Chapter 1: Assets, liabilities and principles of double entry bookkeeping

1. Elements of the financial statements

• Assets are items that the business owns, such as cash and machinery, and amounts owed to
the business by credit customers.

The assets are made up of non-current assets which are assets that the business will hold for
more than one year and current assets which are assets which the business will hold for less
than one year.

• Liabilities are amounts that are owed to other parties, such as loans, overdrafts and amounts
owed to credit suppliers.

The liabilities are made up of current liabilities which are amounts the business owes which
must be paid within one year. It is also possible to have non-current liabilities, which are
amounts the business owes which are due to be paid in more than one year, eg bank loans.

• Capital is the amount of cash injected by the owner, plus the profit the business has made,
less any drawings the owner had taken.

• The main sources of income for a business will be from sales of goods and services, but may
also include sundry income, such as interest paid to the business by its bank, rent received
from tenants, and commission received by the business for acting as an agent.

• The main expenses of the business will be the goods that it purchases for resale as well as the
other ongoing costs of running the business such as wages to employees (not the owner), rent
paid for its premises, utilities and stationery.

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2. Double entry bookkeeping
The dual effect
Double entry bookkeeping is based on the fundamental principle that every transaction has two
erects on the business: this is called the dual effect.

a. A business makes a cash sale for $200:

b. A business makes a sale on credit for $500:

Principles of double entry bookkeeping – general rules

There are some general rules for double entry bookkeeping which can help you to decide where
debit and credit entries should be made in the ledger accounts:

(a) A debit entry represents:

i. An increase in an asset
ii. An item of expense
iii. An increase in drawings
iv. A decrease in liabilities, income or capital

(b) A credit entry represents.

i. An increase in a liability
ii. An item of income
iii. An increase in capita
iv. A decrease in assets, expenses or drawings

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Complete the following journal entries. Show the impact of each transaction on the elements of
the financial statements. Then show the account name and amount and tick to indicate debit and
credit entries.

(1) Credit sale of $200

(2) Cash purchase of $150
(3) Credit purchase of $500
4) Capital contribution from the owner into the bank account of $1,000
(5) Receipt of loan into the bank account of $2,000
(6) Drawings of $4,000 taken by the owner from the bank account
(7) Repayment of bank loan of $500
(8) Credit sale of $100
(9) Payment of wages in cash of $350
(10) Payment of rent from the bank account of $800

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Question 8 from lecture note

Question 9 from lecture note

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3. Recording transactions in the nominal ledger accounts
The following transactions took place during the first week of trading for Hampton:

(1) Started business by depositing $20,000 into the bank account

(2) Bought goods for resale and paid $250 by cheque

(3) Paid rent of $225 by cheque

(4) Sold goods for $650, customer paid in cash

(5) Paid rates $135 by cheque

(6) Sold goods on credit to a customer, J Henry, tor $/50

(7) Bought goods for resale on credit from C Bableton for $450

(8) Paid wages $75 cash

Required

Record the transactions above in the nominal ledger accounts.

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