Lesson 9 Flashcards
(12 cards)
What is double entry bookkeeping
It’s a system where every transaction is recorded in at least two accounts:
- one debit
- one credit
This helps keep the books balanced.
What is an account
An account is a record of money related to one specific thing, like:
- Asset (e.g. cash, property)
- Liability (e.g. loans, accounts payable)
- Equity (e.g. owner’s capital)
- Income (e.g. sales)
- Expense (e.g. wages, rent)
What are debits and credits
Debits and credits are notations used to record the increases or decreases in account balances
Each transaction affects both sides:
One account is debited, and another is credited
Explain the debit side
Debits are recorded as left-hand entries.
Debits represent
increases in:
- assets
- expenses
decreases in:
- liabilities
- equity
- revenues
Explain the credit side
Credits are recorded as right-hand entries.
Credits represent
increases in:
- liabilities
- equity
- revenues
decreases in:
- assets
- expenses
What is a trial balance
It is a list of all accounts and their balances (debits or credits).
It’s a step before making financial statements.
Its purpose is to check that total debits = total credits.
If it doesn’t balance, it means there’s an error in the records.
When do you balance an account
If an account has entries in both debit and credit, it should be balanced.
If one side is empty, no need to balance (yet).
Exception: The Sales Revenue account must always be balanced
What is balance c/d and balance b/d
- Balance c/d = Balance Carried Down
End balance of the account (used to close it). - Balance b/d = Balance Brought Down
Opening balance for the next period
Comes from the previous period’s c/d but moves to the opposite side when brought down. So if it was credit in c/d then it is debit in b/b
What happens if the 2 sides aren’t balanced
Example:
Step 1: Add up both sides
Total debits = £7800
Total credits = £3000
They are not balanced
Step 2: Find the difference
£7800 − £3000 = £4800 (this is the balance).
Step 3:
Add £4800 to the credit side to make both sides equal.
Now the cash account is balanced: both sides = £7800.
How do you prepare an income statement from the trial balance
Step 1: Start from the trial balance
The trial balance lists all account balances.
You only need the revenue and expense accounts for the income statement.
Step 2: Identify revenue
Find the total sales revenue (from credit side or “balance b/d”).
Step 3: Identify COGS
Find the COGS account and calculate gross profit (Revenue – COGS)
Step 4: Add operating expenses
Collect all other expense accounts:
Rent, Wages, Electricity, Depreciation
Add them up to get total operating expenses.
Step 5: Calculate net profit or loss.
Net Profit = Gross Profit – Operating Expenses
Step 6: Present the income statement
Layout:
Sales revenue
- Cost of sales
= Gross profit
- Operating expenses (list each)
= Net profit or loss
What is a balance sheet
A balance sheet shows what a company owns (assets) and owes (liabilities), plus the owner’s equity at a specific date.
What are the 2 main parts of a balance sheet
- Assets
- Current assets: Things the business owns short-term.
Examples: cash, inventories, trade receivables
- Non-current assets: Long-term things.
Example: office furniture (minus depreciation).
- Equity and Liabilities
- Owner’s equity: Money invested by the owner.
- Current liabilities: Short-term debts.
Example: unpaid electricity (accrued expense), trade payables. - Non-current liabilities: Long-term debts.
Example: borrowings from finance companies.
