4 double entry rules (1)

Double entry rules

Chapter 4


Objective test
On 20 June 20x3 an entity pays R500 in advance for repairs
on its vehicle. The supplier first had to order the spare
part that needs to be replaced, so the repairs would be
done later. On 5 July 20x3 the supplier informed the entity
that the spare part had arrived. The entity took the vehicle
in for repairs on 6 July 20x3 and the work was completed
on the same day.
With reference to the concept of Accrual accounting,
explain on which date the repair expense will be
recognised.
(6 marks)


The accounting equation

ASSETS = EQUITY
INCOME (+)
EXPENSES (-)

+

LIABILITIES


The accounting equation

Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

 

 

 


The accounting equation
Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

Income
CR
Expenses
DR  


The accounting
process
AFS (Annual financial
Transaction
/event

-

Journal
(prime entry)

-

General ledger
(accounts)

-

Trial balance
& adjustments

-

statements) of:
Profit and loss
(P&L)
Statement of
financial position
(SFP)
Statement of
changes in Equity
(SCE)
Cash flow
statement (C/F)
Notes & policies

T-Account
Page 83
- Date,
- Name of contra account,
- Amount


Journal entry
Page 96
- Date,
- Account debited (+ F/S)
- Account credited (+ F/S),
- Amounts
- Reason for journal
(journal
narration/description)


Exercise

Indicate the effect (DR and CR) on the
accounting equation of the following
transactions:
1) Owner contributes R10 000 as
capital cash.
2) Purchase inventory for R2 000 cash.
3) Pay rent expense R5 000 cash.
4) Obtain loan from Bank for R20 000.
5) Pay water & electricity R1 000 cash.

Owner contributes R10 000 as capital cash

Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

10 000

 10
 

000

(Equity classification: Capital)
DR
Dr Bank (SFP)
Cr Capital (SCE)

CR
10 000
10 000

 


Purchase inventory for R2 000 cash
Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

  2
2 000

000

DR
Dr Trade inventories (SFP)
Cr Bank (SFP)

 

 

CR
2 000
2 000


Pay rent expense R5 000 cash
Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

 5
000

5 000  
(Equity classification: Expense)

DR
Dr Rent expense (P&L)
Cr Bank (SFP)

CR
2 000
2 000

 


Obtain loan from Bank for R20 000
Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

20 000

 

 20
 

DR
Dr Bank (SFP)
Cr Loan: Bank (SFP)

000

CR

20 000
20 000


Pay water & electricity R1 000 cash
Assets

=

Equity

+

Liabilities

+

-

-

+

-

+

DR

CR

DR

CR

DR

CR

1
000 

1 000  

(Equity classification: Expense)
DR
CR
Dr Water and electricity (P&L) 1 000
Cr Bank (SFP)
1 000

 


The accounting process
Transaction
/event
Journal
(prime entry)
General ledger

(accounts)
Trial balance
& adjustments

AFS (Annual financial
statements) of:
- Profit and loss
(P&L)
- Statement of
financial position
(SFP)
- Statement of
changes in Equity
(SCE)
- Cash flow
statement (C/F)
- Notes & policies


Account (Ledger/GL)
Bank
Tx1 Capital

Tx4 Loan: Bank

10 000
Tx2 Trade inventories

2 000

Tx3 Rent expense

5 000

20 000
Tx5 Water & electricity 1 000
.

30 000
Balance bd

Balance cf

22 000
30 000

22 000


Example 4.5 – nr 1
On 2 January 20.7, the owner made the
property that AC Entity utilises available
for the exclusive use of the entity.
The property was registered in the owner’s
name a few days before 2 January 20.7.
The purchase price of the property was
R1 200 000 (R200 000 for the land and
R1 000 000 for the buildings).

Example 4.5 – nr 1
20.7
2

 

Land (SFP)

Dr

200 000

Cr

 

Jan
 

Buildings (SFP)

1 000

 

000
 

Capital (SFP)

 

000

Recognise capital

 

 

contribution by owner
Assets
= Liabiliti +
+

200
000

=

es
0

1 200

+

Equity
+1 200
000

 

Classification
Capital


Example 4.5 – nr 2
On 2 January 20.7, the owner opened a
cheque account for the entity and
deposited R1 800 000 in the account.


Example 4.5 – nr 2
20.
7
2

 

Dr

Bank (SFP)

1 800

Jan
 

= Liabiliti +

Recognisees
capital
contribution
the
+1 800
=
0 by +

 

 

000
Capital (SFP)

Assets

Cr

owner
000

 
Equity
+1 800
000

1 800

000
Classificati
  on

Capital

 


Example 4.5 – nr 3
On 2 January 20.7, furniture and equipment to
the amount of R225 000 was ordered.
The supplier, Payable K, delivered the furniture
and equipment on 5 January 20.7 to AC Entity’s
premises.
The invoice price is R225 000 and it was agreed
with Payable K to pay the outstanding amount
on 30 January 20.7.


Example 4.5 – nr 3
20.

 

Dr

Cr

7

5

Furniture and equipment (SFP)

225

Jan

000

 
 

 

Payable K (SFP)

 

225
000

Recognise furniture and

 

 

equipment received together
with accompanying

Assets
= Liabilitie liability
+
Equity
+225
000

=

s
+225
000

+

0

Classificati
on
 


Example 4.5 – nr 4
Trade inventories to the amount of R20 000 was
ordered on 7 January 20.7 and it was agreed with
Payable L that the outstanding amount will be
paid 30 days after delivery. On 25 January 20.7,
Payable L delivered the trade inventories to AC
Entity’s premises. The invoice price is R20 000
and the invoice reflects that the amount is

payable on 24 February 20.7.


Example 4.5 – nr 4
20.7
25

 

Dr

Trade inventories (SFP)

Cr

20 000

 

Jan
 
 

Payable L (SFP)

  20 000

Recognise trade inventories

 

 

received together with
accompanying liability
Assets
= Liabilitie
+
+20 000

s
= +20 000

+

Equity
0

Classification
 


Example 4.5 – nr 5
On 30 January 20.7, the amount due to
Payable K was paid.