Topic 2- Double Entry Mr. BarryA-Level Accounting Year 12

Learning Outcomes Recording of transactions in accounts in the accounting system Double-entry accounts – how debits and credits work Bank Account – money received and money paid Accounts for income and expenses – some example transactions Mr. BarryA-Level Accounting Year 12

Mr. BarryA-Level Accounting Year 12 Double-entry system Most accounting systems are based on double- entry accounts Double-entry involves two entries for each transaction – a debit entry and a credit entry The two entries are for the same amount but are made in separate accounts Payment of insurance through the bank involves entries in two accounts – Insurance Account and Bank Account Receipt of rent paid by a tenant involves entries in two accounts – Rent Received Account and Bank Account

A double-entry account has two sides – a debit side and a credit side Mr. BarryA-Level Accounting Year 12 Insurance Account credit debit The debit side is on the left of the double-entry account and the credit side is on the right You can remember the sides by thinking “DRive on the left and CRash on the right!” The account is headed up with its name, for example Insurance Account, Bank Account

Content and design ©2008 Osborne Books Limited Debits and Credits in double- entry The two equal entries in the accounts for every transaction involve a DEBIT entry and a CREDIT entry The DEBIT entry is always recorded on the left-hand side of one account The CREDIT entry is always recorded on the right-hand side of the other account Insurance Account Bank Account Debit entry Credit entry debit credit Mr. BarryA-Level Accounting Year 12

Using bank accounts An organisation such as a business will need to use a bank account set up at a bank Bank Account in the accounting system of a business is a separate record of the money paid into and out of the bank Bank Account in the accounting system of a business can be thought of as a ‘mirror image’ of the bank account held at the bank As a result of this, the terms ‘debit’ and ‘credit’ are often used differently by the bank and a business When using double-entry accounting you must keep to the rules set out on the next screen and ignore the way banks refer to ‘debits’ and ‘credits’ Mr. BarryA-Level Accounting Year 12

Bank Account – the rules for debits and credits Bank Account in a business records: Money paid into the bank is ALWAYS a DEBIT entry for the business Money paid out of the bank is ALWAYS a CREDIT entry for the business Bank Account Money out debit credit - payments into the bank, sales for example The rule for Bank Account that ‘money in = debit’ and ‘money out = credit’ NEVER changes and must not be confused with the way banks talk about debits and credits - payments out of the bank, such as insurance and expenses Money in Mr. BarryA-Level Accounting Year 12

debitcredit How to write up the double-entry accounts So far the double-entry accounts have been shown as a simple ‘T’ The ‘T’ shows the structure of the account, but you will need to know how to enter all the transaction details The details are entered in sets of columns which are headed up: - ‘ date’ – the date of the transaction - ‘details’ – the name of the other account involved - ‘£’ – the amount of the transaction, shown as ‘£’ datedetails£datedetails£ Mr. BarryA-Level Accounting Year 12

debitcredit Paying the insurance – the entry in Bank account The details of the transaction are: Starting with Bank Account, insurance is money paid out, so it will be a credit entry: - date – this is 10 January, abbreviated to ‘10 Jan’ - amount – this is £300 datedetails£datedetails£ 10 January, insurance of £300 paid through the bank This involves two accounts: Bank Account and Insurance Account Bank Account money out money in 10 JanInsurance300 - details – the other account involved is the Insurance Account Mr. BarryA-Level Accounting Year 12

debitcredit Paying the insurance – the entry in Insurance Account The details of the transaction are: A credit entry has been made in Bank Account and so a debit will need to be entered in Insurance Account to complete the double entry: - date – this is 10 January, abbreviated here to ‘10 Jan’ datedetails£datedetails£ 10 January, insurance of £300 paid through the bank Insurance Account 10 JanBank300 - details – this is the other account involved ie Bank Account - amount – this is £300, the amount that was entered in Bank Account Mr. BarryA-Level Accounting Year 12

Summary of the double-entry - paying insurance by cheque Firstly, credit Bank Account: Secondly, debit Insurance Account: Mr. BarryA-Level Accounting Year 12

Sample transactions – payments into the bank We will now show two ‘paying in’ transactions being entered in the accounts using double-entry The transactions relate to a shop run by Sam and both involve money being paid into the bank in September The transactions are: We will now explain how these transactions are entered in the accounts 3 September Sam pays into the bank a cheque for ````````````£350 for rent received from a tenant ````````````who has a flat above his shop 5 September Sam pays his sales takings of £5,500 ````````````from the shop into the bank Mr. BarryA-Level Accounting Year 12

debit datedetails£datedetails£ Bank Account 3 SepRent Received350 Starting with Bank Account you can see that it is money received, so it must be a debit entry: On 3 September Sam pays into the bank a cheque for £350 for rent received Capital Account Rent Received Account debit datedetails££ date 3 SepBank350 The other account is Rent Received Account, and this will therefore be a credit entry: money in money out credit Mr. BarryA-Level Accounting Year 12

debit datedetails£datedetails£ Bank Account 5 SepSales 5,500 This is money received into the bank, so it must be another debit entry to Bank Account: On 5 September Sam pays into the bank a cheque for £5,500 for sales from the shop Capital Account Sales Account debit datedetails££ date 5 SepBank5,500 The other account will be Sales Account and this will therefore be a credit entry: money in money out credit Mr. BarryA-Level Accounting Year 12

Sample transactions – payments out of the bank Here are two further transactions from Sam’s double-entry accounts This time the transactions involve payments out of the bank The transactions are: We will now show how these transactions are entered in the double-entry accounts 8 September Sam buys some stock for his shop ````````````writing out a cheque for £3,500 for ````````````his supplier. These are ‘purchases’ for ````````````the business 10 September Sam pays his electricity bill, writing out ``````````` a cheque for £325 to the power company Mr. BarryA-Level Accounting Year 12

debit datedetails£datedetails£ Bank Account 8 SepPurchases3,500 This is a payment out of the bank, so it must be a credit entry to Bank Account: On 8 September Sam writes out a cheque for £3,500 for purchases for the shop Capital Account Purchases Account debit datedetails££ date 8 SepBank3,500 The other account used will be Purchases Account and this must be a debit entry: money in money out credit Mr. BarryA-Level Accounting Year 12

debit datedetails£datedetails£ Bank Account 10 SepElectricity 325 This is a payment out of the bank, so it must be a credit entry to Bank Account: On10 September Sam writes out a cheque for £325 to pay an electricity bill Capital Account Electricity Account debit datedetails££ date Bank 325 The other account will be Electricity Account and this must be a debit entry: money in money out credit 10 Sep Mr. BarryA-Level Accounting Year 12

debit datedetails£datedetails£ Bank Account Purchases 3,500 After these four transactions the Bank Account will look like this: Summary of the Bank Account transactions money in money outcredit Remember that the other double-entry accounts we have used will have the entries on the opposite side: - for payments into the bank (rent received, sales) the other account will have a CREDIT entry - for payments out of the bank (purchases, electricity) the other account will have a DEBIT entry 10 Sep 8 Sep Electricity 3 SepRent Received 5, SepSales Mr. BarryA-Level Accounting Year 12

debit Sales Another way of working out which side the debit or credit should go – except for Bank Account, which has its own rules - is to remember the following diagram: Debits and Credits – which side of the account? credit Income Purchases Expenses An easy way to remember these words are by remembering the first letters of these phrases: Dead Parrots Exploding (for the debit side) Cause Serious Injuries (for the credit side) Mr. BarryA-Level Accounting Year 12

Transactions are recorded in accounts in the accounting system Summary The double-entry system requires two equal entries – a debit and a credit – for each transaction in two separate accounts Debit entries are recorded on the left-hand side of an account and credits on the right It is important to work out which account should have the debit and which account should have the credit The Bank Account is easy to remember because debits (on the left) are always ‘money in’ and the credits (on the right) are always ‘money out’ If a transaction involves the Bank Account, work out the bank entry first (debit or credit) and the other entry will always be on the opposite side Mr. BarryA-Level Accounting Year 12