FA1 Recording Financial Transactions, exam June 2014

double entry: ever transaction has 2 effects.

if u pay 55 for taxi fare, what is happening? your cash is REDUCED – because u paid 55. against this loss of 55, u have gained a service which allowed u to do ur business activity. in other words, ur expense ROSE.

to completely and clearly understand double entry, 4 concepts have to be understood simultaneously.

1. accounts fall into 5 CATEGORIES (assets, liabilities, expense, income and equity)

2. to denote increase/decrease the terms DR and CR r used. HOWEVER, DR does not always mean an increase and a CR does not always mean a reduction. The meaning of dr/cr follows the following rule:

Category dr cr
asset + –
expense + –
liability – +
income – +
capital – +

3. Ability to classify accounts in its proper CATEGORY.

whereas 1 and 2 are easily learnt because they r simple rules, 3 is very difficult for a beginner. and most mistakes are made here. some accounts are obvious, for example CASH. this is an ASSET. Expenses are mostly obvious, like salaries, purchases of raw material, coffee.

BUT what about when u buy a car for the business? is it an expense? or is it an asset?

4. one transaction can have several debits and credits. example, payroll entries. to make us understand the concepts, initially simple transactions r given which involve one debit and one credit. but the reality is there r many complex transactions that have several dr/cr. might as well get used to this right now!

5. the sum of debits MUST equal the sum of credits.

writing down an accounting transaction thus needs the student to

a. which category do the accounts belong to #3
b. apply the correct dr/cr rules

Points a and b together can be classified as TRANSACTION ANALYSIS.

it may seem daunting at first, but if u take it slow and ALWAYS FOLLOW these steps, u will never go wrong and pretty soon it will become second nature to you.

ANALYZE EACH TRANSACTION JUDICIOUSLY

EXAMPLE 1:

for example, if took a loan from the bank. lets examine this transaction. lets say the loan is 12000.

what is happening here?

YOU R TAKING A LOAN – A LOAN HAS TO BE REPAID .. THUS LOAN IS A LIABILITY ACCOUNT.

WHAT ARE U GETTING FOR THE LOAN? U R GETTING CASH, WHICH IS AN ASSET ACCOUNT.

so, when a liability increases, u CR the account
and when an asset increases, u DR the account

we can now write the transaction as:

Cash Dr 12,000
Loan Cr 12,000

by convention, accountants write the debit first

the sum of debits is 12000 and sum of credits is 12000..so we r cool

EXAMPLE 2

lets say you bought a delivery van for 2000. now, this van will last you for much longer than a year thus u will treat it as an asset. (NOTICE HOW I HAVE TO CLASSIFY THE ACCOUNT)

since you pay by cash, cash is also an asset account.

in this case, notice that BOTH are asset accounts. one is increasing (the van account, and one is decreasing, the cash account)

van is increasing thus van account will be Dr
cash is reducing thus it will be Cr

we can now write the entry:

Van dr 2000
cash cr 2000

and of course, sum of dr = sum of cr

EXAMPLE 3

you went to the store and bought:

a generator in case of emergencies – 600
4 liters of petrol – 40

at the counter u paid 640.

the generator is an asset account because it will last you for many years.

petrol is just expense since it will be consumed

cash is asset

generator asset a/c is increasing – dr (#2 rule)
petrol expense a/c is increasing – dr (#2 rule)
cash is asset account is decreasing – cr

we can now write the entry:

generator dr 600
petrol dr 40
cash cr 640

sum of debits (600+40)= sum of credits (640)

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final note: when u r doing examples. u will be learning which accounts belong to which category. dont judge urself harshly if u dont know the category. ask.

and the more examples u do, the more u will learn.
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final final note: if u have any questions reply…then i will explain integrated/interlocked

Hi, Can you help to send me the FA1 study materials? I don’t know why but I cannot download from this website… Thank you~

lrenyimx@gmail.com Thx~ 😕

I mean any tips or useful information. I’m really worried.

@farazdotmalik .. fa1 is ur very basic accounting course where you learn about debits and credits, different books that accountants use to keep a record of transactions.

its not a difficult course but if you dont have background in accounting then it needs a bit of study.

oo..plis do send me fa2 n ma1 notes too if u free to do

faaaiz… u can post questin here and i will try to answer ur queries. this site is a great site for learning and i use it for my exams too.