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Double-Entry Bookkeeping: A Comprehensive Guide for Beginners, Study notes of Financial Accounting

notes from book chapter 3, double-entry bookkeeping

Typology: Study notes

2019/2020

Uploaded on 12/06/2020

giorgia-dorrell
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Financial Accounting – NOTES CHAP 3 : double-entry bookkeeping
INTRODUCTION
Working def : a way of systematically recording the financial transactions of a company so that each
transaction is recorded twice
Formal def : most commonly used system of bookkeeping based on the principle that every financial
transaction involves the simultaneous receiving and giving of a value, and is therefore recorded twice.
Double-entry bookkeeping is a key element to understand accounting
= A way of systematically recording accounting transactions into an orga’s accounting books.
-it’s a business diary where all the financial transactions are recorded;
-it’s systematic recording of income, expenses, assets, liabilities and equity.
THE ACCOUNTING EQUATION
-Each transaction is recorded twice because it’s a method of checking that the entries have been made
correctly
-At the heart of the double-entry system is the accounting equation
Step 1 :
Assets=Liabilities
For every asset, there is a liability
Step 2 : equity is a type of liabilities because it is owed to the owner of a business
If we expand our accounting equation to formally distinguish btw claims which owners have over a
business (equity) and claims which others have over the business (third-party liabilities), we now
have:
Assets=Liabilities+Equity
Step 3 :
Assets=Liabilites+Equity+Profit
When orga earns a profit, its assets increase. Profit is on the same side as liabilities because profit
is owed to the owner. Thus, profit also increases the owner’s share in the business. If a loss is
made, assets decrease, but the principle of equality still holds
Step 4 :
Asssets=Liabilities+Equity (+IncomeExpenses)
All we have done is broken down profit into its constituent parts. The basic equality is maintained
Step 5 :
Assets+Expenses=Liabilites+Equity +Income
We have now rearranged the accounting equation by adding expenses to assets. We have still
preserved the accounting equation
Step 6 : In accounting terms, assets and expenses are recorded using debit entries and income, liabilities
and equity are recorded using credit entries. Each page of each book of account has a debit side
(left) and a credit side (right)
‘T’ Account (ledger account)
Assets and expenses
on the left-hand side
DEBIT
Incomes, liabilities and capital
On the right-hand side
CREDIT
Rule of double-entry bookkeeping:
-For every transact°, there must be a debit and credit entry
- these debit and credit entries are equal and opposite
-in the cash book all accounts paid in are recorded on the debit side, whereas all amounts paid out are
recorded on the credit side
Summary of some of the major types of assets, liabilities and equity, income and expenses
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Financial Accounting – NOTES CHAP 3 : double-entry bookkeeping INTRODUCTION Working def : a way of systematically recording the financial transactions of a company so that each transaction is recorded twice Formal def : most commonly used system of bookkeeping based on the principle that every financial transaction involves the simultaneous receiving and giving of a value, and is therefore recorded twice. Double-entry bookkeeping is a key element to understand accounting = A way of systematically recording accounting transactions into an orga’s accounting books. -it’s a business diary where all the financial transactions are recorded; -it’s systematic recording of income, expenses, assets, liabilities and equity. THE ACCOUNTING EQUATION -Each transaction is recorded twice because it’s a method of checking that the entries have been made correctly -At the heart of the double-entry system is the accounting equation Step 1 : Assets = Liabilities For every asset, there is a liability Step 2 : equity is a  type of liabilities because it is owed to the owner of a business If we expand our accounting equation to formally distinguish btw claims which owners have over a business (equity) and claims which others have over the business (third-party liabilities), we now have: Assets = Liabilities + Equity Step 3 : Assets = Liabilites^ +^ Equity + Profit When orga earns a profit, its assets increase. Profit is on the same side as liabilities because profit is owed to the owner. Thus, profit also increases the owner’s share in the business. If a loss is made, assets decrease, but the principle of equality still holds Step 4 : Asssets = Liabilities + Equity (+ IncomeExpenses ) All we have done is broken down profit into its constituent parts. The basic equality is maintained Step 5 : Assets + Expenses = Liabilites +^ Equity^ + Income We have now rearranged the accounting equation by adding expenses to assets. We have still preserved the accounting equation Step 6 : In accounting terms, assets and expenses are recorded using debit entries and income, liabilities and equity are recorded using credit entries. Each page of each book of account has a debit side (left) and a credit side (right) ‘T’ Account (ledger account) Assets and expenses on the left-hand side DEBIT Incomes, liabilities and capital On the right-hand side CREDIT Rule of double-entry bookkeeping: -For every transact°, there must be a debit and credit entry

  • these debit and credit entries are equal and opposite -in the cash book all accounts paid in are recorded on the debit side, whereas all amounts paid out are recorded on the credit side Summary of some of the major types of assets, liabilities and equity, income and expenses

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STEP 1 : the initial recording using double-entry bookkeeping. The individual amounts are directly entered into 2 different ledger account one on each side. We record 3 items : date of transaction, account which is equal and opposite to complete the double-entry and the amount. The first transaction is recorded as A and so on STEP 2 : Balancing off When all the entries for a period have been completed, we need to balance off the accounts and carry forward the new total to the next period. It’s convenient to carry forward all the figures especially for the trial balance; -However, revenues, purchase, revenue returns, purchases returns and expenses will be closed off as they will not be carried forward for the next period. -The Statement of financial position items will be brought forward on the first day of the new accounting period because assets, liabilities and equity continue. The aim of the trial balance : -to prepare a trial balance from which we will prepare the statement of finan posit° and income statemt -to close down income and expenses accounts which relate to the previous Period -to bring forward to the next period the assets, liabilities and equity balances 1° All the accounts are closed off. we then close of the revenue and expenses items to the income Statement The balance would be carried forward if above totals and brought forward if below them Financ. posit° items brought forward are brought forwrd on the 1st^ day of the new accountg period