Book-keeping

The double entry system

for expenses and revenues

Chapter 5

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007 5-1

 Learning Objective 1

Understand the concept of profit and loss by

comparing revenues with expenses

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-2

 Learning Revenues and expenses

 Revenue
Revenue means
means the
the sales
sales value
value of
of goods
goods and
and
services
services that
that have
have been
been supplied
supplied to
to customers.
customers.

 Expenses
Expenses means
means the
the cost
cost value
value of
of all
all the
the assets
assets
that
that have
have been
been used
used upup to
to obtain
obtain those
those revenues.
revenues.

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-3

 Learning calculating
profit or loss

Expenses
Expenses Revenues
Revenues
££ 70.000
70.000 ££ 100.000
100.000

£100.000
£100.000 -- £70.000
£70.000 == Profit
Profit of
of ££ 30.000
30.000

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-4

 Learning calculating
profit or loss

Expenses
Expenses Revenues
Revenues
££ 80.000
80.000 ££ 60.000
60.000

£60.000
£60.000--£80.000
£80.000== Loss
Lossof
of ££20.000
20.000

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-5

 Learning Objective 2

See the effects of profits and losses on capital

and the relationship to the accounting system

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-6

 Learning the effect of profit and loss
on capital

Capital = Assets – Liabilities

Old capital + Profit = New capital

or
Old capital – Loss = New capital

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-7

 Learning Debit or Credit entry?

Debit Credit

Expenses Revenue
Losses Profits
Assets Liabilities
Drawings Capital

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-8

 Learning Objective 3

Understand why separate accounts are used

for each type of expense and revenue

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5-9

 Learning why separate Expense accounts
for each type of expense

In
Instead
steadof
of one
one Expense
ExpenseAccount
Account we
weidentify
identify
specific
specificareas
areasof
of aa firms
firmsexpenditures:
expenditures:

--Rent;
Rent; --Postages;
Postages; --Stationary;
Stationary;
--Telephone;
Telephone; --Insurance;
Insurance; --Wages.
Wages.
--Salaries;
Salaries; --Motor
Motorexpenses;
expenses; --Advertising;
Advertising;

Each
Eachexpense
expenseabove
aboveon
onseparate
separateaccount
account

Each
EachExpense
Expensedecreases
decreasesthe
theamount
amountof
ofCapital
Capitalon
onEnd
EndBalance
Balancesheet
sheet
Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 10
 Learning why separate Revenue accounts
for each type of expense

In
In stead
stead of
of one
oneRevenue
RevenueAccount
Account we
weidentify
identify
specific
specificareas
areasof
of aafirms
firmsrevenues:
revenues:

Rent
Rentreceivable;
receivable;
Commission
Commissionreceived;
received;
Bank
Bankinterest
interestreceived.
received.

Each
Eachrevenue
revenueabove
aboveon
onseparate
separateaccount
account

Each
Eachrevenue
revenueincreases
increasesthe
theamount
amountofofCapital
Capital
on
onthe
theEnd
Endbalance
balancesheet
sheet
Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 11
 Learning Objective 4

Be able to record expenses and revenues

using double entry system

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 12

 Effect of transactions [1]

Example
Example2:
2:
Motor
Motorexpenses
expensesare
are paid
paidwith
withaa cheque
cheque for
for £230
£230

Debit Credit
Motor expenses* Capital £230
Bank (asset) is decreased £230

* As result this expense decreases the amount of Capital on End Balance

sheet

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 13

 Effect of transactions [2]

Example
Example4: 4:
AAproprietor
proprietor takes
takes £50
£50 cash
cashout
out of
of her
her business
business for
for
her
her own
ownuse
use

Debit Credit
Drawings Capital £50
Cash (asset) decreases £50

* As result this decreases the amount of Capital on End Balance sheet

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 14

 Effect of transactions [3]

Example
Example5: 5:
On
On55June
Juneitit isis decided
decided that
that part
part of
of aa firm’s
firm’spremises
premises
are
are not
not needed
needed at at the
themoment.
moment. TheThefirm
firmlets
lets someone
someone
else
elseuse
use the
thesurplus
surplusspace
spaceand
and receives
receivesrent rent at
at of
of
£140
£140 bybycheque
cheque
Debit Credit
Bank (asset) is increased £140
Rent received (revenue)* Capital £140
* As result this increases the amount of Capital on End Balance sheet

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 15

 Learning Objective 5

Understand the term ‘drawings’, be able to

record them and recognise the effects of
drawings on capital

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 16

 Learning effect of drawing

On Aug 25 2008: Proprietor takes ₤500 cash out of her

business for her own use
Effect Action
1 Capital is decreased by £500 Debit the drawings account ₤500
2 Cash is decreased by £500 Credit the cash account ₤500

Dr Cash account Cr
2006 Aug 25 Drawings ₤500

Dr Drawings account Cr
2006 Aug 25 Cash ₤500

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 5 - 17

 End of Chapter 5:
The double entry system
for expenses and revenues

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007 5 - 18