A guide into how to make entries for assets, liabilities, capital, income, and expenses within the financial accounts. it also briefly looks into VAT and how to account for it.
Double entry means that every accounting event must be submitted as a debit and a credit
entry.
Journal entries are used to record transactions that are a one-off or don’t usually happen.
This could be selling non-current assets, or corrections in mistakes. These entries require an
explanation.
Assets + expense=Capital + liabilities + income, where assets and expense are debit and
capital, liabilities and income is credit.
The rules for debits and credits are:
Assets increasing= debit, decreasing=credit
Liabilities increasing=credit, decreasing=debit
Capital increasing= credit, decreasing=debit
Income increasing= credit, decreasing=debit
Expense increasing=debit, decreasing =credit
The nominal ledger is the main accounting record where financial transactions are
recorded.
The receivables ledger is where individual ledger accounts for credit customers are
recorded. Then the total pay receivables is recorded in the nominal ledger as trade
receivables.
The payables ledger is where individual ledger accounts for credit suppliers are kept.
Then the total payables account is held in the nominal ledger under trade payables.
These two ledgers are not part of the double entry system.
Trade discounts are a percentage discount from the list price of goods and are usually
given to regular customers and on bulk purchases. The purchases and sales should be
recorded as the net of the trade discount. In other words, the final price is the one
recorded.
Early settlement discounts are a percentage discount given to customers if they pay
within a shortened period of time. This is to encourage customers to pay the company
quicker. Sales or purchases should be recorded net of the discount if it is taken.
However, judgment should be made as to whether the company will make the payment
in time and sales, or purchases should be recorded and adjusted accordingly.
When you have VAT on sales, the debit is receivables and credit is owed to HMRC. On
purchases, VAT is due from HMRC as debit and payables are credit.
A trader must pay VAT at the appropriate rate on the full sales value, this is known as
output tax. Sales in the statement of profit or loss should exclude output tax. However,
the receivables will include the VAT as it is the amount due from customers.
A trader is usually entitled to reclaim VAT on goods bought, expenses and non-current
assets or input tax. This is not included in the statement of profit or loss but on the
credit side of the double entry statement will be tax included as it is what will be paid to
the suppliers.
The overall tax paid to HMRC is the output tax-input tax. If this is a debit balance, a
repayment is due from HMRC.
In the statement of financial position, the overall tax either from or to HMRC should be
included in other payables or other receivables.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller vickylongstaff2002. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £4.99. You're not tied to anything after your purchase.
