Double entry bookkeeping (Part 2)

So now look at a transaction and let’s say I Bank £300 from the business petty cash and pay it in the bank current account.

Debits are always recorded on the left-hand side and credits on the right.

I am therefore creating a liability in the petty cash (as I’ve taken money out) and creating an asset in the current account (as I’m putting money in).

So using the DEAD CLIC table in Double Entry Bookkeeping (part 1) we can see an asset is a debit and a liability is a credit.

So our accounting entry would be:

 


When we use most brands of bookkeeping software one side of this transaction is done for you but you do need to understand the way it works in order to appreciate the make up of your accounts but also if you need to make adjustments to the figures produced.

A few examples for you to try (don’t worry the answers are further down the page).

I pay the Business Credit Card £500 from the bank account on 1 April Transaction number 002

 


I buy some items to sell (which would go into cost of sales/Purchases) from the petty cash for £55 1 April Transaction number 003 buy some stamps (which would go into expenses/Postage) from the petty cash for £1.01 on 1 April Transaction number 004

 

I pay the vans Road Tax (which would go into expenses/Motor Expenses) from the bank account for £255 1 April Transaction number 005

Now the answers see how you’ve done

I pay the Business Credit Card £500 from the bank account

 

Again referring to our table I’ve taken money out of the bank so that’s a liability, therefore, a credit and paid money into the Credit Card which is an asset, therefore, a debit

I buy some items to sell (which would go into cost of sales/Purchases) from the petty cash for £55

 


 

Again referring to our table I’ve taken money out of the petty cash so that’s a liability, therefore, a credit and paid an expense which is a debit

I buy some stamps (which would go into expenses/Postage) from the petty cash for £1.01

 


Again referring to our table I’ve taken money out of the petty cash so that’s a liability, therefore, a credit and paid an expense which is a debit

I pay the vans Road Tax (which would go into expenses/Motor Expenses) from the bank account for £255

 

Again referring to our table I’ve taken money out of the bank account so that’s a liability, therefore, a credit and paid an expense which is a debit.

How did you do? If you struggled take a while to look back at the table then go through the questions and answers and Double Entry Bookkeeping (Part 1) till it’s clear in your mind. If you take the time now this will reap huge dividends in the future. Trust me this is really worth the effort.

Now let’s work through an example with more transactions and in some accounts a combination of both debits and credits together

We have a sole trader who operates a business as a market trader with £789 cash in the bank at the start of the month and £180 petty cash.

He sells £2000 of stock all of which is paid in cash which was £500 per Day on each of 1st April, 8th April, 15th April and 22nd April

He buys £800 of stock from his suppliers for cash on 22nd April

He Banks £800 of his petty cash on 8th April

He pays from the bank £95 to his bookkeeper on 10th April

He pays £15 bank charges from his bank account on 30th April

He puts £10 diesel in is van on 1st April, £20 diesel in is van on 8th April, £30 diesel in is van on 10th April, £45 diesel in is van on 28th April all paid in cash.

He paid a standing order from his bank for £20 for liability insurance on 30th April

He paid for some advertising £50 in cash on 1st April

He paid stall rent in cash £200 for the month which was £50 on each of 1st April, 8th April, 15th April and 22nd April in cash

We need to now do his accounts for him.

I have put template double entry bookkeeping sheet on the next page for you to  print and also print the table showing debits and credits from earlier and then I’ll go through the entries for you to complete yours as we go.

I have put some opening balances in the Bank Account and Petty Cash Accounts for you. Please also note there is an opening balance in the Capital Account (which will become apparent later of £969 shown in the account below I have abbreviated Opening Balance to Op Bal). We do not need this until we produce our trial balance, profit and loss and balance sheet in a few moments time.

 


So let’s do the transactions above one by one.

His sales were £500 per day on 1st April, 8th April, 15th April and 22nd April

We know from earlier that sales is a credit and the sales were in cash because sales are a credit it automatically tells us that the entry to the cash account needs to be a debit because we must have adebit to the same value of a credit on every entry (and vice versa). So the accounts we need this time are the petty cash and sales accounts

 


And our entries should be:


We know he paid £800 in stock by cash on 8th April so we need cost of sales/purchases and Petty cash accounts. We know an expense is a debit so therefore using the rule that we must have a corresponding Credit for the same value then the entry to the cash account must be a Credit.


Our entries should be

We know he paid for diesel £10 on 1st April, £20 on 8th April, £30 on 10th April £45 on 28th April all in cash again we know an expense is a debit so the petty cash entry must be a credit.
The accounts we need here are the expenses/motor expenses and petty cash

 

And the entries are

 

The advertising was £50 in cash on 1st April. Again advertising is an expense so it’s a debit and, therefore, the petty cash entry must be a credit

We need our expenses/advertising and petty cash accounts

And our entries are

 

The rent for his stall was £50 per week again rent is an expense so the corresponding cash entry needs to be a credit

The accounts we need are expenses/rent and petty cash

 


And our entries are:

 

He paid his bookkeeper £95 from the bank account on 10th April. Bookkeeping is an expense so consequently the bank account entry must be a credit

The accounts we need are the Expenses/Bookkeeping and Bank Account

 

And the entries are:

He paid bank charges of £15 from his bank account on 30th April. Bank charges are an expense and so therefore are a debit this means the entry to the bank account must be a credit

The accounts we need are Expenses/Bank charges and Bank account

 

And the entries are:


He paid insurance of £20 from his bank account on 30th April. Insurance is an expense and so therefore are a debit this means the entry to the bank account must be a credit
The accounts we need are Expenses/Insurance and Bank account

 


And the entries are:


He paid £800 from his petty cash to his bank account on 8th April now on this one we need to go to our table and see that an asset is a debit and a liability is a credit. If we pay money into a bank account this is an asset.Therefore, we can deduce that the money paid into the current account is a debit and the money paid out of the petty cash account is a credit.
The accounts we need here are our bank account and petty cash account


And the entries are:


We now need to look at our sheet that you printed out and it should look like this

Now if we total up each column with figures in we have this


All we now need to do is analyse our totals don’t forget out Capital Account I said we would come back to, we need to add this into our figures at this stage.

And this gets us our finished Trial Balance

I have totalled up each column just to demonstrate as we discussed earlier that every Debit must have a corresponding Credit in order for the accounts to balance, if they didn’t balance our accounts must be wrong and we would need to investigate our error at this stage before progressing due to the amount of entries in double entry bookkeeping it’s easy to make a mistake so it’s good to check at this stage that everything balances.

Now our client asked for monthly profit and loss and balance sheet so we need to convert our trial balance into a monthly profit and loss and balance for him.

If you look at the chart of accounts we had earlier in this module you will see that the bank current account, petty cash account and capital account all feature on the balance sheet the profit and loss account details the Income(sales) and Expenses (purchases) of the business which is (in this example) Sales, Bookkeeping, Bank Charges, Advertising, Motor Expenses, Insurance, Purchases, Rent

And this is the resulting profit and loss account
Bookkeeping training profit and loss
And the balance sheet is

Again the balance sheet must balance that means net assets MUST match the Total Funds. This is achieved by bringing the Net Profit from the profit and loss account through to the balance sheet under the heading of Capital Account as you can see above. If a balance sheet does not balance we have made a mistake and must investigate our mistake.

I will be covering profit and loss accounts and balance sheets again in more detail during this course especially when we get to the computerised bookkeeping. This is a fundamental part of our work andwhile you may think its difficult or confusing (many people do when they start) with many more examples during this course I’m sure it will be a lot clearer by the end.

For those of you who drive just remember back to your first driving lesson with all those things to remember and getting confused now it’s second nature to you, bookkeeping is the same when the penny drops everything falls into place. This course is all little building blocks to get the knowledge to sink in by many more similar examples.

You can normally expect certain accounts in your trial balance to have a credit or debit balance (some accounts could have either a credit or debit balance). I have listed them in the table below.

 

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