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Chapter 3

Chapter 3. THE DOUBLE ENTRY BOOKKEEPING (SISTEM CATATAN BERGU). Study Objectives. Explain what an account is and how it helps in the recording process. Define debits and credits and explain their use in recording business transactions. Identify the basic steps in the recording process.

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Chapter 3

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  1. Chapter 3 THE DOUBLE ENTRY BOOKKEEPING (SISTEM CATATAN BERGU)

  2. Study Objectives • Explain what an account is and how it helps in the recording process. • Define debits and credits and explain their use in recording business transactions. • Identify the basic steps in the recording process.

  3. DOUBLE ENTRY ACCOUNTING Accounting is defined as : Art of recording, classifying and summarizing In a significant manner And in terms of money Transactions and events Which are of a financial character And interpreting the results thereof.

  4. The Recording Process The Account Steps in the Recording Process The Recording Process Illustrated The Trial Balance Debits and credits Expansion of basic equation Journal Ledger Summary illustration of journalizing and posting Limitations of a trial balance Locating errors Use of dollar signs

  5. Double entry book keeping Art enables one to attain objectives Recording of transaction in orderly manner Classifying refers to grouping of accounts Summarizing thru Trial Balance, Trading, Profit and Loss Account and Balance Sheet. Terms of money : common language that is through the help of money example :

  6. Double entry Starts with recording and ends with presentation of financial information. Each transaction or event has two aspects or sides : DEBIT and CREDIT Accounting trail : it’s a sequence of activities in an accounting process

  7. The Account • Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. • Debit = “Left” • Credit = “Right” Account An Account can be illustrated in a T-Account form. LO 1 Explain what an account is and how it helps in the recording process.

  8. THE ACCOUNTS FOR DOUBLE ENTRY The left hand side is called debit side; the right side is called the credit side.(T- account) Eg. If you paid Rs.10 by cheque for kettle, so debit the kettle account and credit bank account

  9. Debits and Credits Double-entry accounting system • Each transaction must affect two or more accounts to keep the basic accounting equation in balance. • Recording done by debiting at least one account and crediting another. • DEBITSmust equalCREDITS. LO 2 Define debits and credits and explain their use in recording business transactions.

  10. In terms of asset, liabilities, and capital 1. To increase an asset we make debit entry. 2. To decrease an asset we make a credit entry 3. To increase a liability/capital account we make a credit entry 4. To decrease a liability/capital account we make a debit entry.

  11. Debits and Credits If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 15,000 Balance LO 2 Define debits and credits and explain their use in recording business transactions.

  12. Debits and Credits If Debits are smaller than Credits, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance 1,000

  13. Expansion of the Basic Equation Relationship among the assets, liabilities and owners’ equity of a business: Illustration 2-11 Basic Equation Assets = Liabilities + Owners’ Equity Expanded Basic Equation The equation must be in balance after every transaction. For every Debitthere must be a Credit.

  14. Debits and Credits Summary Review Question • Debits: • increase both assets and liabilities. • decrease both assets and liabilities. • increase assets and decrease liabilities. • decrease assets and increase liabilities. LO 2 Define debits and credits and explain their use in recording business transactions.

  15. Assets and Liabilities • Assets - Debits should exceed credits. • Liabilities – Credits should exceed debits. • The normal balance is on the increase side. LO 2 Define debits and credits and explain their use in recording business transactions.

  16. Owners’ Equity • Owner’s investments and revenues increase owner’s equity (credit). • Owner’s drawings and expenses decrease owner’s equity (debit). LO 2 Define debits and credits and explain their use in recording business transactions.

  17. Debits and Credits Summary Review Question • Accounts that normally have debit balances are: • assets, expenses, and revenues. • assets, expenses, and owner’s capital. • assets, liabilities, and owner’s drawings. • assets, owner’s drawings, and expenses. LO 2 Define debits and credits and explain their use in recording business transactions.

  18. Eg 1….. • The owner starts the business with Rs.10,000 in cash on 1 August 2008. • The effect…

  19. Answer…

  20. Eg 2….. • A van is bought for Rs.4,500 cash on 2 August 2008. • The effect…

  21. Answer…

  22. Eg 3….. • Fixtures (e.g. shelves) are bought on credit from shop Fitters for Rs.1,250 on 3 August 2008. • The effect…

  23. Answer…

  24. Eg 4….. • Paid the amount owing to Shop Fitters in cash on 17 August 2008. • The effect…

  25. Answer…

  26. REVIEW QUESTIONS

  27. THANK YOU

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