dpa1013 note chapter 3
DESCRIPTION
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DOUBLE ENTRY
CONCEPT
CHAPTER 3
DOUBLE ENTRY SYSTEMS
This Double Systems has been used in all over the world by day.
This System has been developed to ensure all these records been kept in proper manner.
According to double entry principle, each transaction must be recorded in at least two ledger Account, with a debit to one more ledgers and a credit to one another ledger
INTRODUCTION
ACCOUNTING CYCLE
Document
Sources First Book Entry
Ledger
Trial Balance
Financial Report
Adjusted Trial
Balance
Accounting Cycle is a Process gathering and processing accounting data
It is call a complete cycle because the phase in accounting cycle keep repeating for each time and every transaction .
DOUBLE ENTRY SYSTEMSAn
Accounting equation
shows the relationship
between three
element –Assets ,liabi
lity and owner equity
Assets Liability
Owner Equity
What is double entry Systems
1.When transaction occurs ,it will impact on the element of its accounting equation
2.The relationship between assets and the financial resources used to finance
Contribution from Owners
Asset owned by business
Investment (Financial Resources)
External Sources-
Bank Loan ,Account Payable
DOUBLE ENTRY SYSTEMS
DOUBLE ENTRY SYSTEMS
The sum of all debits of the transaction must be equaled to the sum of credit of transactions
Debit entries will not necessary means an increase in the value of an account, and the credit will not necessary means a decrease value of account
TYPES AND FUNCTIONS OF ACCOUNT
Ledger
• Ledger accounts can be divided into 5 main categories:
• Revenues, Expenses, Assets , Liabilities ,Owner Equity
TYPES AND FUNCTIONS OF ACCOUNT
Revenue
• Revenue are income earned from business activities through the selling of goods and providing business
• Example revenue are sales revenue from services provided ,commission received ,interest received or
rent received.
Revenue
• However, revenue may be received from extraordinary business such as profit sale of used assets and dividend from investment
• The receipt of revenue will increase the profit and capital of a business entity
• A revenue account has a credit balance
TYPES AND FUNCTIONS OF ACCOUNT
Expenses
• Operating expenses refers to expenditure for formal business activities
• Examples are purchase of goods ,employer salaries and wages and freight charges
Expenses
• If expenses are not incurred as a result of business operation ,then the expenses are for non-ordinary business activities such as Loss of Sale used Assets, donation.
• An expenses have debit balance
Expenses
• The journal entries for payment of expenses:• Dt.Expenses• Ct. Cash \Bank
TYPES AND FUNCTIONS OF ACCOUNT
Assets Assets are resources or properties used to help operate
business Asset can be divided into 2 main categories- Non Current Assets and Currents Assets Assets account have a debit balance
TYPES AND FUNCTIONS OF ACCOUNT
Types of Assets
Types of Assets
Characteristics
Example Debit /balance
Fixed Assets a) Assets life is longer than one accounting period
b) Can be used repeatedly
c) Fixed Value
a) Land and Premises
b) Vehiclesc) Office
equipment
Debit Balance
Current Assets
a) Asset that are easily converted into cash
a) Cashb) Debtorc) Inventoriesd) Prepaid
Expensese) Accrued
revenue
Debit Balance
TYPES AND FUNCTIONS OF ACCOUNT
Liabilities Liabilities are debt owed by a business entity to external
party Liabilities can be divided into non current liabilities and non
current liabilities
TYPES AND FUNCTIONS OF ACCOUNT
Types of LiabilitiesLiabilities Characteristi
csExample Debit
/balance
Long term liabilities
a) Debts that must be paid off after one accounting period
a) Bank loanb) Debenturesc) Mortgage
Credit Balance
Current Liabilities
a) Debts that must be paid off within one accounting period
a) Creditorsb) Bank
Overdraft
Credit Balance
TYPES AND FUNCTIONS OF ACCOUNT
Owner Equity (Capital Account) The business owner will invest a certain amount of money or
assets into the business as the initial capital The total amount of cash or assets initially invested belong to
the business owner The owner equity is the business debt to the business owner
based on the amount invested by the business owner The total amount of owner equity will be determined by the
capital ,drawings and business performance.
TYPES AND FUNCTIONS OF ACCOUNT
Owner EquityEquity Characteristics Debit /balance
Capital a) Cash and Assets brought into the business by the owner
Credit Balance
Drawings a) Cash/goods/Assets taken by owner for personal use
b) Reduction of owner equity
Debit Balance
Profit Loss a) Calculate the Closing Account
b) Owner equity is increased if business generates a profit
Debit or Credit balance
Transactions and the double entry principles
Transaction Account Debited
Account Debited
a) Cash inflows Cash/Bank Sales/Debtor/Revenue/Capital
b) Cash outflows PurchaseCreditorExpenses Drawing Assets
Cash/Bank
c) Purchase of Goods: Cash Purchase Credit Purchase
PurchasePurchase
Cash/BankCreditors
d) Sales: Cash Sales Credit Sales
Cash/BankDebtor
SalesSales
e) Returns Inwards/Sales Returns Returns Inwards
Debtor
f) Returns Outwards/Purchase Creditors Returns Outwards
Transactions and the double entry principles
Transaction Account Debited
Account Credited
g)Assets: Business ResourcesPurchase of Assets (Cash)
(Credit)
Sales: Selling of used asset (Cash) (Credit)
AssetAsset
Cash/BankDebtors
Cash/BankCreditor
AssetAsset
h)Capital: Resources brought into business by owner
Cash Bank Assets
CashBankAsset
CapitalCapitalCapital
i) Drawings: Cash or goods assets withdrawn by the owner for personal use
Drawings CashBankPurchaseAsset
Transactions and the double entry principles
Transaction Account Debited
Account Credited
j) Payment of expenses Expenses Cash/Bank
k) Receipt of revenue Cash\Bank Revenue
l) Debtors:Customer who purchased goods on credit
Sale of Goods on credit to customer
Debtor returned goodsDiscount allowed
Received Cash or cheque from debtors
Debtor
Return Inwards
Discount Allowed
Cash\Bank
Sales
Debtor
Debtor
Debtor
Transactions and the double entry principles
Transaction Account Debited
Account Credited
m) Creditor: Supplier who supplied goods on creditPurchase of goods on creditReturn of goods to creditorDiscount receivedPayment to creditors by cash or cheque
PurchaseCreditorCreditorCreditor
CreditorReturn OutwardsDiscount ReceivedCash\Bank
n)Liabilities
Bank LoanApproved bank Overdraft
Cash\Bank-
Loan-
Double Entry Accounting
Double Entry Accounting
Double Entry Accounting
Example :Transaction and Double Entry Principle
Example: Transaction and Double Entry Principle
Example: Transaction and Double Entry Principle
QUESTION & ANSWER SESSION
EXERCISE AND
TUTORIAL SESSION