Ebook 8 - Payhip Sample Preview
CONTENTS WHY USE THE DOUBLE ENTRY ACCOUNTING SYSTEM
3
DEBITS & CREDITS
6
CONTROL ACCOUNTS
22
GENERAL LEDGER
30
GENERAL ACCOUNTING EQUATION
39
CHART OF ACCOUNTS
45
TRIAL BALANCE
48
INCREASING-DECREASING ACCOUNT BALANCES
60
ADJUSTING ACCOUNTS
66
CLOSING OUT INCOME AND EXPENSE ACCOUNTS
76
P&L STATEMENT
97
BALANCE SHEET
104
REVERSING ADJUSTMENTS
116
BANK RECONCILIATION
126
INDEX
138
The double-entry accounting system was never designed to make recording easy. Instead, it was designed with checking in mind—to make checking quick, easy, and very reliable.
2
Why Use the Double Entry Accounting System
3
You could attempt to keep a business’s record of income and expenses by using a simple system.
Electricity Rent
Sales
Wages Purchases
The problem is a business makes many transactions—some of which are cash transactions — some of which are credit transactions—and all of these transactions are mixed together.
Cash Transactions Credit Transactions
This makes checking a simple system difficult and time consuming. Because of this, it’s easy to make mistakes, and if only some of these transactions are incorrect, your records will be rendered useless.
4
To overcome this problem, modern day accounting systems are based upon the double entry accounting system. This system is not only more reliable, but it is also much quicker and easier to check. With this system, you still record income and expenses.
Electricity Rent
Sales
Wages Purchases
But you record a duplicate copy of those transactions in other accounts, as well. As you do this, the system is cleverly designed to sort your duplicate record of transactions into homogenous groups of cash transactions and credit transactions.
Debtors Creditors Bank
Once sorted, the transactions shown in these other accounts are in a convenient format for checking against the records of other businesses, such as the bank statement and suppliers statements. If the duplicate record proves to be correct, it follows that your record of transactions shown in the income and expenses should be correct, as well.
Debtors Creditors Bank
Electricity Rent
Sales
Wages Purchases
5
Debits & Credits
6
When recording transactions with the double entry system, you always use two or more accounts. The reason for this is each transaction is deemed to have two sides: money or value comes from somewhere, and that money or value goes somewhere or is used somewhere.
Came from
Went to
For example, if you pay for telephone expense by check or electronic payment, you withdraw money from the bank and send it to the telephone company. To record this transaction, you would use an account called a checking account or a bank account to show where the money came from.
Came from
Bank
And you would use an account called a telephone expense account to show where the money was used or where it went.
Went to
Telephone
7
Each account is also divided into two sides: a credit side and a debit side. The reason for this is sometimes money or value comes from an account, but at other times, it goes to that account. Take the bank account for example. Sometimes you withdraw money from the bank, but at other times, you deposit money into it.
Need some way to tell whether the money came from the bank or went to it?
Bank 500
With the double entry system, you overcome this problem by using debits and credits. If money or value has come from an account, you record the transaction amount on the credit side of the account.
Came from
Bank DR
CR
If money or value went to an account, you record the transaction amount again, but this time on the debit side of the account.
Went to
Telephone DR
CR
8
In your bookkeeping or accounting course, these accounts are shown as Taccounts, and when you record transactions with T- accounts, you’re always showing a flow of money or value.
Came from
Bank CR
DR
Went to
Telephone CR
DR
For example, to record a telephone payment, you would record the transaction amount on the credit side of the bank account to show that money came from the bank.
Came from
Bank DR
CR
500
At the same time, you would record the transaction amount on the debit side of the telephone expense account to show where the money went or where it was used.
Went to
Telephone DR
CR
500
9
Presumably, the words credit and debit were chosen to signify which account is owed for the provision of money or value and which account owes for it. In other words, by using a credit entry, you signify that the account is owed for the provision of money or value.
(Owed Came from
Bank DR
CR
500
And by using a debit entry, you signify the account owes for the receipt of that money or value.
(Owes) Went to
Telephone DR
CR
500
Regardless of etymology, though, you use the same process to record each and every transaction the business makes no matter whether you’re recording a cash transaction or a credit transaction.
Came from DR
CR
500
Went to DR
CR
500
10
Recording Cash Transactions Cash transactions are those the business makes with the bank, and you need to record all deposits.
BANK STATEMENT Deposit Withdrawal
5000 500
Deposit Withdrawal
1200 750
Deposit
1300
Withdrawal Withdrawal Deposit Withdrawal
300 700
1200
And you need to record all withdrawals, made by either check or electronic payment.
BANK STATEMENT Deposit Withdrawal
5000 500
Deposit Withdrawal
1200 750
Deposit
1300
Withdrawal Withdrawal
300
Deposit Withdrawal
1200 700
11
Recording a Loan Whenever you are required to record a cash transaction using debits and credits, begin by asking “where did the money or value come from and where did it go, or where was it used?” For example, suppose a business owner borrowed some money from a friend or relative to start a retail store. When they received the money, the business owner would deposit it in the business’s bank account. To record the deposit transaction, you would use an account known as a loan account and the bank account.
Loan CR
DR
Bank CR
DR
You would record the transaction amount on the credit side of the loan account to show that the money came from a loan.
Came from
Loan CR
DR
5000
Then you would record the transaction amount again, but this time on the debit side of the bank account to show that the business owner deposited this money into the bank.
Went to
Bank DR
CR
5000
12
Recording Purchases You use the same process to record all transactions, and with cash transactions, you always update the bank account and one other account. For example, if the business owner buys goods to sell in the store and pays for those goods by check or electronic payment, they will withdraw money from the bank. To record the withdrawal transaction, you would use the bank account and an account known as a purchases account.
Bank CR
DR
Purchases CR
DR
You would record the transaction amount on the credit side of the bank account to show that money came from the bank.
Came from
Bank DR
CR
750
Then you would record the transaction amount again, but this time on the debit side of the purchases account to show that the money was used to purchase goods.
Went to
Purchases DR
CR
750
13
Recording Expenses To operate the store, the business owner will need to pay for various expenses. If paying by check or electronic payment, they will withdraw money from the bank. To record expense transactions, you use the bank account and the appropriate expense account.
Bank CR
DR
Rent CR
DR
You credit the bank account to show that money came from the bank.
Came from
Bank CR
DR
1200
Then you debit the relevant expense account to show where the money was used or where it went.
Went to
Rent DR
CR
1200
14
Recording Sales You show the flow of money the same way regardless of whether you’re recording an expense transaction or an income transaction. For example, if the store owner sold some of the goods for cash, they would deposit the money in the bank. To record the deposit transaction, you would use an account known as a sales account and the bank account.
Sales CR
DR
Bank CR
DR
You credit the sales account to show that money came from sales
Came from
Sales CR
DR
850
Then you debit the relevant expense account to show where the money was used or where it went.
Went to
Bank DR
CR
850
15
Checking Cash Transactions By month-end, you should have a complete record of cash transactions. You will have one record of sales and costs in accounts known as income and expense accounts.
Electricity 250
And you will have a duplicate record of these transactions in the bank account.
Bank 5000
500
850
750
1800
300
950
700 600
16
Because the bank account contains a duplicate record of your cash income and expense transactions, you can check all of your income and expense accounts by checking the bank account, alone. You do this by checking your bank account against your business’s bank statement.
BANK STATEMENT Deposit Withdrawal
5000 500 1200
Bank
750 1300
5000
500
1200
750
1800
300
950
700
300 1200 700
600
If it proves your bank account is correct, then your record of transactions in the in the income and expense accounts should be correct, as well.
17
3
DEBITS & CREDITS
6
CONTROL ACCOUNTS
22
GENERAL LEDGER
30
GENERAL ACCOUNTING EQUATION
39
CHART OF ACCOUNTS
45
TRIAL BALANCE
48
INCREASING-DECREASING ACCOUNT BALANCES
60
ADJUSTING ACCOUNTS
66
CLOSING OUT INCOME AND EXPENSE ACCOUNTS
76
P&L STATEMENT
97
BALANCE SHEET
104
REVERSING ADJUSTMENTS
116
BANK RECONCILIATION
126
INDEX
138
The double-entry accounting system was never designed to make recording easy. Instead, it was designed with checking in mind—to make checking quick, easy, and very reliable.
2
Why Use the Double Entry Accounting System
3
You could attempt to keep a business’s record of income and expenses by using a simple system.
Electricity Rent
Sales
Wages Purchases
The problem is a business makes many transactions—some of which are cash transactions — some of which are credit transactions—and all of these transactions are mixed together.
Cash Transactions Credit Transactions
This makes checking a simple system difficult and time consuming. Because of this, it’s easy to make mistakes, and if only some of these transactions are incorrect, your records will be rendered useless.
4
To overcome this problem, modern day accounting systems are based upon the double entry accounting system. This system is not only more reliable, but it is also much quicker and easier to check. With this system, you still record income and expenses.
Electricity Rent
Sales
Wages Purchases
But you record a duplicate copy of those transactions in other accounts, as well. As you do this, the system is cleverly designed to sort your duplicate record of transactions into homogenous groups of cash transactions and credit transactions.
Debtors Creditors Bank
Once sorted, the transactions shown in these other accounts are in a convenient format for checking against the records of other businesses, such as the bank statement and suppliers statements. If the duplicate record proves to be correct, it follows that your record of transactions shown in the income and expenses should be correct, as well.
Debtors Creditors Bank
Electricity Rent
Sales
Wages Purchases
5
Debits & Credits
6
When recording transactions with the double entry system, you always use two or more accounts. The reason for this is each transaction is deemed to have two sides: money or value comes from somewhere, and that money or value goes somewhere or is used somewhere.
Came from
Went to
For example, if you pay for telephone expense by check or electronic payment, you withdraw money from the bank and send it to the telephone company. To record this transaction, you would use an account called a checking account or a bank account to show where the money came from.
Came from
Bank
And you would use an account called a telephone expense account to show where the money was used or where it went.
Went to
Telephone
7
Each account is also divided into two sides: a credit side and a debit side. The reason for this is sometimes money or value comes from an account, but at other times, it goes to that account. Take the bank account for example. Sometimes you withdraw money from the bank, but at other times, you deposit money into it.
Need some way to tell whether the money came from the bank or went to it?
Bank 500
With the double entry system, you overcome this problem by using debits and credits. If money or value has come from an account, you record the transaction amount on the credit side of the account.
Came from
Bank DR
CR
If money or value went to an account, you record the transaction amount again, but this time on the debit side of the account.
Went to
Telephone DR
CR
8
In your bookkeeping or accounting course, these accounts are shown as Taccounts, and when you record transactions with T- accounts, you’re always showing a flow of money or value.
Came from
Bank CR
DR
Went to
Telephone CR
DR
For example, to record a telephone payment, you would record the transaction amount on the credit side of the bank account to show that money came from the bank.
Came from
Bank DR
CR
500
At the same time, you would record the transaction amount on the debit side of the telephone expense account to show where the money went or where it was used.
Went to
Telephone DR
CR
500
9
Presumably, the words credit and debit were chosen to signify which account is owed for the provision of money or value and which account owes for it. In other words, by using a credit entry, you signify that the account is owed for the provision of money or value.
(Owed Came from
Bank DR
CR
500
And by using a debit entry, you signify the account owes for the receipt of that money or value.
(Owes) Went to
Telephone DR
CR
500
Regardless of etymology, though, you use the same process to record each and every transaction the business makes no matter whether you’re recording a cash transaction or a credit transaction.
Came from DR
CR
500
Went to DR
CR
500
10
Recording Cash Transactions Cash transactions are those the business makes with the bank, and you need to record all deposits.
BANK STATEMENT Deposit Withdrawal
5000 500
Deposit Withdrawal
1200 750
Deposit
1300
Withdrawal Withdrawal Deposit Withdrawal
300 700
1200
And you need to record all withdrawals, made by either check or electronic payment.
BANK STATEMENT Deposit Withdrawal
5000 500
Deposit Withdrawal
1200 750
Deposit
1300
Withdrawal Withdrawal
300
Deposit Withdrawal
1200 700
11
Recording a Loan Whenever you are required to record a cash transaction using debits and credits, begin by asking “where did the money or value come from and where did it go, or where was it used?” For example, suppose a business owner borrowed some money from a friend or relative to start a retail store. When they received the money, the business owner would deposit it in the business’s bank account. To record the deposit transaction, you would use an account known as a loan account and the bank account.
Loan CR
DR
Bank CR
DR
You would record the transaction amount on the credit side of the loan account to show that the money came from a loan.
Came from
Loan CR
DR
5000
Then you would record the transaction amount again, but this time on the debit side of the bank account to show that the business owner deposited this money into the bank.
Went to
Bank DR
CR
5000
12
Recording Purchases You use the same process to record all transactions, and with cash transactions, you always update the bank account and one other account. For example, if the business owner buys goods to sell in the store and pays for those goods by check or electronic payment, they will withdraw money from the bank. To record the withdrawal transaction, you would use the bank account and an account known as a purchases account.
Bank CR
DR
Purchases CR
DR
You would record the transaction amount on the credit side of the bank account to show that money came from the bank.
Came from
Bank DR
CR
750
Then you would record the transaction amount again, but this time on the debit side of the purchases account to show that the money was used to purchase goods.
Went to
Purchases DR
CR
750
13
Recording Expenses To operate the store, the business owner will need to pay for various expenses. If paying by check or electronic payment, they will withdraw money from the bank. To record expense transactions, you use the bank account and the appropriate expense account.
Bank CR
DR
Rent CR
DR
You credit the bank account to show that money came from the bank.
Came from
Bank CR
DR
1200
Then you debit the relevant expense account to show where the money was used or where it went.
Went to
Rent DR
CR
1200
14
Recording Sales You show the flow of money the same way regardless of whether you’re recording an expense transaction or an income transaction. For example, if the store owner sold some of the goods for cash, they would deposit the money in the bank. To record the deposit transaction, you would use an account known as a sales account and the bank account.
Sales CR
DR
Bank CR
DR
You credit the sales account to show that money came from sales
Came from
Sales CR
DR
850
Then you debit the relevant expense account to show where the money was used or where it went.
Went to
Bank DR
CR
850
15
Checking Cash Transactions By month-end, you should have a complete record of cash transactions. You will have one record of sales and costs in accounts known as income and expense accounts.
Electricity 250
And you will have a duplicate record of these transactions in the bank account.
Bank 5000
500
850
750
1800
300
950
700 600
16
Because the bank account contains a duplicate record of your cash income and expense transactions, you can check all of your income and expense accounts by checking the bank account, alone. You do this by checking your bank account against your business’s bank statement.
BANK STATEMENT Deposit Withdrawal
5000 500 1200
Bank
750 1300
5000
500
1200
750
1800
300
950
700
300 1200 700
600
If it proves your bank account is correct, then your record of transactions in the in the income and expense accounts should be correct, as well.
17
