Double entry bookkeeping
What is the seperate entity concept?
Double entry bookkeeping is based on the premise that the business is a separate entity, distinct from the owner.
Meaning that if the owner puts capital into the business, the business “owes” that amount to the owner.
Double entry bookkeeping
What is the dual effect?
- The dual effect is known as duality
- The beauty of the system lies in the requirement that every transaction affects two accounts.
- For every entry there must be an equal and opposite entry. Double entry bookeeping is the recording of transactions in the nominal ledger, with two sides to every entry. There can not be any single entries.
Double entry bookkeeping
All entries are classified as either DEBITS or CREDITS what does the acronyms DEAD CLIC mean?
DEBITS
E - Expense (e.g. rent, wages)
A - Asset (e.g. cash, receivables, fixtures and fittings)
D - Drawings (which is effectively a decrease in capital)
Decrease in liabilities (e.g. making payment to a supplier)
CREDITS
L - Liability (e.g. payables, accruals)
I - Income (e.g. sales, interest receivables)
**C **- Capital (effectively a liability owed to the owners of the business)
Decrease in asset (e.g. customer pays us so receivables are reduced)
What is a control account?
Is an account in the SFP which when the accounts are settled, would have a nil balance.
What is control account reconciliations?
CONTROL ACCOUNT RECONCILIATIONS is - reconciling the balance on the control account with the sum of the balances on the memorandum ledgers to ensure receivables and payables figures in the SFP.
- This requires the correct entry of all relevant transactions to both the control accounts and the memorandum ledger accounts
Define accruals
- Accruals are expenses incurred by the business, using up resources, before the year-end, but which are paid for after the year-end.
Examples :
1- Electricity
2- Telephone
3- Staff bonuses
4- Year-end staff party
- Accruals is a liability in the SFP
