Double Entry Accounting

• Accounting process


  • OBSERVING, IDENTIFYING, and MEASURING EVENTS
  • RECORDING, CLASSIFYING, and SUMMARIZING measurements
  • REPORTING ECONOMIC EVENTS and INTERPRETING FINANCIAL STATEMENTS
• Financial Statements


  • Statement of Financial Position
  • Statement of Financial Performance
  • Statement of Changes in Equity/Retained Earnings
  • Statement of Cash Flows
• Assets


  • Resources controlled by the business as a result of past transactions & events from which future economic benefits are expected to flow to the business
  • CURRENT ASSETS - reasonably expected to be realized in cash within one year from the reporting date or the normal operating cycle, whichever is longer
  • NON-CURRENT ASSETS - resources held for the accretion of wealth, for use in the production of supply of goods or services, or for the administration purposes
• Liabilities


  • Present obligations of an entity arising from past transactions or events, the statement of which is expected to result in an outflow from the business of resources embodying economic benefits
  • CURRENT LIABILITIES - reasonably expected to be settled by cash, delivery of goods or performance of service within its normal operating cycle or within one year from reporting date whichever is longer
  • NON-CURRENT LIABILITIES - long term liabilities which are payable for a period longer than one year
• Owner's Equity (OE)


  Residual interest containing the net difference between total assets and total liabilities (OE=A-L) that represents ownership. OE is increased by additional contribution of the owner and the recognition of net income (NI=R-E) and decreased by withdrawals of the owner and recognition of business' net loss
• Revenues


  Earnings arising from the main line of operations of the business
• Expenses


  Costs being incurred by the business in generating revenue
• Chart of accounts


  Listing of all the accounts and is usually tailored to the operation of business. The function is to guide the accountant or bookkeeper in ensuring uniformity and consistency in the use of all the accounts in recording business transactions. Account titles are arranged in financial statement order: assets, liabilities, owner's equity, revenues, and expenses. Assets are always ordered by liquidity with the most liquid on top. Liabilities short-term debts (paid in less than1 year) first followed by long-term liabilities arranged in alphabetical order. Owner's Equity capital goes first, then drawing. Revenues and Expenses are always in alphabetical order. The accounts are numbered or coded for the purpose of indexing and cross-referencing.
• Journal


  Financial diary of business that is used to record chronologically all transactions of the business as they occur. Provides the 1st evidence of a formally-recorded transaction. Commonly referred as the BOOK OF ORIGINAL ENTRY. Two Types of Journal: GENERAL JOURNAL - typically displays the transaction date, account titles and explanations, references, and respective amounts of corresponding accounts. SPECIAL JOURNAL - used to record recurring transactions. There are four (4) common types of special journals: Sales Journal, Cash Receipts Journal, Purchase Journal, Cash Payments Journal.
• Ledger

  Accounting book in which the accounts and their related amounts as recorded in the journal are posted periodically. Known as BOOK OF FINAL ENTRY. The balances of the different accounts in the ledger are used to prepare financial statements. Two Types of Ledger: GENERAL LEDGER - grouping of all accounts used in preparing the FS. Ledger are usually grouped according to their chart of accounts and arranged according to the order on how they appear on the FS. SUBSIDIARY LEDGER - group of accounts with a similar characteristic. ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER, ACCOUNTS PAYABLE SUBSIDIARY LEDGER.
• Debit


  Accounting entry that: Increases Assets, Increases Expenses, Decreases Liability, Decreases Owner's Equity. Positioned on the left in an accounting entry.
• Credit


  Accounting Entry that: Increases Liability, Increases Owner's Equity, Decreases Assets, Decreases Expense. Positioned on the right in an accounting entry.
• Golden rules of accountancy (rules of debit and credit)


  FIRST - debit what comes in, credit what goes out. SECOND - debit all expenses and losses, credit all incomes and gains. THIRD - debit the receiver, credit the giver
• Impact of debit and credit on different accounts


  ASSETS ACCOUNTS - a debit increases the balance and a credit decreases the balance. LIABILITY ACCOUNTS - a debit decreases the balance and a credit increases the balance. EQUITY ACCOUNTS - a debit decreases the balance and a credit increases the balance. REVENUE ACCOUNTS - a debit decreases the balance and a credit increases the balance. EXPENSE ACCOUNTS - a debit increases the balance and a credit decreases the balance.
• 1. account


  An informal term for asset of financial records that use double-entry bookkeeping. It contains the most basic parts of an account which are Account Title, a debit side, and a credit side.
• This is prepared every time a transaction is made.
• A listing of all account titles used by a company.
• Transactions in the general journal are recorded in what order?
• True or False. A journal provides a complete history of all transactions recorded in the order they occurred.
• A journal results from posting entries in the ledger.
• The fundamental accounting equation is Assets = Liabilities + Owner's Equity, which must remain balanced after every transaction.
• Debits increase assets and expenses, while credits increase liabilities, revenues, and equity.
• In double-entry accounting, every transaction affects at least two accounts: one account is debited, and another account is credited.