Year 1 recap

double entry bookkeeping

What is the business entity concept in accounting?

It means transactions are recorded for the business itself, not for the owner’s personal affairs.

What is the duality concept in double entry bookkeeping?

Every transaction has two or more equal and opposite effects, ensuring that debits = credits.

What are the three main forms of the accounting equation?

1. Assets – Liabilities = Owner’s Capital

2. Net Assets = Capital + Profit – Loss + Capital Injected – Dividends

3. Assets = Capital + Liabilities

What is a nominal ledger and why is it important?

A collection of all accounts (assets, liabilities, income, expenses, capital) that records transactions. Figures from it are used to prepare financial statements.

How are T-accounts structured?

Each account is split in two halves:

• Left side = Debit (Dr)

• Right side = Credit (Cr)

What does the DEADCLIC mnemonic stand for?

• Debit increases: Expenses, Assets, Drawings.

• Credit increases: Liabilities, Income, Capital.

How does the expanded accounting equation incorporate profit?

• Assets = Capital + (Income – Expenses) + Liabilities

• Rearranged: Assets + Expenses = Capital + Income + Liabilities

How are drawings treated in accounting?

• They reduce owner’s capital (not an expense).

• Entry: Dr Drawings, Cr Bank/Cash (or Purchases if goods are withdrawn).

Why are purchases and sales not recorded directly in an “Inventory” account?

Because inventory is tracked through:

• Purchases (goods bought for resale)

• Sales (goods sold)

• Returns Outwards (to suppliers)

• Returns Inwards (from customers)

What is the core principle of the double entry system?

For every transaction:

• One account is debited

• Another account is credited

• Ensuring that Debits = Credits and the accounting equation stays balanced.