Lecture 3 notes

Question 1

What will we be looking at today?

Answer 1

Double entry bookkeeping and journal enteries

Question 2

So far what have we learnt in terms of the formula for balance sheets?

Answer 2

Assets = liabiilites + equity ( retained earnings and owner equity capital)

Question 3

Transcations of a SOFP always have what?

Answer 3

A dual aspect

Question 4

Give an example of an asset having a dual aspect?

Answer 4

E.g. the company purchases a motor van for £20000 cash

Motor van asset ( Up)

Cash asset will go down

Question 5

We know that assets = liabilities + equity

but now for bookeeping what do we know?

Answer 5

Sum of debits = Sum of credits ( they dont have a meaning, it doesnt mean good or bad btw)

Debits = left hand entry

Credits = Right hand entry

Question 6

So how would we debt and the motor van example?

Answer 6

Dr Motor van 20000

Cr Cash 20000

Question 7

When we increase assets we are doing what and when we decrease an asset what are we doing?

Answer 7

When we are increasing assets we are debting but when we decrease assets we are crediting.

Question 8

When we increase liabilities we are doing what and when we decrease liabilities what are we doing?

Answer 8

When we increase liabilities we are crediting but when we decrease liabilites we are debting.

Question 9

The whole process of debting and creditiing transcations is called what?

Answer 9

A journal entry

Question 10

What would be the Journal entry for this ABC BORROWED £5000 FROM SK BANK BY SIGNING A 6 MONTH 10%.

What would be the Journal entry for this ABC brought equipment worth £5000 using cash?

Answer 10

Dr Cash 5000

Cr Notes payable 5000

DR PPE 5000

CR cash 3000

Question 11

Now ledgers can do all these transcations but they would be so long so where do these ledgers post their information and how do they look?

Answer 11

They post it on T accounts

Question 12

So when sorting about T accounts and making a long list how do you separate Assets, liabilites, expenses, equity, retained earnings etc how would they look on a T table?

Answer 12

Assets = Liabilities + Beginning equity + Retained earningss + Revenue - Expenses

Add expenses on both sides

Assets + Expenses = Liabilities + Beginning Equity + RE + Revenue

Question 13

Example 1

ABC receives £300 through a bank loan

Create a journal entry and post it on a T account?

Answer 13

Question 14

Example 2 using T account from Example 1

ABC BOUGHT INVENTORY USING £150 CASH

Show a double entry and post it on T account?

Answer 14

Question 15

George Cowley’s firm purchases a car polishing machine for 5000 using cash. Which accounts are affected and how?

A. Dr Cash 5000

Cr PPE 5000

B. Dr Inventory 5000

Cr Cash 5000

C. Dr PPE 5000

Cr Cash 5000

Answer 15

B

Question 16

Remember remember that what do we credit and debit ?

Answer 16

Question 17

Firm ABC buys £250 of inventory for credit. What is the double entry

Answer 17

Dr cash 250

Cr Notes payable 250

Question 18

An owner of firms ABC invests £400 in the business? What is the journal entry?

Answer 18

Dr cash 400

Cr capital 400

Question 19

After you create Journal entries and post it to the T accounts what do you do after?

Answer 19

You create a unadjusted ( no adjustments)trial balance.

Question 20

Now we will go through a bookeeping example

provide double enteries dor these 3 transcations and post them on T accounts.

.1) Paolo starts a retail shop called Funny Sun by depositing £200,000 in a bank account that he has opened in the name of the business.

2. Paolo borrows £100,000 from his bank.
3. Paolo buys property plant and equipment (PPE) for £100,000 for cash.

Answer 20

1) Dr Cash 200,000

Cr Issued Capital 200,000

2) Dr Cash 100,000

CR Bank Loan 100,000

3)Dr PPE 100,000

Cr Cash 100,000

Question 21

Countiuning with the t accounts what are the double enteries for this

4. Paolo buys goods for resale costing £90,000, on credit.

Answer 21

Question 22

5. Paolo sells an equipment for £40,000, on credit. The selling price happens to equal its cost.

Post this on the t accounts

Answer 22

Question 23

6) Paolo returns half of the inventory acquired for £90,000 to the supplier who agrees to credit Paolo for the amount of inventory returned.

Answer 23

Question 24

7- Paolo receives from the customer £30,000 against the receivable of £40,000.

Post on T accounts

Answer 24

Question 25

8-Paolo buys goods costing £50,000. A cash payment of £10,000 is made on the same day. The remaining £40,000 should be paid in 60 days. Post on the T accounts

Answer 25

Question 26

Paolo sells goods for £70,000, on credit (i.e. the customer agreeing to pay later). The goods in question are those remaining after transaction 6 (i.e. costing £45,000). Before we post on T account, what do we have to do when we sell something what is the Journal entry and post it on T accounts?

Answer 26

We split it into 2, there is always a cost price and a selling price. The cost price is 45000 and the selling price is 70000 So now cost price 45000 two things related is COS and Inventory Dr COS - 45000 ( cost that went to preparing the inventory) CR inventory 45000 Selling price 70000 Dr Trade receivables 70000 Cr Sales revenue 70000 ( remember sales revenue is on the right hand side and as it is going up we credit it)

Question 27

10- Paolo pays wages of £10,000 for the period, in cash Post on T accounts

Answer 27

Question 28

What is a contra asset and give an example?

Answer 28

It reduces the value of an asset it works the opposite of an asset e.g reduces PPE, to get net PPE on balance sheet e.g. if you have an asset e.g a machine that costs 10000 and it depreciates every year of $2000 At end of year 1 Dr Depreciation expense 2000 Cr Accumulated depreciation 2000 On SOFP it would be NCA Equipment = 10000 Less acculumlated depreciation = 2000 Net Equipment = 8000

Question 29

11) Part A (Difficult transcation) For the period 1–11 January, Paolo pays rent of £5,000, in cash; the bank charged interest of £500 (paid in cash); Paolo accounts for depreciation for £5,000 and also takes into account the income taxes payable on the profit earned. Income taxes payable are determined at £1,500. First of all focus on the rent

Answer 29

Question 30

11) Part B (Difficult transcation) For the period 1–11 January, Paolo pays rent of £5,000, in cash; the bank charged interest of £500 (paid in cash); Paolo accounts for depreciation for £5,000 and also takes into account the income taxes payable on the profit earned. Income taxes payable are determined at £1,500. Now lets focus on the interest, what is interest, double entry it and post it on the t accounts?

Answer 30

Interest is an expense

Question 31

Part C (Difficult transcation) For the period 1–11 January, Paolo pays rent of £5,000, in cash; the bank charged interest of £500 (paid in cash); Paolo accounts for depreciation for £5,000 and also takes into account the income taxes payable on the profit earned. Income taxes payable are determined at £1,500. What do we do with the depreciation, what goes on I/S and what goes on SOFP?

Answer 31

Depreciation means an asset losses its value Depreciation is an expense as we have used the asset we debt depreciation We have to credit something, so we create an account called accumulated depreciation which is a contra asset ( it is the opposite to what an asset is, so we increase it by crediting) Dr depreciation expense Cr Acculumated depreciation ( contra asset)

Question 32

Part D(Difficult transcation) For the period 1–11 January, Paolo pays rent of £5,000, in cash; the bank charged interest of £500 (paid in cash); Paolo accounts for depreciation for £5,000 and also takes into account the income taxes payable on the profit earned. Income taxes payable are determined at £1,500. What are we going to do with the income tax?

Answer 32

This is a trick question, you havent paid taxes in cash, he has calculated the tax and has decided he has to pay so much it becomes a payable.

Question 33

Now how would we create a trial balance?

Answer 33

We had the total of the T accounts and decide whether they are have a Net debit balance or credit balance, by calculating totals and translate them onto the a trial balance.

Question 34

Formulate a trial balance of this example we have just gone over

Answer 34

Question 35

Double entryChris runs a shop in Bristol, Shoe Shop. The shop sells fashionable shoes and accessories. On June 30 th 2018 his business assets and liabilities were: Cash 125 Bank balance (overdraft) 11,000 Trade receivables 16,750 T Trade payables 14,625 Inventory (at cost) 40,575 Capital 31,825 Chris decided to expand the business and sell clothes. On July 1 st he: (1) Arranges to rent the adjoining shop premises. His total monthly rent is now £625 per calendar month. (See list of transactions for payment of rent). (2) Borrows £20,000 from his bank, and uses it to buy a van for the business. This is a special business loan, which is repayable in three years’ time and carries interest at 13%. (3) Pays £6,250 out of his personal bank account to have the new premises refitted. His summarised transactions for the rest of the year are as follows (they are not in chronological order): (4) Bought stock on credit, £489,625. (5) Bought stock for cash, £16,550. (6) Sold stock which cost £63,000, for £84,000 cash. (7) Paid creditors £477,225 by cheque. (8) Sold stock which cost £394,500, for £526,000 on credit. (9) Collected £517,750 from his debtors. (10) Returned some damaged goods to his suppliers. These cost £8,500, but Chris had not yet paid for them. (11) Paid the following (by cheque): £ Rent (see (1)) 7,500 Shop wages 35,000 Interest (see (2)) 2,600 Electricity 4,500 Telephone 1,750 Other expenses 3,050 Holiday 1,000 (12) Personal drawings were £500 per month. Shop takings were banked daily. On June 30th 2019 cash in the till was still £125. 1. Double-entry accounts reflecting the above transactions. (Hint: as a constant ‘float’ of £125 is maintained in the shop till, you may treat cash transactions as movements on the business's bank account.) You should show all workings clearly. 2. A trial balance at June 30th 2019

Answer 35

Question 36

Trial balance Chris runs a shop in Bristol, Shoe Shop. The shop sells fashionable shoes and accessories. On June 30 th 2018 his business assets and liabilities were: Cash 125 Bank balance (overdraft) 11,000 Trade receivables 16,750 T Trade payables 14,625 Inventory (at cost) 40,575 Capital 31,825 Chris decided to expand the business and sell clothes. On July 1 st he: (1) Arranges to rent the adjoining shop premises. His total monthly rent is now £625 per calendar month. (See list of transactions for payment of rent). (2) Borrows £20,000 from his bank, and uses it to buy a van for the business. This is a special business loan, which is repayable in three years’ time and carries interest at 13%. (3) Pays £6,250 out of his personal bank account to have the new premises refitted. His summarised transactions for the rest of the year are as follows (they are not in chronological order): (4) Bought stock on credit, £489,625. (5) Bought stock for cash, £16,550. (6) Sold stock which cost £63,000, for £84,000 cash. (7) Paid creditors £477,225 by cheque. (8) Sold stock which cost £394,500, for £526,000 on credit. (9) Collected £517,750 from his debtors. (10) Returned some damaged goods to his suppliers. These cost £8,500, but Chris had not yet paid for them. (11) Paid the following (by cheque): £ Rent (see (1)) 7,500 Shop wages 35,000 Interest (see (2)) 2,600 Electricity 4,500 Telephone 1,750 Other expenses 3,050 Holiday 1,000 (12) Personal drawings were £500 per month. Shop takings were banked daily. On June 30th 2019 cash in the till was still £125. 1. Double-entry accounts reflecting the above transactions. (Hint: as a constant ‘float’ of £125 is maintained in the shop till, you may treat cash transactions as movements on the business's bank account.) You should show all workings clearly. 2. A trial balance at June 30th 2019

Answer 36

Question 37

Chris runs a shop in Bristol, Shoe Shop. The shop sells fashionable shoes and accessories. On June 30 th 2018 his business assets and liabilities were: Cash 125 Bank balance (overdraft) 11,000 Trade receivables 16,750 T Trade payables 14,625 Inventory (at cost) 40,575 Capital 31,825 Chris decided to expand the business and sell clothes. On July 1 st he: (1) Arranges to rent the adjoining shop premises. His total monthly rent is now £625 per calendar month. (See list of transactions for payment of rent). (2) Borrows £20,000 from his bank, and uses it to buy a van for the business. This is a special business loan, which is repayable in three years’ time and carries interest at 13%. (3) Pays £6,250 out of his personal bank account to have the new premises refitted. His summarised transactions for the rest of the year are as follows (they are not in chronological order): (4) Bought stock on credit, £489,625. (5) Bought stock for cash, £16,550. (6) Sold stock which cost £63,000, for £84,000 cash. (7) Paid creditors £477,225 by cheque. (8) Sold stock which cost £394,500, for £526,000 on credit. (9) Collected £517,750 from his debtors. (10) Returned some damaged goods to his suppliers. These cost £8,500, but Chris had not yet paid for them. (11) Paid the following (by cheque): £ Rent (see (1)) 7,500 Shop wages 35,000 Interest (see (2)) 2,600 Electricity 4,500 Telephone 1,750 Other expenses 3,050 Holiday 1,000 (12) Personal drawings were £500 per month. Shop takings were banked daily. On June 30th 2019 cash in the till was still £125. Find Chris opening balance Chris’s opening balance at 30 June 2018

Answer 37