LPC NOTES
[BUSINESS ACCOUNTS]
(2019-2020)
, BUSINESS ACCOUNTS
Double entry booking
THE PURPOSE OF DOUBLE ENTRY BOOKKEEPING
Bookkeeping - process of recording financial transactions in accounting records of business.
Double entry bookkeeping system - bookkeeping system to record day-to-day transactions.
System of recording financial dealings built upon a series of rules.
PRINCIPLES OF DOUBLE ENTRY
Every business transaction has two aspects to it, both aspects need to be recorded.
Examples which illustrate the two aspects of transactions:
(a) The business pays cash to buy premises:
Aspect 1 – The business has less cash
Aspect 2 – The business has acquired premises
(b) The business sells goods to a customer for cash:
Aspect 1 – The business has earned income
Aspect 2 – The business has more cash
(c) The business provides services to a client on credit:
Aspect 1 – The business has earned income
Aspect 2 – The business has a debt owing to it
(d) The client pays the business the money owed:
Aspect 1 – The business has lost the debt that was owing to it
Aspect 2 – The business has more cash
(e) The business pays wages:
Aspect 1 – The business has less cash
Aspect 2 – The business has incurred an expense
Each aspect must be recorded in a different account e.g. one account for cash, one account
for each type of asset, one for each type of expense, one for each person to whom the
business owes money, one for each debtor that owes money to the business.
Rules for recording transactions
For every transaction these two aspects must first be identified and then each of them
recorded in two separate accounts.
The system is a mechanical method of recording transactions as they happen and
involves no value judgements about the state of the business.
The business is separate from the proprietor
Business is regarded as completely separate from its proprietor.
When proprietor puts in cash, transaction recorded from the point of view of business.
Business is gaining cash and is incurring a liability, now owes money to the proprietor.
This liability to repay its proprietor is normally referred to as the ‘capital’ of the business.
Debit and credit
[BUSINESS ACCOUNTS]
(2019-2020)
, BUSINESS ACCOUNTS
Double entry booking
THE PURPOSE OF DOUBLE ENTRY BOOKKEEPING
Bookkeeping - process of recording financial transactions in accounting records of business.
Double entry bookkeeping system - bookkeeping system to record day-to-day transactions.
System of recording financial dealings built upon a series of rules.
PRINCIPLES OF DOUBLE ENTRY
Every business transaction has two aspects to it, both aspects need to be recorded.
Examples which illustrate the two aspects of transactions:
(a) The business pays cash to buy premises:
Aspect 1 – The business has less cash
Aspect 2 – The business has acquired premises
(b) The business sells goods to a customer for cash:
Aspect 1 – The business has earned income
Aspect 2 – The business has more cash
(c) The business provides services to a client on credit:
Aspect 1 – The business has earned income
Aspect 2 – The business has a debt owing to it
(d) The client pays the business the money owed:
Aspect 1 – The business has lost the debt that was owing to it
Aspect 2 – The business has more cash
(e) The business pays wages:
Aspect 1 – The business has less cash
Aspect 2 – The business has incurred an expense
Each aspect must be recorded in a different account e.g. one account for cash, one account
for each type of asset, one for each type of expense, one for each person to whom the
business owes money, one for each debtor that owes money to the business.
Rules for recording transactions
For every transaction these two aspects must first be identified and then each of them
recorded in two separate accounts.
The system is a mechanical method of recording transactions as they happen and
involves no value judgements about the state of the business.
The business is separate from the proprietor
Business is regarded as completely separate from its proprietor.
When proprietor puts in cash, transaction recorded from the point of view of business.
Business is gaining cash and is incurring a liability, now owes money to the proprietor.
This liability to repay its proprietor is normally referred to as the ‘capital’ of the business.
Debit and credit
