Professional, Practical, Proven

Academy 2019/2020

Financial AccountingLecture 2

Double Entry Book-keeping

- Each transaction that a business enters into affects the financial statements in two ways (Duality)

Examples:1) Purchase a Machine for €6,000 cash

- Increase in Machinery- Decrease in Bank

2) Payment of €3,000 Wages- Increase in Wages- Decrease in Bank

Double entry book-keeping ****

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Assets = Capital + Liabilities(own) = (owners money) (owe)

Basis of the Statement of Financial Position

- Why is it correct ?

Accounting Equation **

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Debit side (left) and Credit side (right)

- Number example adding

Ledger Account: T account

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Increase DecreaseDebit Credit

lAsset lExpenses lDrawings lPurchases l

T account rules – Asset Account ***

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Decrease IncreaseDebit Credit

ll Liabilityl Gainsl Capitall Sales

T account rules – Liability Account ***

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1) Identify the two items that are affected

2) Are they being increased or decreased

3) Decide whether each account should be debited or credited

1) Check that a Debit entry and a Credit entry have been made for the same amount

Steps for every transaction ***

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1) Cash transactions are transactions where payment is made or received immediately

• Also includes cheque payments and receipts.

• Bank account is an Asset account so money in (Receipt) is a Debit, while money out (Payment) is a credit.

• Bank account can have a Credit Balance (overdraft)

Common Transactions

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Examples: Opening Bank Balance of €1,0001) Pay wages €200 by cheque2) Cash Sales of €4003) Purchases by cash of €300

___________________Bank a/c_________________Balance b/f 1000 l Wages a/c 200Sales a/c 400 l Purchases a/c 300

l Balance c/f 9001400 l 1400

___________________Wages a/c________________Bank a/c 200 l

__________________Sales a/c__________________l Bank a/c 400

_________________Purchases a/c_______________Bank a/c 300 l

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2) Credit Sales and Credit Purchases- Credit Sales and Credit purchases are transactions where goods change hands

immediately, but payment is not made or received until sometime in the future.

a) Credit Sales- Goods go out of the business and the customer owes money to the company.- This customer is known as a Trade Receivable (Debtor – old name)- Trade Receivables are Current Assets in the Statement of Financial position.

• Example: Credit Sales of €1,000

• Debit (DR.) Receivables a/c 1,000• Credit (CR.) Sales a/c 1,000

• Receivables pays 1,000 they owe• Debit (DR.) Bank a/c 1,000• Credit (CR.) Receivables a/c 1,000

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b) Credit Purchases- Business buys goods on credit, they owe money to the supplier.- The supplier is known as a Trade Payable (Creditor – old name)- Trade Payables are Current Liabilities in the Statement of Financial

position.

• Example: Credit Purchases of €800

• Debit (DR.) Purchases a/c 800• Credit (CR.) Payables a/c 800

• When we pay the Payable we owe• Debit (DR.) Payables a/c 800• Credit (CR.) Bank a/c 800

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• Customers may return some goods to us and we may return some goods to our suppliers.

• Sales Returns (Returns In)• a) Sales Returns (cash) of 120 (Returns In)

• Debit (DR.) Sales Returns a/c 120• Credit (CR.) Bank a/c 120

• b) Sales Returns (credit) of 180

• Debit (DR.) Sales Returns a/c 180• Credit (CR.) Receivables a/c 180

3) Returns: Sales Returns and Purchases Returns

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• a) Purchases Returns (cash) of 80 (Returns Out)

• Debit (DR.) Bank a/c 80• Credit (CR.) Purchases Returns a/c 80

• b) Purchases Returns (credit) of 180

• Debit (DR.) Payables a/c 80• Credit (CR.) Purchases Returns a/c 80

Purchases Returns – Returns Out

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Transactions page 53 – Practice **

Questions 3,4 Manual page 61,62

DisclaimerCare has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate. To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication. Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation of the information contained in these lectures or in its use.