Double-entry bookkeeping: first principles

Question 1

How do ledger accounts work?

Answer 1

Double-entry bookkeeping recognises that each transaction has a dual aspect. Once the dual aspect of each transaction has been identified, the two bookkeeping entries can be made in the ledger accounts of the accounting system.
An account is kept in the ledger to report each different type of transaction.

Question 2

How is the ledger set out in a handwritten bookkeeping system?

Answer 2

the ledger will consist of a bound book, or separate sheets of paper - each account in the ledger will occupy a separate page

Question 3

How is the ledger set out in a computerised bookkeeping system?

Answer 3

the ledger will consist of a computer file, divided into separate accounts

Question 4

Illustrate the commonly-used layout of an account

Question 5

Illustrate a ‘T’ account

Question 6

Debit entry

Answer 6

the account which gains value. or records an asset, or an expense

Question 7

Credit entry

Answer 7

the account which gains value, or records a liability, or an income item

Question 8

What is recorded on the debit side for bank accounts and cash accounts?

Answer 8

money in

Question 9

What is recorded on the credit side for bank accounts and cash accounts?

Answer 9

money out

Question 10

When capital is introduced, what are the bookkeeping entries?

Answer 10

debit bank account
credit capital account

Question 11

True or False? The introduction of capital into a business is often the very first business transaction entered into the books of account.

Answer 11

true

Question 12

What are non-current assets?

Answer 12

items purchased by a business for use on a long term basis

Question 13

Examples of non-current assets

Answer 13

premises, motor vehicles, machinery, office equipment

Question 14

What is capital expenditure?

Answer 14

the expenditure of when a business buys non current assets

Question 15

What is revenue expenditure?

Answer 15

where the items bought will be used by the business quite quickly

Question 16

Example of capital expenditure and revenue expenditure

Answer 16

purchase of a car is capital expenditure
cost of fuel for the car is revenue expenditure

Question 17

When non-current assets are bought, are separate accounts for each type of non-current asset used?

Answer 17

yes
eg premises account, motor vehicle account, machinery account etc.

Question 18

Examples of revenue expenditure

Answer 18

rent, wages, electricity, telephone, vehicle running expenses (day to day expenses)

Question 19

What are the bookkeeping entries for purchase of a non-current asset?

Answer 19

debit non-current asset account
credit bank account (or cash account)

Question 20

What are the bookkeeping entries for the payment of an expense?

Answer 20

debit expense account (using the appropriate account)
credit bank account (or cash account)

Question 21

From time-to-time a business may receive an amount of income, eg rent, commission or fees. Are these recorded into separate accounts for each category of income?

Answer 21

yes
eg rent income account, commission income account

Question 22

What are the bookkeeping entries for receipt of income?

Answer 22

debit bank account (or cash account)
credit income account (using the appropriate account)

Question 23

What are drawings?

Answer 23

When the owner takes money, in cash or by cheque (or sometimes goods) from the business for personal use

Question 24

What are the bookkeeping entries for owner’s drawings?

Answer 24

debit drawings account
credit bank account (or cash account)

Question 25

What are the bookkeeping entries for loan received?

Answer 25

debit bank account (or cash account)
credit loan account (in name of the lender)

Question 26

What are the bookkeeping entries for loan repayment?

Answer 26

debit loan account
credit bank account (or cash account)

Question 27

What are the bookkeeping entries for disposal (sale) of a non-current asset?

Answer 27

debit bank account (or cash account)
credit non-current asset account

Question 28

What are the bookkeeping entries for withdrawal of cash from the bank for use in the business?

Answer 28

debit cash account
credit bank account

Question 29

What are the bookkeeping entries for payment of cash into the bank?

Answer 29

debit bank account
credit cash account

Question 30

Illustrate a running balance account