Recording Transactions with Double Entry Bookkeeping

Hi and welcome back for the introduction to financial accounting course. The topic for this session are the

following: we will in essence be moving from transactions to recording. But now we can more formally use all the tools and instruments of

the double entry bookkeeping system: and in fact who will be starting with the accounting identity. We will then use journal entries and then the T-accounts. These are what happens throughout the year. Then at the end of the year we know that we to rely on the general ledger and the unadjusted trial balance to summarize all the transactions prior to getting to the financial statement. As a means to signpost what we are doing We would again start from company transactions and use double entry into accounts in order to track the transactions throughout the year.

Then, we will summarize all the transactions through a general ledger and then we will end up using a trial balance that can be adjusted or unadjusted prior to getting to financial statements. Transaction number one on January the 30th Tony launches a new start up food on the go. Whose business idea is exploding is lacking extra food cooked on a daily basis by the households in a small city, and connect it with workers who would like to have genuine food but lacked time and rather prefer to buy it.

The initial equity to launch these enterprise is 120,000 of which path is provided on the same day through a bank transfer whereas the remaining part is a receivable that the company has with Tony. How would you record this transaction. Well let’s start here. Because we know that equity goes up by one 120. But on the other hand we know that we want to increase also something on the asset side, and we know that bank with an A because it’s an asset will go up by 60. And the same thing with receivables which are still innocent and wouldn’t go up by the same amount as you can see we have an increasing bank by 60000.

We have an increase in receivables of 60,000 and on the other side you’ve got paid in capital which is a protein that goes up by 120. One thing you should immediately recognize is that the totals on the left hand side in the right hand side are the same 120,000. Let’s move on to how we record this transaction using the journal entries and the T-accounts. How do we record this transaction using the journal entries? In the first column.

We have the transaction number and then we have a date: January 30th. And here we record the account titled And explanation that will also be relevant in the T-accounts. If the item is debited we write the amount here. If the item is credited we write the amount here. In this case, we know that the company is having an increasing equity and an increase in the bank and receivables and let’s see how we would normally record this in a journal entry. If we write it here, we know that the bank which is an asset account will be debited by 60, but also we know that receivables which are again an asset account, will go up by 60.

On the other hand we know that there is paid-in-capital. which is an equity account that will be credited by 60. Well it’s not too different what happens in the accounts. I mean to look at the account see what we have. We have one account named after receivables. We have one account named after bank, and then we have one account named after equity We know that receivables will go up and will be debited by 60. We know that the bank account will go up and will be debited by 60 and then we know that the equity account will be credited by 1,2. Here you have the representation of the journal entries and the accounts for the just seen transaction.

But let’s move on now to transaction 2. Transaction number two on February the 5th. Food on the Go buys five electric scooters for eight thousand and these are needed to start with the deliveries. The payment occurs the bank transfer the expected useful life of each school there is two years before replacement.

Notice that here we have two pieces of information: The first one is that the food on the go is purchasing scooters for a thousand and is paying cash. Something that occurs on February but the useful life of these scooters goes beyond the financial year. It will span across two years and you know that will have to bear this information in mind at the end of the year. Prior to estimating end of year performance. But let’s have a look at what happens with this transaction in terms of accounting identity.

The way we operate with accounting identity is that we will add each transaction after the other so that we can get the overall picture of what happened throughout the year transaction number two. We know that there is equipment say scooters which is an asset account and the value goes up by 8. On the other hand we know that there is a decreasing bank so there is one asset was the value goes down by the same amount. Let’s start with journal entries.

This is transaction number two: On Feb 5th. Which are the relevant accounts? It is not that different from what we have seen in the previous slides, as we have an equipment account which is Scooter which is a nascent account for these eight. On the other hand we have bank account which is an asset with a minus sign because it’s going to be credited. What is your expectation in terms of the accounts with the T-accounts? We already have them here, and we know that the bank account in transaction two is credited by 8 and correspondingly we have equipment and school this account that goes up by the same amount as you can tell them prior to moving to the next slide.

One thing you want to notice here is that the total credit and the total debit equals. Furthermore if you remember we had an important piece of information that the useful life of these squandered spans over two years. But this is not taken into account as of now. It will be eventually at the end of the year.

Let’s move now to the transaction number three: on February 7 for them to go buy some license to use a platform to handle orders and deliveries. This is something like an app. The total cost is twelve thousand one third is paid via bank transfer whereas the remaining amount will be paid in the following year. The useful life of these license is three years. Yes the contract would go over three years. Let’s see what happens in terms of the accounting identity. And remember here we have quite a few pieces of important information.

So, we know that the company buys a license which is an asset that goes up by 12000 and we also know that there is a decrease in the bank account (minus asset) by 4000. On the other hand, we know that something happens on the liability side. Because the company now has a payable - that’s a liability - that goes up by eight thousand. Here we have the representation of the transaction number three using the accounting identity. But let’s move on to how we account using journal entries and T-account. We know that we have transaction number three here on February the 7th. And we know that there is an increase in the value of license.

We know that this is an asset account soon given that the value is going up. We’ll get it by 12. By the same token We have that the bank account which is a minus. It is going to be created by for the same way. We know that there are some payables - which are a liability which are are trying to buy. When we look at the accounts the expectation is that we will in essence be using the same account item, and in fact we’ve got payables that go up so they are credited by eight. We know that the bank account is credible as well by four what has the license are increased by 12.

Transaction 4: on before March 30th. A large company buys at a discount 7200 meals to be delivered to its employees every day for the next twelve months. The cost per meal is three euros (hence the total is twenty one thousand six hundred). The payment is upfront via a bank transfer. Now let’s see what happens in terms of the accounting identity it is transaction number four. And here what we have is an increase in bank, which is an asset, that goes up by twenty one thousand six hundred. What happens on the other side of the equation? Well the company is selling products in essence so we bulk of revenue (sales) for twenty one thousand six hundred.

Now whether these sales have fully accrued or not is an important issue which we will have to discuss at the end of the year but let’s move on now and see what happens in terms of journal entries and T-accounts. Transaction number four on March 30th. Here we have bank asset that is debited by 21,600. That corresponds to a credit on the Sales account for the same amount.

increase what in terms of the accounts. Well we’ll only have two accounts in both and in fact we have sales which are revenue and we remember that revenues increasing means crediting and correspondingly we have a bank account that goes up by twenty one thousand six hundred as a debit.

Transaction five: on April 4 Food on the Go pays 1,500 for a six month rental of its office space at Aroba22. What happens in terms of the accounting identity? Well here we have a decrease in the value of the bank so minus assets and on the same side of the equation we have an increase in an expense for 1500. So overall the accounting identity is unchanged. What happens in terms of journal entries and key accounts in terms of journal entries and T-account? This is what we have we recorded office rentals. That is an expense account which is debited for 1500 that corresponds to a reduction in the bank account for 1500 which is therefore credited.

And this is also reflected into the accounts where we see that office rental and the bank account.

Transaction number six: on May 5 Food on the Go pays salaries for 3,400. Let’s look at what happens in terms of accounting identity. This is quite straightforward to ascertain. You know that there is a decrease in a bank account by three thousand five hundred and an increase in expense account salaries, for the same amount. So the only side of the equation that is affected by this transaction is the left hand side. Let’s see what happens in terms of journal entries into accounts. Journal entries on May 5. The companies pay salaries for three thousand four hundred. Therefore we debit an expense account and correspondingly we credit an asset account like the bank account in some accounts.

This is what we have: salaries will go up by three thousand four hundred one Whereas the bank account will be created for the same amount. As you can see the total credits and the total debits will always be equal. On June 3 Food on the Go receives a cheque of thirty thousand from pay pay for the sales made earlier throughout the platform. So the company has been selling has been generating revenues and now it’s time to cash in. In terms of the accounting identity How do we take this into account? Well let’s see.

We know that one of the asset accounts bank will go up by 12000 and on the other side of the equation we have that sales go up by the same amount as you can tell the total of the left hand side and the right hand side go up by the same amount. Let’s see what happens in terms of general injuries and accounts this is transaction number seven. On June the 3rd and the two relevant accounts that will be involved are the sales revenues when there is an increase in revenues. We have to credit something. And also we have the bank account which is going to be debited by twelve thousand.

Let’s go back to the journal entries and see what we write here. We know that there is a bank account which is an asset and it debited.

And here we have a savings account which is a revenue account that goes up by 12 and therefore it is credited. On July 5th 800 are withdrawn from the bank account. To pay the bill accrued for the last two months. What is the effect on the accounting identity? Well we know that the bank account will go down by 800

at the same time we know that bills - which are an expense account - will go up by the same amount. Let’s see the effects of transaction 8. In terms of journal entries

And T-accounts: transaction number eight on July the 5th we have the bills account which is an expense that we did buy 800 by the same token the bank account which is not set the account goes down. Therefore it is credited by 800 and this is also reflected in the accounts. In fact the account is debited because an expense and goes up. Whereas the bank account is credited because it’s an asset and goes down. On August 28, Food on the go pays 1,500 for six months rental of it office space at Aroba22. Now this is quite the same transaction as the one we have seen earlier. But bear in mind that this is prepaid rental.

So at the end of the year would have to be cautious in assigning these expense as a full costs for the year. But let’s put this on hold for now and let’s have a look at what happens in terms of the accounting identity. It is fairly straightforward because we have a bank account here that goes down by 1500 and by the same token we have office rentals that go up which is an expense account by 1500.

In terms of the journal entries and T-accounts: this is quite a straightforward transaction to record transaction number nine on August 28. We know that the office rental, which is an expense account, will go up and therefore it’s going to be credited by 1.5 and we also know that the bank account a change in asset we go down. Therefore we do it by one point for and this is also what we see in terms of the D accounts and in fact the office rental would be debited by 1.5 whereas the bank account would be created. Now we have gone through all the nine transactions that happened throughout the year. So let’s go back to our signpost.

We have analyzed the company transactions. We have used T-accounts. Now it’s time to summarize and use the journal ledger. So let’s see how we do this. Before we go to try to balance the ledger is in essence the journal that summarizes all the accounts that have been used throughout the year. Let’s have a look at all the accounts that we have been using and referring to for the nine transactions.

First, let’s have a look at the equipment and scooter: this is an asset account that has a debit for eight thousand that has been used in transaction number two. As you can see here. Then we have the bank accounts. The bank account has been has been used many times nearly in relation to all the transactions which are listed after each of the individual then we have the Sales account. The Sales account is a revenue account that has been used twice when the company sold the meals to a large enterprise.

And when the company cash theme from pay pay worth thousand of previous sales and then we have a license which is enough said the code which is something that the company has been doing an investment on. Then we have payables which are charge short term debit and demand that is a liability account. We can see that we have credited then we have salaries. Salaries as an expense account. That is usually debited.

Office rental: This is again an expense account. In the same way as salaries the office rental is debited then we have beats again an expense account which we have analyzed in transaction number 8 and here we’ve got receivables. The receivables are an asset, a short term credit and these credits arose at the time of the set up of the company. So this is a credit that Food on the Go has with the owner. And then the last account is the equity. Equity is a sort of liability account and in fact an increase in equity is credited. Now try and do the estimation yourself of whether the balance is on the credit side or on the debit side.

So I’ll give you a couple of seconds before you move to the next slide.

All right. I am glad to be back. And here is the promised slide with all the balances for each and every account. If you have done all the calculations correctly you should see that the total debits equal the total credit. You know that this is the general rule for the double entry bookkeeping system and here we are at the unadjusted trial balance the unjust trial balance is a synthesis of all the residual values of the balance

for each account that is structured in the following way: in the upper part We have bank, receivables, equipment, license, which are asset accounts. On the right hand side We have equity, payables and net income or loss which Are liabilities account. Below the line you see here This is what we called mini income statement because we have the expenses and revenues account. Now what I’m going to ask you to do is estimating the net income or loss yourself prior to moving to the next slide. Here we have this is the unadjusted trail balance with an estimation of net income.

And you could clearly see that the amount of sales exceeded the amount of all the expenses dance for the company is reporting A positive net income. As you can also see the net income here is reported in this value here. And in fact this is what we can see twenty six thousand four hundred. We’re not done with this session and it is your time to practice. See you at the next video.