Double Entry An introduction to the dark side

1
Double Entry An introduction to the dark side

• Introduction to Business Accounting
• Week 2

2
The Basic Concept

• Whenever a financial transaction is recorded
• There must be 2 sides to the transaction
• The CREDIT (Cr)
• The DEBIT (Dr)

3
The main players

• In accounting we distinguish 4 types of item
• Balance Sheet items
• Assets
• Liabilities
• Profit Loss items
• Expenses
• Income
• Item Increase Decrease
• Asset Dr Cr
• Liability Cr Dr
• Expenses Dr Cr
• Income Cr Dr
• Capital Cr Dr
• Usually in sole traderships

4
A capital idea

• Decrease Capital by Increasing Drawings
• Drawings is a movement of capital
• Shown separately to clarify how much capital has
  been taken out
• Such that
• Opening Capital
• Plus Profit (or Less Loss)
• Less Drawings
• Closing Capital

5
Recording Financial Transactions

• Basic example
• Suppose you buy stationery for 50 pay by cheque
• And you have 1,000 in the bank already
• Bank 1,000 - 50 950
• Stationery 50
• Then motor expenses of 30
• Bank 950 - 30 920
• Motor Expenses 30
• And so on.

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More logical way

• Keep all transactions of a similar type in an
  account
• Manual systems use books of account for each type
• T accounts are representations of account books

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Recording Financial TransactionsDouble Entry

• A Starts Business with 5,000 cash 20,000
  loan
• B Buys market stall cash 1,500
• C Buys van cash 6,000
• D Buys stock cash 2,000
• Starts trading!
• E Sells goods costing 1,000 for 1,500 for
  cash
• F Puts fuel in van 30 cash
• G Buys more stock on credit 3,000
• H Sells goods costing 2,000 for 3,000 on
  credit
• I Celebrates good sale by spending evening in the
  pub, uses 50 from business
• Link 2.ppt

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Other Book entries

• Depreciation
• Example
• Straight Line Depreciation
• Car costs 12,000
• Has Useful Economic Life (UEL) of 4 years
• Has Residual Value (RV) of 2,000
• Annual Depreciation charge
• (12,000 2,000) / 4 2,500

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The Book Entries

• Year 1
• Dr Depreciation (PL) 2,000
• Cr Accumulated Depreciation (BS) 2,000
• Year 2
• Dr Depreciation (PL) 2,000
• Cr Accumulated Depreciation (BS) 2,000
• So total Accumulated Depreciation is 4,000

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Reducing Balance Depreciation

• D (1 - nv RV/Cost) X 100
• Asset cost 50,000
• UEL 10years
• RV 5,000

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The Process

• Depreciation (1- 10v5,000/50,000) X 100 21
• Year 1
• Cost 50,000
• Depreciation 10,500
• Year 2
• Net Book Value (50,000 10,500) 39,500
• Depreciation 39,500 X 21 8,295
• Year 3
• Net Book Value 31,205
• Depreciation 6,553
• Etc..
• End of Year 9
• Net Book Value should be about 5,000

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Selling Assets

• Because depreciation is matter of judgement
• The value of an asset after several years MAY NOT
  EQUAL the market value
• If we sell the asset
• There will be a difference between
• the Net Book Value and
• the Sale Receipt
• Because every transaction must balance Debits
  Credits
• We invent a balancing figure
• This is Profit (or Loss) on sale of asset

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Example

• Asset has NBV of 5,000
• It is sold for 6,500
• Dr Bank 6,500
• Cr Asset 5,000 (write it out of accounts)
• Cr Profit Loss account 1,500
• A Credit to PL is income
• We treat this as a profit on the transaction

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Worked Example

• Dilton Ltd. Began trading on 1st April 20X1 and
  on that date purchased equipment for 10,000 and
  two vans for 15,000 each.
• It has not bought any other assets since that
  date.
• The company's policy is to depreciate the
  vehicles over 4 years on a straight-line basis
  with estimated residual value of 3,000 per van.
  
• The company depreciates equipment by 15 per
  annum on a reducing balance method.
• During the year ended 31/3/20X4 the company sells
  one van for 7,500 and an item of equipment for
  1,200.
• This item had cost 1,500 and had accumulated
  depreciation of 416.

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Worked Example

• Required
• What entries would appear in the Profit Loss
  account for the year ended 31/3/20X4 for
• (a) these transactions
• (b) depreciation
• Show the Fixed Assets section of the Balance
  Sheet as at 31/3/20X4
• Link_3.ppt

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Doubtful Debts Credit Sales

• Doubtful Debts Provision
• Found in Balance Sheet
• Reduces Debtors figure
• But is not a real reduction
• Flags up a possibility
• Reduces profit accordingly (prudence principle)

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Provisions

• To Create a Provision
• Cr Provision in Balance Sheet
• Dr Profit Loss
• To Increase a Provision
• Cr Provision by amount of increase
• Dr Profit Loss

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Worked Example

• Frome Ltd has an accounting year end of 31
  August.
• Below is an extract from their Balance Sheet as
  at 31 August 20X2
• Debtors 180,000
• Provision for Doubtful Debts 3,600
• 176,400
• In the year ended 31 August 20X3 Frome Ltd
  received 548,000 from debtors and at the end of
  the year had outstanding Debtors of 207,000
  after writing off a debt of 5,200.
• The directors have also decided to make a
  provision for doubtful debts of 3 of
• closing debtors.
• Required
• Calculate credit sales for the year.
• Show the entries in the balance sheet as at 31
  August 20X3.
• What entries would appear under Expenses in the
  Profit and Loss account?

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Answer

• Debtors
• Opening balance 180,000 548,000 Bank
•   5,200 Bad debt
• CREDIT SALES 580,200 207,000 Closing balance
•  
• 760,200 760,200
• Provision for Doubtful Debts 207,000 X 3
  6,210 therefore increase of 2,610
• Credit sales 580,200
• Debtors 207,000
• Provision for Doubtful Debts 6,210
• 200,790
• Expenses

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What does this all mean?

• Accounting is based on a very straightforward
  principle.
• The opening balance sheet shows the position of
  the business its wealth
• If every transaction is recorded with equal
  debits credits the accounts will ALWAYS be in
  balance
• At year end subtract expenses from income
• This is profit (or loss)
• Close the PL account and clear this to the
  balance sheet
• Balance all the asset liability accounts, add
  profit/loss and you have the position at year
  end