10
ACTIVITY (CONTINUED)

Cash

2012
Aug 1 Capital 10,000

Capital

2012
Aug 1 Cash 10,000

11
ACTIVITY (CONTINUED)
A van is bought for £4,500 in cash on 2 August 2012.

12
ACTIVITY (CONTINUED)

Cash
2012
Aug 2 Van 4,500

13
ACTIVITY (CONTINUED)
Fixtures (e.g. shelves) are bought on credit from
Shop Fitters for £1,250 on 3 August 2012.

14
ACTIVITY (CONTINUED)
Paid the amount owning to Shop Fitters in cash on 17
August 2012.

15
ACTIVITY (CONTINUED)
Combining all four of these transactions, the accounts now contain:

16
ACTIVITY

17
Activity (Continued)

18
Activity (Continued)

19
ACTIVITY (CONTINUED)

20
INVENTORY
Normally, goods and services are sold
above cost price, the difference being
profit. As you know, when goods and
services are sold for less than their cost,
the difference is a loss.

Selling Price Cost → profit

Selling Price Cost → loss.

21
AN INCREASE IN INVENTORY
An increase in inventory can be due to
one of two causes:

1) The purchase of additional goods.


2) The return in to the business of goods
previously sold.

22
AN INCREASE IN INVENTORY
(CONTINUED)
To distinguish the two aspects of the increase
of inventory, two accounts are opened:
A purchases account, in which purchases of
goods are entered.
A return inwards account, in which goods
being returned into the business are entered.

Purchases Return Inwards

23
A DECREASE IN INVENTORY
A decrease in inventory can be due to one of two
causes:

1) The sale of goods.


2) Goods previously bought by the business now
being returned to the supplier.

24
A DECREASE IN INVENTORY
(CONTINUED)
To distinguish the two aspects of the decrease
of inventory, two accounts are opened:
A sales account, in which sales of goods are
entered.
A return outwards account, in which goods
being returned out to a supplier are entered.
Sales Return Outwards

25
TWO PAIRS OF ACCOUNT AT A GLANCE

After purchases, there is a possibility of


returning the goods to suppliers ….it will be
entered into return outwards account.
Purchases Return Outwards
Return Outwards
is also known as
Purchase Returns

After sales, there is a possibility that the


customer returns good to us, it will be entered
into return inwards account.
Sales Return Inwards Return Inwards
is also known as
Sales Returns

26
PURCHASE OF INVENTORY ON CREDIT
On 1 August 2012, goods costing £165 are bought on
credit from D. Henry.

27
PURCHASE OF INVENTORY FOR CASH
On 2 August 2012, goods costing £310 are bought, cash
being paid for them immediately at the time of purchase.

28
SALES OF INVENTORY ON CREDIT
On 3 August 2012, goods were sold on credit for £375
to J. Lee.

29
SALES OF INVENTORY FOR CASH
On 4 August 2012, goods are sold for £55, cash being
received immediately at the time of sale.

30
RETURNS INWARDS
On 5 August 2012, goods which had been previously
sold to F. Lower for £29 are now returned to the
business.

31
RETURNS OUTWARDS
On 6 August 2012, goods previously bought for £96 are
returned by the business to K. Howe.

32
SPECIAL MEANING OF
‘SALES’ AND ‘PURCHASES’

Both ‘sales’ and ‘purchases’ have a special


meaning in accounting.
Purchases means the purchase of those goods
which the business buys with the sole
intention of selling.
Sales means the sale of those goods in which
the business normally deals and which were
bought with the prime intention of resale.

33
END

34

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