Summary
Summary ULAW LPC, Solicitors Accounts Chapter Readings
- Module
- Solicitors Accounts (SAC)
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- University Of Law (ULaw)
ULAW LPC, Solicitors Accounts Chapter Readings
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Intro to PP – WS1 Solicitors Accounts TIFF LIAOChapter 2 – Double Entry Bookkeeping page 9
PURPOSE
OF DOUBLE ENTRY BOOKKEEPING
Bookkeeping = Process of recording financial transactions in the accounting records of a business.
o Historically involving handwritten records but modern businesses use computerised systems for record-
keeping.
o All businesses employ the double entry bookkeeping system
o This system dates back to Ventian traders in the 15th century
o its continued use speaks to its efficiency and ingenuity.
o Uniformity is important for understanding accounts by outsiders.
o The double entry system, used worldwide, ensures this understanding.
PRINCIPLES
OF DOUBLE ENTRY
Every business transaction has TWO aspects to it, and both need to be recorded to give an accurate picture of the state of the
business.
EXAMPLES (c) The business provides services to a client on credit
DR – Expenses incurred (business has a debt
owing to it)
CR – Income earned
(a) Business pays cash to buy premises (d) The client pays the business the money owed:
DR = Asset acquired/increased DR – Asset disposed of (the business has lost
CR = Cash Paid the debt that was owing to it)
CR – Cash gained
(a) The business sells goods to a customer (e) The business pays wages:
for cash DR – Expenses incurred (the business has less
DR – Cash gained cash)
CR – Income earned CR – Cash paid
NB: No matter what type of transaction you consider, there should always be TWO aspects to it.
- Both aspects of a transaction are recorded in the books of the business.
- Each aspect MUST be recorded in a DIFFERENT account.
- The double entry bookkeeping system requires the business to have a number of a SEPERATE accounts.
e.g there is one account for cash, one account for each type of asset, one for each type of expense, one for each
person to whom the business owes money, one for each debtor that owes money to the business.
RULES FOR RECORDING TRANSACTIONS
Debt DR Credit CR Examples:
(left column) (right column) (a) Business buys a machine for £20,000 cash
Income Earned DR = Asset acquired/increased/gained CR = Paid
Expense incurred/ pays The business gains an asset in the form of a machine (recorded on
cash the L of the machine account) and pays cash (recorded on the R of
the cash account)
Asset disposed
Asset of/reduced/lost (b) The business buys stock for £1,000 cash
acquired/increased/gaine DR = Expense incurred CR = Paid
d The purchase of stock is an expense of the business. The
business incurs an expense, recorded on the L of the purchase
Liability account. There is a payment of cash, recorded on the R of the
Liability incurred/increase cash account.
reduced/extinguished d
(c) The business sells stock for £30,000
DR – Income earned CR = Cash gained
Cash Gained Cash Paid/Lost By selling stock the business earns income, recorded on the R of
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TIFF LIAO
, Intro to PP – WS1 Solicitors Accounts TIFF LIAO
Chapter 2 – Double Entry Bookkeeping page 9
the sales account. There is a ain of cash, recorded on the L of
the cash account.
THE BUSINESS IS SEPARATE FROM THE PROPRIETOR
- When a proprietor sets up a business and puts some cash, the transaction must be recorded from the point of view of
the business.
- Two aspects:
(1) The business is gaining cash; AND
(2) Is incurring a liability (in that, it owes money to the proprietor).
This liability to repay its proprietor is normally referred to as the ‘capital’ of the business.
DEBIT AND CREDIT
Examples
(a) Joe sets up a business and pays £120,000 to start it
DR = The business gains cash CR = Incurs a liability to its proprietors
(b) The business buys premises for £100,000
DR = Gains asset in the form of premises CR = Cash paid
THE FORM OF ACCOUNTS
Most common form is the tabular form;
Date Details DR CR Balance
Of the transaction Cross reference to the The amount entered Running balance on
name of the account in the L-hand debit the account
where the other part of column as appropriate
the double entry is IF the DR entries
made EXCEED the CR
(often with a brief entries, the balance is
description of the described as a DR
nature of the balance and vice
transaction as well) versa
Example:
A business pays three electricity bills, £1,000, £2,000 and £3,000.
Each payment will be recorded on the ELECTRICITY account and the CASH account.
The electricity account will show DEBIT entries as the business is incurring an expense.
Date Details DR CR Balance
1 Cash 1,000 1,000 DR
2 Cash 2,000 3,000 DR
3 Cash 3,000 6,000 DR
The corresponding entries appear in the CASH account as CREDIT entries because the business is paying cash.
Date Details DR CR Balance
1 Electricity 1,000 1,000 CR
2 Electricity 2,000 3,000 CR
3 Electricity 3,000 6,000 CR
Every financial transaction MUST be recorded in the accounts of the business as it happens.
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TIFF LIAO
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