Double Entry System

Double Entry

System

DR CR

Accounting Equation

Assets = Owner’s Equity + Liabilities

Items of value owned by the business

The funds of a business provided by its owners –CAPITAL

PLUS: the profits entitled to him

Less: Drawings

Debts owed by a business to external parties such as suppliers

Assets = Owner’s Equity + Liabilities

Land & Buildings

Motor vehicles

Office Equipment

Fixtures/Fittings

Stock/Inventory (closing)

Cash

Debtors/Acc Receivables

Capital

- Drawings

+ Profits

Creditors/Acc Receivables

Loan from bank

Other creditors

Assets = Owner’s Equity + Liabilities

Every transaction will affect 2 items.

The equation will still balance!

A = OE + L TRANSACTION THAT AFFECTS BOTH

ASSET AND LIABILITY

ASSET LIABILITY

ASSET LIABILITY

A = OE + L

TRANSACTION THAT AFFECTS BOTH ASSET AND OWNER’S EQUITY

ASSET OWNER’S EQUITY

ASSET OWNER’S EQUITY

ASSET ASSET

LIABILITY LIABILITY

A = OE + L

TRANSACTION THAT AFFECTS ASSETS ONLY

TRANSACTION THAT AFFECTS LIABILITIES ONLY

Examples :a) John began business with a cash contribution of R5000.

Bank R5000 = Capital R5000 + 0 +

A = OE + L

b) The firm took a bank loan of R8000.

Bank R8000 = 0 + Loan R8000

A = OE + L

Vehicles R200 000 = 0 + 0 Bank R200 000

A = OE + L

c) Purchase a motor vehicle from

ABC Trading for R200 000.

A = OE + L

d) Payment of R500 to Creditor, Peter.

Bank R500 = 0 + Creditors R500

A = OE + L

e) A receipt of R3500 from a debtor.

Debtors R3500 = 0 + 0

Bank R3500

A = OE + L

f) A repayment of bank loan for R1500.

Bank R1500 = 0 + Loan R1500

A = OE + L

g) A purchase of office equipment from

Lee Trading on credit for R780.

Equipment R780 = 0 + CreditorsR780 (Lee Trading)

Assets = Owner’s Equity +

Liabilities

ACCOUNTING EQUATION

What is a Balance Sheet?It is a report that is used to present the Accounting Equation that involves a firm’s total assets, total owner’s equity and total liabilities of an accounting period.

It is a report that external parties like investors or bankers look at when making important business decisions.

How does it look like?Click me!

BALANCE SHEET AS AT 1 Jan 2012 Owner’s Equity RCapital Add: ProfitsLess: Drawings

Non-Current LiabilitiesLoan Current LiabilitiesCreditors Other creditors

Non-Current Assets R Land & Buildings Equipment Vehicles Furniture & Fixtures

Current Assets Inventory (*closing) Debtors/Acc Rec Bank

Assets = Owner’s Equity + Liabilities

Same figure

a) Owner brought in cash R2000 as additional capital

+ 2000

A = OE + L BALANCE SHEET AS AT 1 Jan 2012

Owner’s Equity RCapital 38000

Non-Current LiabilitiesLoan 3000Current LiabilitiesCreditors 6650

Non-Current Assets R Vehicle 25000 Fixtures 10050 35050 Current Assets Inventory 4570 Debtors 7400 Bank 630

12600

47650 47650

Example 2 :

+ 2000

BALANCE SHEET AS AT 1 Jan 2012 Owner’s Equity RCapital 38000

Non-Current LiabilitiesLoan 3000Current LiabilitiesCreditors 6650

Non-Current Assets R Vehicle 25000 Fixtures 10050 35050 Current Assets Inventory 4570 Debtors 7400 Bank 630

12600 47650

47650

Example 2 :

+ 2000

+ 2000

b) Owner paid off the loan R1000

- 1000

- 1000

c) Owner paid creditors R1100

- 1100 - 1100

BALANCE SHEET AS AT 1 Jan 2012 Owner’s Equity RCapital 38000

Non-Current LiabilitiesLoan 3000Current LiabilitiesCreditors 6650

Non-Current Assets R Vehicle 25000 Fixtures 10050 35050 Current Assets Inventory 4570 Debtors 7400 Bank 630

12600

47650 47650

Example 2 :

+ 2000

+ 2000

- 1000

- 1000

BALANCE SHEET AS AT 31 Dec 2012

Owner’s Equity RCapital 40000

Non-Current LiabilitiesLoan 2000Current LiabilitiesCreditors 5550

Non-Current Assets R Vehicles 25000 Fixtures 10050 35050 Current Assets Inventory 4570 Debtors 7400 Bank 530

12500

47550 47550