When sales are made, capital increases by the amount of profit made on the sale. 2. Expenses
When ongoing costs, such as wages or rent are incurred, capital decreases. 3. Income and expense accounts
Periodically, usually once a year, the figure of profit (income - minus expenses) is added to capital. During the year figures are accumulated in separate accounts for each item of income and expenditure. 4. Cost of sales
At the end of the year, the cost of all the items sold is deducted from sales to give the gross profit. The cost of items unsold appears in the Statement of financial position inventory account. There are different ways of recording the purchase of goods for resale to arrive at this final position. This section shows how we deal with such purchases in this tutorial. 5. Example: Mr Allen - Introduction
We now bring in new accounts for Mr Allen's income and expenses. 6. Example: Mr Allen - Worked examples
We see here how the values of the various items of income, expenses, assets, liabilities and capital change for a few transactions. 7. Double entry
In this section, we see the double entry principles for income and expense accounts. 8. Example: Mr Allen - Double entry
This section explains 3 transactions for Mr Allen in terms of double entry. 9. Double entry: Mr Allen - Student examples
This section contains 6 transactions for you to complete the double entry required. After these transactions are recorded, you can then draw up the trial balance. 10. Example set 1: 20 transactions
This section contains 20 transactions for you to work out which accounts are to be debited and credited. You do not need to complete all 20 questions, but, if you need practice, you will find them useful. 11. Example set 2: Miss Hassan
This section contains more questions if you need them - the more questions you do, the easier double entry becomes! There are 10 questions for Miss Hassan, followed by the preparation of her trial balance. 12. Summary
This section summarises the main points from the module.
This section reviews what you have learnt in the module.
<object classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,28,0" width="320" height="240" title="Introduction"> <param name="movie" value="../../Published/avatar/module4.swf" /> <param name="quality" value="high" /> <param name="wmode" value="transparent" /> <embed src="../../Published/avatar/module4.swf" quality="high" pluginspage="http://www.adobe.com/shockwave/download/download.cgi?P1_Prod_Version=ShockwaveFlash" type="application/x-shockwave-flash" width="320" height="240"></embed> </object> In this module we will look at the classification of Income statement items into income and expenses. You will see that the net figure of income less expenses (i.e. profit) goes to increase capital.
3.1.1We have seen the effects of various transactions on the Statement of financial position.This has been simplified by the fact that Mr Allen has sold all items at cost price. He will not stay in business long if he continues to do this!Let us now consider how to record transactions when he sells at a profit and has to pay various expenses such as rent or telephone.3.3.1We do not wish to alter Capital for each item of income or each expense paid. These trading items are accumulated separately under the appropriate categories of:Expensese.g. Purchase cost of goods sold, rent, electricity, postage.Incomee.g. Sales, interest received.Accounts will be kept in the ledger for each of these items in just the same way that accounts are kept for the Statement of financial position items such as Receivables or Bank. * * 3.3.2Accounting EquationWe are opening income and expense accounts so that we do not have to alter the Capital account for each such transaction.Periodically, usually once a...