Topic 3 - The Double Entry System

From Uni Study Guides
Jump to: navigation, search

This article is a topic within the subject Accounting 1A.

Contents

Required Reading

Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP pp. 99-128.

The Double Entry Accounting System

Account Type Increases Decreases
Assets Debits Credits
Expenses Debits Credits
Liabilities Credits Debits
Shareholders Equity Credits Debits
Revenue Credits Debits

As you know from previous weeks, the accounting equation, assets (resources) = liabilities + equity (sources of funds) must be maintained at all times. Thus, for every transaction there will be 2 effects (effecting 2 or more accounts). For example if cash (asset) increased than either another asset must decrease (e.g. accounts receivable) or a liability must increase (bank borrowing) or an equity account rises (revenue).

Hence, when we record transactions there are always to journal entries and "Debits" (LHS) must be equal to "Credits" (RHS). If we expand the equation to the following: Assets = Liabilities + Share Capital (Equity) + Opening Retained Earnings + Revenue - Expenses Then: Assets + Expenses = Liabilities + Share Capital (Equity) + Opening Retained Earnings + Revenue

Thus Assets and Expenses are on the left hand side and are increased by "Debiting" the account and are decreased by "Crediting" the account (as shown in the table above). Whilst, Liability and Equity accounts are increased by "Crediting" them and are decreased by "Debiting" them.

Prescribed Text Book Example

This is an example from page 114 of the prescribed textbook "Trotman, K. and M. Gibbins. Financial Accounting: An Integrated Approach" [1]

Step 1: Recording Journal Entries for Each Event

  • Revenue
    • DR Cash $85250, DR Receivables $4490
      • CR Revenue $89740
  • General Expenses
    • DR Expenses $67230
      • CR Payables $65110, CR Cash $2120
  • General Expenses / COGS - 2 events, you can separate it into 2 journal entries
    • DR Expenses $250, DR Expenses $610 [Decrease Equity]
      • CR Inv. Of Food $250, Cr Inv. Of Supplies $650 [Decrease Assets]
  • Depreciation Expense
    • DR Depreciation Expense $2380
      • CR Accumulated Depreciation $2380
  • Tax
    • DR Tax Expense $4460
      • CR Tax Payable $4460
  • Dividends
    • DR Retained Earnings $1000 [Decrease Equity]
      • CR Dividends Payable $1000 [Increase Liabilities]
  • Collecting Receivables
    • DR Cash $3330
      • CR Receivables $3330
  • Payment to Suppliers
    • DR Payables $59420
      • CR Cash $59420
  • Payment of Tax
    • DR Tax Payable $3000
      • CR Cash $3000
  • Payment of Dividend
    • DR Dividends Payable $800
      • CR Cash $800

Step 2: Find the Ending Balance of each Account

Untitled.jpg

End

This is the end of this topic. Click Accounting 1A to go back to the main subject page for Accounting 1A

References

Textbook refers to Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP

  1. Trotman, K. and M. Gibbins. Financial Accounting: An Integrated Approach, Thomas Nelson, Fourth Edition 2009
Personal tools
Namespaces

Variants
Actions
Navigation
Toolbox