Double Entry Bookkeeping

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Chapter

DOUBLE ENTRY BOOKKEEPING

CHAPTER CONTENTS
Introduction Ledgers Journal Trial Balance Practice Questions Answer Bank

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INTRODUCTION ACCOUNTING CYCLE Accounting cycle includes all five of the following records: Journal Ledger
It is the first book of accounts where transactions are initially recorded in a chronological order (date wise). It is also known as Day Book or Book of Prime Entry.

It is the second book of accounts where transactions are posted from journal and are classified according to their nature that is assets, capital, liabilities, income and expenses. It is not a part of double entry rather it is prepared for the following two purposes: It ensures the arithmetical accuracy of the previous two steps that is journal and ledger. It provides the list of balances of all assets, capital, liabilities, income and expenses with the help of which income statement and statement of financial position will be prepared.

Trial balance

Income Statement Statement of financial position

It is prepared to show the results of business activity conducted during the year in terms of profit and loss. It was before known as Trading, Profit and loss account. It shows what assets, capital and liabilities a business has at a particular date.

Note: Both income statement and statement of financial position are combined referred as financial statements. These are prepared annually on the last day of the business financial year. Here we will look at the actual definition of accounting, which is as follows: Accounting It is a process of recording, classifying and summarizing the results of business activity conducted during the year. Journal Ledger Income statements and Statement of financial position

Recording Classifying Summarizing

PREPARING JOURNAL Journal is used to keep record of transactions taking place on daily basis. It is used as an initial store of information of the transactions before transferring them to ledger accounts. It also facilitates the preparation of ledger accounts. HOW DOES A JOURNAL LOOK LIKE? DATE MORE TERMINOLOGIES As we have learnt from our earlier chapters that in order to earn income a business has to do some activity, which will result in income generation. We have come to know that all business organizations fall under any three categories, manufacturing, trading and services. Throughout our syllabus we will be concerned more about trading businesses. Now what do trading businesses do? They sell already manufactured goods. This means that they first need to buy these goods at some cost, which will be later sold to generate income at a stated price. Purchases Sales These are the goods which business buys in order to resell them at profit. Purchases fall under the category of Expenses. These are the goods that business has sold at their fixed price. Sales fall under the category of Income.
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DESCRIPTION

Dr

Cr

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PREPARING LEDGER We have seen how transactions are entered in an accounting equation and that too with double effect. It has been explained earlier that businesses do not constantly draw accounting equation each time a transaction takes place rather it is recoded in proper books of accounts, which have been explained above. The principles followed in preparation of journal and ledgers are same that every transaction is to be recorded in two effects, which is known as DOUBLE ENTRY BOOKKEEPING SYSTEM. However, ledger comes next to journal but in order to have better understanding of double entry system we will consider journal after having complete learning about ledger accounts. According to this system the transactions are entered in a set of individual ACCOUNTS.
LEDGER ACCOUNTS OR

An account is a place where all the information in terms of increase and decrease relating to assets, capital, liabilities, incomes and expenses is summarized. Ledger accounts are separate pages in a book where a separate page is allocated to each individual asset, capital, liability, income and expense. For example, there will be a separate account for motor vehicles where all the information in respect of it will be recorded. From our earlier knowledge we know that there can be a total of two possible effects in any of the items listed above, either an increase or decrease. In order to record these two effects each ledger account (which is a separate page) is divided into two halves. Once this division has been made one side will be called as left side and the other as right. In accounting terminology left side is referred as Debit side and the right side as Credit side abbreviated as Dr and Cr respectively. TIP to learn Drive on left and crash on right. HOW DOES AN ACCOUNT LOOK LIKE? NAME OF ACCOUNT

Dr
Left side

Cr
Right side
This line divides the account in two halves and a horizontal line drawn on top of it across the page gives it a look similar to T that is why it is called as T account.

All items fall in any of the following class of account Asset Capital Liability Income Expense CLASS OF ACCOUNT Asset Capital Liability Income Expense INCREASE + Dr Cr Cr Cr Dr DECREASE Cr Dr Dr Dr Cr

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PREPARING TRIAL BALANCE All the items recorded in all the accounts on the debit side should equal all the items recorded on the credit side of the accounts. There is a need to check that for each debit entry there is an equal credit entry. This requires listing separately all debit balances and credit balances as calculated during balancing process. This list of balances is typically known as a Trial Balance. HOW DOES A TRIAL BALANCE LOOK LIKE? NAME OF ACCOUNT Cash Capital Dr $ 500 500 It is prepared in following 4 steps: Step # 1 Enter the name of account in the first column. Step # 2 Enter the balance of the account in Dr Column or Cr column. Step # 3 After entering all balances the total of Dr and Cr columns should equal. Cr $ 500 500

Class Assignment
1. Grame commenced business on 1 June 20X9 with cash of $5,000 and she introduced a car valued at $4,500. The following transactions took place: 1 June 2 June 3 June 5 June 8 June 9 June 10 June 11 June 12 June 15 June 16 June 17 June 18 June 19 June 22 June 24 June 25 June 26 June 27 June Purchased goods for $1,000 cash Purchased fixtures and fittings $900 for cash Purchased goods on credit from Eileen $1,500 Sold goods for $1,200 cash Sold goods on credit to Tom for $900 Paid wages $100 in cash Bought goods from Eric for $850 on credit Sold goods to Trevor $800 on credit Sold goods on credit to Tom for $1,000 Paid Eileen $1,350 Tom paid in full Purchased $700 goods for cash Sold goods for cash for $500 Trevor paid $500 Paid wages $150 Paid Eric in full Loan received from Guy $1,000 Purchased a computer system for $4,100 Paid wages $150

Required: Write up the ledger accounts for the month of June.

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2.

Robert Dempster runs a wholesale business supplying small medical items to chemists shops, sports clubs and local businesses. All his transactions are on credit. His transactions in the first month of trading are listed bellow: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Opened a bank account in the name of Surgical Supplies and deposited $10,000. Bought a delivery van for $4,000 from Bans Galore Ltd. Bought bandages, sticking plasters a lint from Surgiplast Ltd for $150. Bought four boxes of antiseptic cream from Jessop Laboratories Ltd for $80. Sold bandages and one box of antiseptic cream to Woodside Rugby Club for $65. Paid Vans Galore $2,000 and Surgiplast Ltd $150. Bought 100 triangular bandages from Brown and Sons for $40. Sold 40 triangular bandages to Sids Scaffolding Services for $30. Received a cheque for $65 from Woodside Rugby Club. Paid Robert Dempsters private electricity bill of $130.

Required: Record the transactions in appropriate ledger accounts, bringing down balances on each account at the end of the period. 3. Mr. R Sharma commenced trading as a wholesale stationer on 1 June 20X4 with a capital of $5,000 with which he opened a bank account for his business. During June the following transactions took place: 1 June 2 June 3 June 5 June 8 June 9 June 10 June 11 June 12 June 15 June 16 June 17 June 18 June 19 June 22 June Required: (a) (b) (c) Post the entries to the ledger accounts. Balance the ledger accounts where necessary. Extract a trial balance at 31 May 20X4. Bought shop fittings and fixtures for cash from Store Fitments for $2,000 Purchased goods on credit from Abel $650 Sold goods on credit to Bruce $700 Purchased goods on credit from Green $300 Sold goods on credit to Hill $580 Cash sales paid intact into bank $200 Received cheque from Bruce in settlement of his account Purchased goods on credit from Kaye $800 Sold goods on credit to Nailor $360 Sent cheque to Abel in settlement of his account Paid rent by cheque $200 Paid delivery expenses by cheque $50 Received from Hill $200 on account Drew cheques for personal expense $200 and assistants wages $320 Settled the account of Green

MULTIPLE CHOICE QUESTIONS

1. A credit balance of $917 brought down on Ys account in the books of X Co means that:
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A. B. C. D. 2.

X owes Y $917 Y owes X $917 X has paid Y $917 X is owed $917 by Y

Which concept explains the principle of double entry bookkeeping in which every transaction is recorded twice? A. B. C. D. Dual aspect Cost of goods Profit Separate entity

3.

Davis has purchased some stationery with a cheque. Which of the following represents the double entry she must use to record this transaction? Account codes Bank Cash Purchases Stationery A. B. C. D. Dr 4071, Cr 5001 Dr 4072, Cr 6137 Dr 5001, Cr 4072 Dr 6137, Cr 4071 A decrease in an asset An increase in an asset A decrease in a liability An increase in an expense 4071 4072 5001 6137

4.

A debit can represent three of the following. Which is the wrong one out? A. B. C. D.

5.

Harry started a business by paying $5,000 into a business bank account. What is the accounting entry required to record this? $ A Dr Capital 5,000 Cr Bank 5,000 B Dr Bank 5,000 Cr Capital 5,000 C Dr Bank 5,000 Cr Drawings 5,000 D Dr Drawings 5,000 Cr Bank 5,000

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6.

Andra started a taxi business by transferring her car, worth $5,000 into the business. What are the accounting entry required to record this? $ A Dr Capital 5,000 Cr Car 5,000 B Dr Car 5,000 Cr Drawings 5,000 C Dr Car 5,000 Cr Capital 5,000 D Dr Car 5,000 Cr Bank 5,000 Which of the following changes cannot occur as a result of an entry in the bookkeeping records? A. B. C. D. Increase asset and increase liability Increase asset and increase capital Increase capital and increase liability Increase capital and decrease liability

7.

8.

A sole trader has capital of $10,000. Which of the following asset and liability figures could appear in this businesss statement of financial position? A. B. C. D. Asset Assets Assets Assets Debit sales Debit debtors Debit cash Debit cash $6,000 $6,000 $10,000 $14,000 Liabilities Liabilities Liabilities Liabilities $16,000 $4,000 $10,000 $4,000

9.

The double entry for receipt of cash from a customer is: A. B. C. D. Credit debtors Credit cash Credit sales Credit debtors

10.

A sole trader had opening capital of $15,000 and closing capital of $8,500. During the period, the owner introduced capital of $6,000 and withdrew $8,000 for her own use. Her profit or loss during the period was: A. B. C. D. $9,500 loss $4,500 loss $7,500 profit $17,500 profit Assets and income Liabilities and income Assets and expenses Liabilities and expenses Debit: motor expenses Debit: motor car Debit: motor expenses Debit: motor car Credit: cash Credit: cash Credit: creditor Credit: creditor

11.

A debit entry usually states: A. B. C. D.

12.

The double entry to record the purchase of a motorcar on credit is: A. B. C. D.

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13.

The double entry to record the withdrawal of cash from the bank account of the business by the owner is: A. B. C. D. Debit: drawings Debit: drawings Debit: liability Debit: capital Debit: stock account Debit: cash account Debit: cash account Debit: cash account Credit: cash Credit: capital Credit: cash Credit: drawings Credit: sales account Credit: sales account Credit: stock account Credit: stock account

14.

The double entry to record the sale of stock for cash is: A. B. C. D.

15.

A business sells goods on credit to a customer who pays two month later. When the cash is received the double entry made is: A. B. C. D. Debit: cash at bank account Debit: cash at bank account Debit: debtors account Debit: creditors account Credit: debtors account Credit: creditors account Credit: cash at bank account Credit: cast at bank account

16.

Which of the following is the best description of the separate entity principle? A. B. C. D. The fixed assets of a business are a separate entity from the current assets The drawings of a business are a separate entity from the profit of the business The business is a separate entity from the owner of the business The owner of the business must be a separate entity from a lender to the business Trade debtors Stock Bank overdraft Drawings Owners capital Petty cash Salesmans motor car Computer software Net assets = capital profit drawings Net assets = capital profit + drawings Net assets = capital + profit + drawings Net assets = capital + profit drawings

17.

Which one of the following is a current liability? A. B. C. D.

18.

Which one of the following is a current asset? A. B. C. D.

19.

Which of the following statements best describes the accounting equation? A. B. C. D.

20.

When inventory is taken out of the business for personal use by the owner of a business, these will be recorded as: A. B. C. Drawings An expense Stock

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D. 21.

A liability

If the owner of a business withdraws cash from the business bank account in order to meet her own expenses, this is classified as drawings. This is an example of the concept of: A. B. C. Internal control Personal ledger accounting Segregation of duties

22.

23.

24.

D. The separate entity principle When inventory is purchased on credit: A. Net assets and owners capital do not change B. Net assets increase and owners capital increase C. Net assets decrease and owners capital decreases D. Net assets increase and owners capital stays the same The effect of expense being paid in cash is: A. Net assets increase and profit increases B. Net assets decrease and profit decreases C. Net assets remain the same and profit increases D. Net asset remain the same and profit decreases Which business transaction would result in the following double entry being posted? Dr Cash Cr Sales A. The purchase of goods for resale on credit B. The receipt of cash from a credit customer C. A cash sale D. The banking of petty cash Which of the following is categorized as current liabilities? (i) (ii) (iii) Trade receivables Sales tax payable Trade payable

25.

26.

(iv) Drawings A. (i) and (ii) B. (ii) and (iii) C. (iii) and (iv) D. (ii) and (iv) Which item will be shown as a debit balance in the ledger accounts? A. Capital B. Bank overdraft C. Trade payables D. Inventory Which of the following summary is correct? A B C D Capital $35,000 $21,000 $25,000 $33,000 Assets $24,000 $15,000 $33,000 $25,000 Liabilities $11,000 $36,000 $8,000 $8,000

27.

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28.

Jenny has just started up a business. She introduced $10,000 of her own savings, equipment worth $2,500 and obtained a bank loan of $1,000. What is the correct balance on Jennys capital account following these transactions? A. B. C. D. $10,000 $13,500 $12,500 $11,000 Debit Purchases Debit Amdale Debit Purchases Debit Bank $300 $300 $300 $300 Credit Amdale Credit Purchases Credit Bank Credit Purchases $300 $300 $300 $300

29.

Which of the following is the correct entry to record a cash purchase of $300 from Amdale? A B C D

30.

East buys goods from South on credit. Which of the following is the correct double entry for this transaction in Easts books? A. B. C. D. Dr Purchases, Cr Cash Dr Purchases, Cr South Dr Cash, Cr Purchases Dr South, Cr Purchases

31.

A sole trader makes cash sales of $5,000 and credit sales of $3,000 in a month. All the stock purchased at a cost of $4,000 was sold, business expenses amounting to $500 were paid and the proprietor took out $300 for living expenses. $600 owed in respect of the stock purchased and sold. What was the profit in the month? A. B. C. D. $4,100 $3,500 $500 $3,200

32.

Which of the following is the correct entry for the repayment of a loan of $10,000 plus outstanding interest $500? A. B. C. D. Assets - $10,500, Liabilities - $10,000, Expenses + $500 Assets + 10,500, Liabilities + $10,500 Assets - $10,500, Liabilities - $10,500 Assets - $10,500, Capital - $10,500 Credit entries record decreases in assets Credit entries record increases in expenses Credit entries record increases in profits Credit entries record increases in capital or liabilities Money which the business currently has in its bank account An asset currently in use by a business An amount owed to somebody else which is due for repayment soon Something a business has or uses, which is likely to be held for a short time

33.

Which of the following statement concerning a credit entry is not correct? A. B. C. D.

34.

Which of the following best explanation of the term current asset? A. B. C. D.

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35.

Which one of the following is a current liability? A. B. C. D. Goodwill A loan from a director of the company repayable in two years time A bank overdraft Capital It is a process whereby every transaction is recorded by two equal accounting entries, a debit and a credit It is a process whereby every transaction is recorded by two accounting entries, a debit and a credit It is an accounting system which automatically produces the accounts of a business It is an accounting system which guarantees that errors cannot occur Assets Capital = Liabilities Liabilities + Capital = Assets Liabilities + Assets = Capital Assets Liabilities = Capital Buildings Cash balance Debtors Loan from Harry Machinery Creditors for goods Motor vehicles Cash at bank

36.

Which of the following best describes the process known as double entry bookkeeping? A. B. C. D.

37.

Which of the following statements is incorrect? A. B. C. D.

38.

Which of the following is not an asset? A. B. C. D.

39.

Which of the following is a liability? A. B. C. D.

40.

41.

Which of the following are correct? Accounts To record Entry in account (i) Assets An increase Debit A decrease Credit (ii) Capital An increase Debit A decrease Credit (iii) Liabilities An increase Credit A decrease Debit A. (ii) And (ii) B. (ii) And (iii) C. (i) And (iii) D. (i), (ii) and (iii) Mathew has a bank overdraft of $500 at the start of January. His only transactions are sales of goods for cash of $900 and purchases of goods on credit for $700 during the month. At the end of the month the balance on his cash at bank account will be: A. $300 credit B. $400 debit C. $700 debit D. $1,400 debit
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ANSWERS TO MULTIPLE CHOICE QUESTIONS

Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Answers A A D A B C C D D B C D A B A C C B D A D Questions 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Answers A B C B D C C C B B C B D C A C D B C B

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