AAT Level 2 Chapter 2 - The basics of double entry processing

The accounting equation = (Assests = Capital + Liabilities)

• For each transaction there is a 'giver of value' and a 'receiver of value'.
  
• Each transaction is recorded at least twice in the financial records. One entry is made to the left hand side of an account (the debit side), with a corresponding entry of equal monetary value being made to the right hand side of an account (the credit side).
• The receiver account is debited, and the giver account is credited.

Definition - resources owner by the entity, or amount owed to it.

• Non current assets - items of value acquired and owned by the business for the specific purpose of being used within the business over a number of years. eg. business premises, machinery, vehicles.
• Current assets - items of value which are held by the business in the form of liquid funds (cash in hand or cash in bank current account). eg. inventory such as stock of finished goods held for resale and raw materials held for use in the production process.
• Trade receivables - amounts due from customers who have been sold goods on credit, but have not yet settled the amount they owe the business.
• Short-term investments - money in a bank deposit account.

Definition - the claim of the owner(s) on the assests of a business after the liabilities have been deducted from the value of its assets. For a limited company capitlal is usually referred to as 'equity'.

Definition - the claim on the assets of a business, its financial obligations.

• Non-current liabilities - the financial obligations of a business that it is not expected to meet within the next twelve months and includes; a loan from a bank or other financial institution repayable over several years and debetures, which is a method of raising funds used by limited companies.
• Current liabilities - the financial obligations of a business that are repayable in the short-term. eg. trade payables (amounts owed to suppliers for goods or services purchased on credit) and an overdrawn balance on the business current account.

• Step 1 - Go to the side of the account containing the most entries, miss a line and rule a total box. Also rule a total box on the same line at the opposite side of the ledger account.
• Step 2 - Add up the bigger side of the account in terms of value content and put this amount in the total boxes on both sides of the account.
• Step 3 -Calculate the account balance. Add up the content value of the smaller side of the account and deduct this from the total of the bigger side of the account. eg debit side £55,230.00 - credit side £43,860.00 = balance of £11,370.00
• Step 4 - Enter the balance (£11,370.00) above the total box on the smaller side of the account, thereby making both sides of the account equal. Desctribe the balance entered on the smaller side as 'balance c/d'.
• Step 5 - Enter the balance (£11,370.00) beneath the total box on the bigger side of the account. Describe the balance entered beneath the total box as 'balance b/d'..

Balances can be classified and grouped as follows:

• Debits (DR) - Assets, Costs, Expenses, Drawings = ACED
• Credits (CR) - Capital, Liabilities, Income = CLI

• Costs - this term is used to describe expenditure associated with buying or makinf goods for resale. eg. Purchases (goods bought for resale)
• Expenses - this term is used to describe the expenditure associated with the day-to-day running and adminastration of a business. eg. Wages, vehicle running costs, gas, electricity and rent.
• Drawings - sole traders, or partnerships, are likely to withdraw cash from their business at regular intervals throughout the year.

• Income - this term is used to describe the activities from which a business generates income. eg. Sales to cash or credit customers, interest received on monies in a bank deposit account and rent received from property sub let to a tenant.
  

Definition - income 'borrowed' by the business and invested for the long term. Capital income is required to set up the business and it may also be necessary to introduce further capital from time to time to finance expansion.

For example: capital invested in a business by its owner(s), or a loan repayable over several years.

Definition - expenditure which has a long-term effect on the profit making capacity of a business. Capital expenditure is related to the acquisition of non-current assets, which are not specifically acquired for resale but will be used in generating profit over several accounting periods.

For example: the purchase of business premises, machinery, plant and equipment, furniture and fittings and vehicles.

Defintion - income earned by a business from its trading and non-trading activities.

For example income received from the sales of goods or from providing services.

Definition - expenditure which has a short-term effect on the profit making capacity of a business. It is often referred to as the costs and expenses incurred in running a business on a day to day basis.

For example, costs of materials purchased for use in the process of manufacturing, the costs of goods purchased for resale, and the expenditure incurred in paying expenses such as rent.