Double Entry Bookkeeping - Starting a business and its initial transactions

CAT FA1 Course Notes Contents Page

Transaction 1

The owner starts up the business in 1/1/2013 by putting $10,000 of cash in as capital. From the business’s point of view, its cash has increased by $10,000 and its capital has increased by $10,000. Cash is an asset (something owned) and the capital is the amount owed by the business back to its owner. The double entry would be: Notice the cross-referencing between the accounts. The entry in the Cash account is described as ‘Capital’, which is where the cash came from; the entry in the Capital account is described as ‘Cash’, the nature of the capital injected.

Accounting equation:

Things owned, cash $10,000 = Things owed, capital 10,000

Transaction 2

The business buys some equipment for $2,000 cash on 3/1/2013. Cash has decreased $2,000 and the cost of equipment has increased by $2,000 Note the balance on this account is Dr 8,000, the net of the Dr and Cr sides Accounting equation: Things owned, cash $8,000 + equipment $2,000 = Things owed, capital $10,000

Transaction 3

On 10/1/2013, the business purchases goods for resale for $5,000 on credit. The asset of inventory increases and the liability to suppliers increases Accounting equation: Things owned, cash $8,000 + equipment $2,000 + inventory $5,000 = Things owed, capital $10,000 + suppliers $5,000 Transaction 4 On 15/1/2013, sells half the goods for $4,000 credit. This will create a profit of 4,000 – 5,000/2 = $1,500. The profit is owed to the owners and is a liability of the business to its owners. We can look at the sale in two parts: earning $4,000 for a cost of 5,000/2 = 2,500. Accounting equation: Things owned, cash $8,000 +equipment $2,000+inventory $2,500 + due from customers $4,000 = $16,500 = Things owed, suppliers $5,000 capital $10,000 + profit [4,000 – 2,500] = $16,500 Transaction 5 On 31/1/2013, the suppliers are paid what they are owed and $100 is paid for rent. The rent is an expense and decreases the profit. Paying suppliers what is owed to them has no effect on profits. Accounting equation: Things owned, cash $2,900+equipment $2,000+inventory $2,500 + due from customers $4,000 = $11,400 = Things owed, capital $10,000 + profit [4,000- 2,500 – 100 (rent)] = $11,400