ACCOUNTING NOTES

DOUBLE ENTRY SYSTEM:

According to this system, every transaction has two aspects. Both the aspects are recorded in the books
of accounts. The double entry system of accounting or bookkeeping means that every business
transaction will involve two accounts (or more). For example, when a company borrows money from
its bank, the company's Cash account will increase and its liability account Loans Payable will
increase. If a company pays $200 for an advertisement, its Cash account will decrease and its
account Advertising Expense will increase.

Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always
be in balance. In our example involving Advertising Expense, the accounting equation remained in
balance because expenses cause owner's equity to decrease. In that example, the asset Cash
decreased and the owner's capital account within owner's equity also decreased.

Advantages of Double Entry System

(1) This system provides information about the concern as a whole.

(2) It is possible to evaluate the operational efficiency of the concern.

(3) This system helps to ascertain the profit or loss by preparing profit and loss account and balance
sheet.

(4) Accuracy of accounting records can be verified by preparing a Trail Balance.

(5) This system helps to know the financial position of a concern for a particular period.

(6) It provides information for meeting various legal requirements.

(7) The values of assets and liabilities can be known at any time by preparing the balance sheet.

Ledgers:

In addition to the general ledger (which contains general ledger accounts), manual bookkeeping systems
often had subsidiary ledgers. The details in a subsidiary ledger’s accounts should add up to the summary
amounts found in the related general ledger account. Subsidiary ledgers were common for the following
general ledger accounts: Accounts Receivable, Accounts Payable, Inventory, and Property, Plant and
Equipment. When a subsidiary ledger is used, the respective general ledger account is referred to as a
control account.

Debits and credits:

• debit indicates that an amount should be entered on the left side of an account
• credit indicates that an amount should be entered on the right side of an account .In short, debit
means left, credit means right.

An increase in an asset account is recorded with a debit amount. In other words, the amount should be
entered on the left side of the account. (Three examples of asset accounts are Cash, Accounts
Receivable, and Equipment.)

A decrease in an asset account is recorded with a credit amount. In other words, the amount should be
entered on the right side of the account.

To illustrate an increase and a decrease in asset accounts let’s assume that a company pays cash for
equipment which has a cost of $20,000. The company should record a debit of $20,000 in its asset
account Equipment (since this asset increased) and it should record a credit of $20,000 in its asset
account Cash (since this asset decreased).

Expenses are recorded as debit amounts. When a company pays $1,000 for its monthly rent, a debit of
$1,000 needs to be entered in the account Rent Expense (and a credit of $1,000 needs to be entered in
the asset account Cash).

Revenues are recorded as credit amounts. To record a cash sale of $700, the account Sales needs a
credit entry of $700, and the account Cash needs a debit entry of $700. An increase in a liability account
is recorded with a credit entry. In other words, the amount will be entered on the right side of the
account. (Two examples of liability accounts are Accounts Payable and Loans Payable.)

A decrease in a liability account is recorded with a debit. To illustrate an increase and decrease in
liability accounts let’s assume that a company signs a promissory note to a supplier to replace its $5,000
accounts payable. A debit of $5,000 is entered in Accounts Payable (since this liability decreased) and a
credit of $5,000 is recorded in Loans Payable (since this liability increased).

STA STAKE HOLDER REFERS TO A GROUP OF PEOPLE WHO HAVE A DIRECT INTEREST IN THE
BUISNESS EG. CUSTOMERS,INVERSTORS, MANAGERS.

An increase in a stockholders’ equity account is recorded with a credit entry. In other words, the amount
will be entered on the right side of the stockholders’ equity account. (Two examples of stockholders’
equity accounts are Common Stock and Retained Earnings.)

A decrease in a stockholders’ equity account is recorded as a debit. For example, the dividends declared
by a corporation will mean a debit is recorded in the Retained Earnings (and a credit to another
account).
 Dr. Cr.
ASSETS
LIABILITIES
CAPITAL
EXPENSE
REVENUE

ASSETS: THINGS OWNED BY THE BUISNESS (OR OWED TO THE BUISNESS) ARE REGARDED AS
RESOURCES OF THE BUISNESS.

LIABILITIES: THE AMOUNT OWED BY THE BUISNESS TO PEOPLE IS KNOWN AS LIABILITIES.

CAPITAL/ OWNER’S EQUITY:ANY RESOURCES PROVIDED BY THE OWNER OF THE BUISNESS.

Bookkeeping equation

The bookkeeping equation (or accounting equation) for a corporation is:

This equation must always be in balance under the double-entry bookkeeping method. The
bookkeeping equation is also helpful in understanding debits and credits. For example, asset accounts
normally have debit balances (and assets are increased with a debit entry). Recall that the term debit
means the left side of an account. As you look at the bookkeeping equation you see that assets are also
on the left side of the equal sign. Note that liabilities are on the right side of the bookkeeping equation.
Recall that earlier we said that liability accounts normally have credit balances (balances on the right
side of the account). Stockholders’ equity accounts are on the right side of the bookkeeping equation
and these accounts will also have credit balances. Since the stockholders’ equity account Retained
Earnings will normally have a credit balance it is logical that:

• Revenues will have credit balances since revenues will cause Retained Earnings (and therefore
stockholders’ equity) to increase, and

• Expenses will have debit balances since expenses cause Retained Earnings (and stockholders’ equity)
to decrease.

• Revenues cause stockholders’ equity to increase, and

• Expenses cause stockholders’ equity to decrease.

In effect the income statement is providing details on how the corporation’s operations had caused
stockholders’ equity to change. (There are also other transactions that will cause stockholders’ equity to
change such as issuing additional shares of stock, declaring dividends, and other transactions.)

Assets = Liabilities + Capital

case A: Collect An Account Receivable

If Edelweiss Corporation collected $10,000 from a customer on an existing account receivable (i.e., not a
new sale, just the collection of an amount that is due from some previous transaction), then the balance
sheet would be revised to show that cash (an asset) increased from $25,000 to $35,000, and accounts
receivable (an asset) decreased from $50,000 to $40,000. As a result total assets did not change, and
liabilities and equity accounts were unaffected, as shown in the following illustration.
Case B: Buy Equipment via Loan
If Edelweiss Corporation purchased $30,000 of equipment, agreeing to pay for it later (i.e. taking out a
loan), then the balance sheet would be further revised. The Case B illustration shows that equipment (an
asset) increased from $250,000 to $280,000, and loans payable (a liability) increased from $125,000 to
$155,000. As a result, both total assets and total liabilities increased by $30,00
Case C: Provide Services On Account
MyExceLab
What would happen if Edelweiss Corporation did some work for a customer in exchange for the
customer’s promise to pay $5,000? This requires further explanation; try to follow this logic closely!
Retained earnings is the income of the business that has not been distributed to the owners of the
business. When Edelweiss Corporation provided a service to a customer, it can be said that it generated
revenue of $5,000. Revenue is the enhancement resulting from providing goods or services to
customers. Revenue will contribute to income, and income is added to retained earnings. Examine the
resulting balance sheet for Case C and notice that accounts receivable and retained earnings went up by
$5,000 each, indicating that the business has more assets and more retained earnings. Note that assets
still equal liabilities plus equity.
Case D: Pay Expenses
MyExceLab
Expenses are the outflows and obligations that arise from producing goods and services. Imagine that
Edelweiss paid $3,000 for expenses. This transaction reduces cash and income (i.e., retained earnings),
as shown in the Case D illustration.
 LEDGER: Collection of an entire group of similar accounts in double-entry bookkeeping. Also
called book of final entry, a ledger records classified and summarized financial information from
journals (the 'books of first entry') as debits and credits, and shows their current balances.

Tangible:
land
Non current building
Assets:A noncurrent fixtures and equipment
asset is an asset that is
not likely to turn to motor vehicles
unrestricted cash within
one year of the balance
sheet date.
Intangible:
Assets Reputation(Goodwill)

Current Assets:cash
and other assets that
are expected to be eg.Inventory
converted to cash trade recievable
within a year. cash and cash
equivalents

Inventory: Unsold goods (trading items)

•NON-CURRENT(PAYMENT DUE WITHIN

MORE THAN ONE YEAR)
•EG.BANK LOAN
LIABILITIES

•CURRENT(PAYMENT DUE WITHIN ONE

FINANCIAL YEAR)
•BANK OVERDRAFT
LIABILITIES •TRADE PAYABLE
 DRAWINGS

CASH BANK GOODS NON-CURRENT EXPENSE

ASSETS

GOODS

PURCHASES SALES PURCHASE SALES RETURN

RETURN (RETURN (RETURN
OUTWARDS) INWARDS)
DEBIT CREDIT CREDIT DEBIT
(EXCEPTION)

THE GENERAL JOURNAL

ournal Entry Format

Transactions are recorded in all of the various journals in a debit and credit format, and are recorded
in order by date, with the earliest entries being recorded first. These entries are called journal
entries (since they are entries into journals). Each journal entry includes the date, the amount of the
debit and credit, the titles of the accounts being debited and credited (with the title of the credited
account being indented), and also a short narration of why the journal entry is being recorded.
 General Journal Accounting Example

An example of a journal entry that would be recorded in the general journal is:

Date Account Debit Credit

June 30 Depreciation expense 10,000
Accumulated depreciation 10,000
To record depreciation for the month of June

Journal Process Flow

After the transactions are recorded in these journals, you "post" the summary of all the transactions in
each journal to the general ledger, which contains all of a company's accounts. An account is a
separate, detailed record associated with a specific asset, liability, equity, revenue, or expense item.
Examples of accounts are:

 Accounts Receivable (an asset account)

 Accounts Payable (a liability account)
 Retained Earnings (an equity account)
 Product Sales (a revenue account)
 Cost of Goods Sold (an expense account)

Example:
The Moon Service Inc. engaged in the following transactions during the month of November 2015:
Nov. 01: Issued 20,000 shares of common stock at $20 per share
Nov. 03: Paid office rent for the moth of November $500.
Nov. 06: Purchased office supplies $250.
Nov. 12: Purchased business car for $25,000. Paid $10,000 cash and issued a note for the balance.
Nov. 21: Billed clients $24,000 on account.
Nov. 25: Declared dividends $3,000. The amount of dividends will be distributed in December.
Nov. 28: Paid utility bills for the month of November $180.
Nov. 29: Received $24,000 cash from clients billed on November 21.
Nov. 30: Paid salary for the month of November $7,500
Required: Record the above transactions in a general journal.
Solution:
Purpose of Subdivision of the journal:

In small concerns only one journal and one ledger may serve the purpose, because the
number of transactions is very small. But in large business concerns the number of
transactions are numerous, just one journal and one ledger will not do the job. That will
cause much inconvenience i.e., if we have only one journal in a large scale business, it is
not possible for one bookkeeper to record all the transactions in time. On the other hand, it
will not be possible for more than one person to use the same journal simultaneously with
the result that the accounting work will fall in arrear.

There are some more factors which necessitate the use of more than one subsidiary book
(journal):

1. If all the transactions are recorded in one book (journal), the book will be very large,
bulky, and difficult to handle.
2. If one bookkeeper is asked to record all the transactions, the possibility of errors and
mistakes will be great. It will also create opportunities for committing fraud.
3. If all the transactions are recorded in one book, it will be difficult to trace out a
particular transaction in future.

Special Journal:

By special journal we mean, a journal in which transactions relating to a certain special

group or recorded. Special journal is again subdivided into eight groups:

1. Purchases book or purchases journal

2. Sales book or sales journal
3. Purchases returns book or purchases returns journal
4. Sales returns book or sales returns journal
5. Bills receivable book
6. Bills payable book
7. Cash book or cash journal
8. Petty cash book

General Journal:

The transactions which do not fall with in the scope of above mentioned books, are recorded
in this journal e.g. purchase of an asset on credit, depreciation on assets, expenses
payable, bad debts etc. It is also known as journal proper, Modern journal or principle
journal. Some authors call it only "journal".

The main function of the above books is to supply necessary information to the ledger. All
the transactions are posted in the ledger on the basis of information available from these
books, so these books are called subsidiary books
Advantages of Subdivision of Journal:

The following advantages are derived from division of journal:

1. Because of subdivision the books cannot be bulky and hence there will be no
difficulty in handling them.
2. Accounting work is divided amongst a large number of employees. So work is done
nicely and promptly and no work is left in arrear.
3. Each employee can be held responsible for mistakes committed by him. This serves
as caution and care to the employees.
4. The efficiency of the employees increases because of the division of labor.
5. By keeping the book under the custody of different employees the chances of fraud
and defalcation are minimized.

THE PURPOSE OF A DOUBLE ENTRY SYSTEM IS TO APPLY THE DUAL ASPECT CONCEPT.

A BUISNESS BOUGHT A COMPUTER FOR THE OFFICE AND PAID BY CHEQUE. HOW WILL THE BUISNESS
RECORD THE TRANSACTION?

OFFICE EQUIPMENT=DEBITT

BANK=CREDIT
1. Bookkeeping is used to record the transactions of which entity?

Owner

Business Right!

Shareholder
2. What do we call the exchange of goods and services?

A transaction Right!
 An entry

A debit

3. What is to term used to describe the recording of a transaction in the accounting records using debits and credits?

A transaction

An entry Right!

A credit
4. What is the left side of a transaction which records something coming into the business called?

Credit

Debit Right!
5. What is the right side of a transaction which records something going out of the business called?

Debit

Credit Right!
6. Accounting records are made up of individual what?

Accounts Right!

Debits

Statements
7. Which of these is not a Financial Statement?

Balance Sheet

Cash Book Right!

Income Statement
8. The length of time over which a set of financial statements is produced is called what?

An Accounting Period Right!

A Balance Sheet date

A Year

TRIAL BALANCE:

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards
the preparation of financial statements. It is usually prepared at the end of an accounting period to assist
in the drafting of financial statements. Ledger balances are segregated into debit balances and credit
balances. Asset and expense accounts appear on the debit side of the trial balance whereas liabilities,
capital and income accounts appear on the credit side. If all accounting entries are recorded correctly and
all the ledger balances are accurately extracted, the total of all debit balances appearing in the trial
balance must equal to the sum of all credit balances.

Purpose of a Trial Balance

  Trial Balance acts as the first step in the preparation of financial statements. It is a working paper
that accountants use as a basis while preparing financial statements.
 Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been
recorded in the books in accordance with the double entry concept of accounting. If the totals of
the trial balance do not agree, the differences may be investigated and resolved before financial
statements are prepared. Rectifying basic accounting errors can be a much lengthy task after the
financial statements have been prepared because of the changes that would be required to
correct the financial statements.

LIMITATIONS:

Trial Balance only confirms that the total of all debit balances match the total of all credit balances. Trial
balance totals may agree in spite of errors. An example would be an incorrect debit entry being offset by
an equal credit entry. Likewise, a trial balance gives no proof that certain transactions have not been
recorded at all because in such case, both debit and credit sides of a transaction would be omitted
causing the trial balance totals to still agree.

Example Trial Balance:

The trial balance ensures that the debits equal the credits.

Errors not revealed by the trial balance

i. Error of omission

This is an error where a transaction is completely omitted from the books. No entries
were made at all for the transaction. It is as if the transaction has not existed.

ii. Error of commission

 In this case, double entry was observed but the transaction was posted to a wrong
account of the same class. For example goods sold to John was correctly credited to
Revenue (Sales) account but debited to Jane’s account.

iii. Error of principle

Double entry observed but an entry made in the wrong class of account. For example,
payment by cheque for vehicle repairs correctly credited to bank account but
debited to vehicle account instead. In this case, not only the account is wrong (vehicle
instead of vehicle repairs) but also the class of account is different. Vehicle account is a
real account (asset) whereas vehicle repairs account is a nominal account (expense).

iv. Error of original entry

The transaction was correctly according to the double entry system but with the wrong
amount. For example, payment of telephone expenses in cash of $560 was credited to
cash account and debited to telephone expenses account but by $600 in both
accounts.

v. Complete reversal of entries

For a given transaction, the account to be debited was credited and the account to
be credited was debited. For example, goods sold to Nadia for $500 was debited to
Revenue (Sales) account and credited to Nadia’s account, both by $500.

vi. Compensating errors

Errors on the debit side of the ledger have been set off by errors on the credit side of
the ledger. For example, vehicle account (debit balance) and commission received
account (credit balance) were both understated by $200.

vii. Error of duplication

A transaction was recorded twice in the ledger. Double entry was observed in each
case.

viii. Error of transposition

For a given transactions, double entry was correctly observed but the figures in amount
were not written in the correct order. Examples are: writing $450 instead of $540, $71
instead of $17, $1 425 instead of $1 452, etc. For example, cash received from Sam $164
was debited to cash account and credited to Sam’s account at $146.

THE PURPOSE OF A TRIAL BALANCE IS TO CONFIRM THAT THE TOTAL OF DEBIT BALANCES

IN THE LEDGER AGREE WITH THE TOTAL CREDIT BALANCES.

Q.WHICH ERROR PREVENTS A TRIAL BALANCE FROM BALANCING?

A) COMPLETELY OMITTING AN ENTRY

B) DEBITING A BROWN INSTEAD OF B BROWN

C) DEBITING PURCHASES INSTEAD OF MOTOR VEHICLES

D) MAKING AN ENTRY IN ONE ACCOUNT ONLY

D=RIGHT ANSWER

Q.X’s trial balance failed to balance. The difference of $100 was entered in a suspense account.it was
later found that rent received of $100 had been debited to the rent payable account.What correcting
entries are required?

A) ACCOUNT DEBITED=SUSPENSE ACCOUNT$100 CREDITED=RENT PAYABLE

RENT RECIEVED $100

B) DEBITED= RENT PAYABLE $100 CREDITED= SUSPENSE ACCOUNT$100

RENT RECIEVED

C) DEBITED= SUSPENSE 100 CREDITED= RENT PAYABLE 100

D) DEBITED= RENT RECEIVED 100 CREDITED=SUSPENSE 100

A=ANSWER

Correction of errors

When correcting errors it is useful to think about:

 What double entry should have been made:

 What double entry was made?
 What is the correcting journal?

For example: the purchase of a non-current asset costing $100 has been recorded by
debiting $10 to the non-current assets account and crediting $100 to cash.

What should the

What was the double
double entry have Correcting journal
entry?
been?
Dr NCA $100 Dr NCA $10 Dr NCA $90
Cr Cash $100 Dr Suspense (bal. fig) $90 Cr Suspense $90
Cr Cash
$100
 CARRIAGE

TRANSPORTATION
COST

CARRIAGE CARRIAGE
INWARDS/CARRIAGE OUTWARDS/CARRIGE
ON PURCHASES ON SALES