lecture_15-double_entry_system_and_trial_balances

lecture_15-double_entry_system_and_trial_balances - MA826...

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MA826 15- The Double Entry System and Trial Balances
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Double Entry System The information used in construction of accounting reports is based on the double entry book- keeping system which enables control to be exercised in recording inflows and outflows. Returning to the relationship: A (assets) = C (capital) + L (liabilities) Where, assets remain equal to the source of finance in all circumstances.
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Double Entry System The interlocking effect of transactions is fundamental to the system of double entry book-keeping. To maintain the relationship, each transaction must have two equal, but opposite effects. This can be extended to include income and expenses:
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Double Entry System Income ↑ Income ↓ Expenses ↓ Expenses ↑ C ↑ C ↓ L ↑ L ↓ A ↓ A ↑ Effect 2 (credit) Effect 1 (debit)
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Double Entry System Both effects have the same value and leave the relationship in balance. Each transaction has a dual effect, hence the double entry system.
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Ledger Accounts The double entry system involves the use of a separate record for each type of revenue, expenditure, asset and liability. Each record is named according to the item to which it relates. The complete set of accounts kept by a firm is called its ‘ledger’.
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Ledger Accounts Example The following example shows the effect of various transactions on the balance sheet
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lecture_15-double_entry_system_and_trial_balances - MA826...

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