Double Entry Accounting Examples?  It’s Easy If You Do It Smart!

What Everyone Must Know About Double Entry Accounting 

Effectiveness in accounts

Double-entry accounting transaction has two effects. For example, if someone purchases grocery goods from a store, he pays cash to the shopkeeper. This simple transaction has two effects from the aspects of both. The buyer and the seller. The buyer’s cash balance would decrease. On the other hand, the seller’s cash balance would increase by the price of grocery goods.

In addition, both entries are affected by accounting records and effects in financial statements. This is the basic application of the dual entry system in accounting. Without applying these concepts, accounting records seemed would not be complete or even it will be a partial view of the accounting perspectives. Suppose that, furniture is purchased for a company but accounting records do not show whether the furniture is cash or on credit. This information we have gained from records of accounting. This would affect both sides’ transactions and it would be accounted for.

 

Example and solution

 

Ted Wood is a CPA charter holder. In 2011, he launched a business named Ted petroleum. Here are some transactions are given below;

• On 1 October 2011, he set aside $50,000 for his business. This will be reflected in double-entry accounting as follows

 

     Cash                      $50,000

Capital, Ted Wood        $50,000

 

On 9 October 2011, he hired an Accountant to maintain Accounts for $5,000. No need journal entry because it’s just started off an agreement and no transaction of goods or services has been shown yet.

 

• On 30 October 2011, Accountant completed his accounts and sent a report. Ted paid him immediately, which is shown below;

 

Accountant salary $ 5,000

              Cash                      $5,000

.

 

• The Accountant analysis was promising. It inspired Ted to put in $100,000 more money and purchase some important equipment worth $50,000 on 2nd November

 

             Cash                          $100,000

                     Capital, Ted wood                    $100,000

 

The purchase of equipment is shown as follows:

 

         Equipment                $50,000
Accounts payable                      $50,000

 

• These transactions change equations, it increases to cash and Owner’s equity $100,000 and it recommended a new asset (equipment) value of $50,000 and its accelerated liability (accounts payable) value of $50,000.
  The equipment seller is paid on 10 November 2011.

Accounts payable        $50,000
Cash                                    $50,000

 

• A Financial analyst was employed on 1 December 2011 for $7,000 a month and a $25,000 signing bonus, and a working space arranged for $3,000 a month paid in advance. The following journal entry is made on 1 December.

 

Salaries expense           $25,000
Prepaid rent                    $3,000
Cash                                       $28,000

 

• On December 2011, adjusting entries are set up to recognize the rent expense, pay salary to the Financial Analyst and noticed monthly depreciation on the equipment (useful life is 20 months).

 

Rent expense                 $3,000
Prepaid rent                          $3,000

.

 

Salaries expense            $7,000
Cash                                        $7,000

 

 

Depreciation expense ($50,000/20)      $2,500
Accumulated depreciation (equipment)               $2,500

 

Principal Formula:

The dual entry system is based on the key formula and it is well-established among accounting experts and firms. Nowadays, everyone uses this formula which is given below:

Assets (A) =Liabilities (L) +Owner’s equity (O. E)

Method Proved

At the end of the first quarter, account balances are shown bellows:

Cash balance = $50,000 – $5,000+$1, 00,000-$50,000-$28,000-$7,000 = $60,000
Prepaid rent balance = $3,000-$3000=0
Equipment balance = $50,000 – accumulated depreciation ($2,500) = $47,500
Liabilities balance = 0
Owner’s equity balance = opening balance ($1, 20,000) – rent expense ($3,000) – salaries expense ($7,000) – depreciation expense ($2,500) = $1,07,500
Accounting equation at the end of the quarter: cash ($60,000) + equipment ($47,500) = shareholders’ equity ($107,500).

So, Assets ($1,07,500)=Liabilities($0)+Owner’s equity($1,07,500).
The balance carried forward balance sheet (statement of financial position) when a complete financial statement is prepared.

 

Generally, the two effects of accounting are known as the golden rules of Accounting Debit and Credit. The double entry system is underlying to fundamental in that every transaction equals to be Debit and Credit entries. This is known as the Dual entry Principle. but there are misconceptions about this formula, we mixed it and confused the single entries and double entries to which one it would be applied. Read more for details about it.