Double Entry System Session 04 Session Outline Double Entry System - PowerPoint PPT Presentation

Double Entry System Session 04

Session Outline ◼ Double Entry System  Normal Account Balances  Debit and Credit Rules ◼ Ledger Accounts  Recording Transactions  Balancing the Accounts

Double Entry System ◼ Double Entry System of Accounting indicates that every business transaction should involve two accounts (or more). ◼ Based on the “Dual aspects concept” ◼ Double Entry System allows for the accounting equation to always be in balance (Assets = Liabilities+ Capital) ◼ Debit vs. Credit : ‘Golden Rule in Accounting’

Double Entry System Normal Balances of Accounts ◼ NOTE: The normal balance of a contra account is always opposite to the main account to which the particular contra account relates. ◼ Examples:  Accumulated Depreciation- Contra Asset: Credit  Sales Returns (Return Inwards)- Contra Revenue: Debit  Drawings- Contra Capital: Debit

Class Activity ◼ Fill in the following blanks based on Double Entry rules.  A debit entry will ◼ …………………an asset ◼ …………………a liability ◼ …………………an expense  A credit entry will ◼ …………………an asset ◼ …………………a liability ◼ …………………an income

Example ◼ Identify the double entries for the following transactions.  Purchased furniture from KP Limited  Sold goods to MX company  Received a loan from MBC Bank  Purchased goods for cash  MX company returned some of the goods sold  Paid utility bills for the period  Received commission income by cheque  Owner pays a creditor from private money  Prepaid insurance expenses  Accrued interest payments

Ledger Accounts ◼ A Ledger Account helps in summarising the same nature of entries at a single place. ◼ Example:  Rather than passing 100 entries for sales, we can create one sales account and post all sales transactions in that ledger account date wise. ◼ There are two sides to a ledger account, and an account heading on top. So they are often referred to as ‘T’ accounts.

Ledger Accounts How to Record Transactions ◼ The ‘T Account’ is a visual representation of individual accounts, where all additions and subtractions (Debits and Credits) to the account can be easily tracked and represented visually. ◼ Left hand side of a T account represents Debit (Dr), where the right hand side of the account represents Credit (Cr). ◼ Based on the type of the account, the transaction should be properly entered in to the account. (e.g. Asset increase- Debit)

Question ◼ Record the following transactions in ledger accounts.  01/10- Started the business using owner’s capital, 600,000  05/10- Purchase of machine by cash, Rs. 200,000  07/10- Purchase of goods from ABC Ltd, Rs. 85,000  13/10- Receipt of bank loan, Rs. 240,000  16/10- Sold goods for cash, Rs. 120,000  19/10- Returned goods to ABC Ltd, Rs. 6,000  22/10- Owner invested additional capital, Rs. 400,000  22/10- Sold goods on credit to JKL Ltd, Rs. 89,000  26/10- Payment of electricity bills, Rs. 9,000  28/10- Paid salaries to employees, Rs. 22,000

Ledger Accounts Balancing Ledger Accounts At a point of time, it is necessary to obtain the balance of an account. ◼ The difference between the two sides (Debit and Credit) of an account is ◼ known as the Account Balance . Process of balancing an account. ◼  Obtain the totals of the two sides of the account separately.  The total which is higher among the two should be put on both sides as the total, leaving a small space above the total.  Write ‘ Balance c/d’ (carrying down balance) in the space above the lower side, compute the difference and put the figure.  Same c/d figure should be mentioned after the total of the other side, as ‘ Balance b/d ’ (Brought down balance): Closing balance will be the opening balance for the next period.  In case the total of both the sides of an account are equal, then that account is said to have ‘No balance ’ .

Ledger Accounts NOTE: Income and Expense Accounts will not have opening balances at the beginning of the period.

Question ◼ Balance the ledger accounts of the previous example.

Practice Question ◼ Following are the extracts from Meta Ltd, regarding the opening balances as at 1 st January 2018. Account Balance Cash 500,000 (Dr) Furniture 250,000 (Dr) Land 800,000 (Dr) Capital 900,000 (Cr) Bank Loan 600,000 (Cr) Simon 40,000 (Dr) PCL Ltd 90,000 (Cr)

Practice Question cont.. ◼ Following are the transactions occurred in January 2018.  05/01- Purchase of equipment from TX Ltd, Rs. 400,000  09/01- Paid Rs. 60,000 to PCL Ltd  10/01- Purchased goods worth Rs. 75,000  13/01- Sold goods to Peter, Rs. 80,000  16/01- Received Rs. 36,000 from Simon  19/01- Peter returned goods worth Rs. 12,000  22/01- Part settlement of the bank loan, Rs. 200,000  25/01- Owner investing Furniture for the business, Rs. 150,000  26/01- Donation made to Children’s trust, Rs. 20,000  26/01- Paid Electricity- Rs. 7,500, Advertising- Rs. 18,000 ◼ Required: Record all transactions in ledger accounts and balance the accounts as at 31 st January 2018.

Thank You Anjalee Senarath Email – anjalee@bms.edu.lk