Competitive Exams Book Keeping and Double Entry

What is book keeping and transaction? Explain double entry single entry book keeping.

Book Keeping is defined as systematic recording of business transaction in asset of books. Book keeping is very important to a person. The importance of recording business transaction need not be emphasized weather it is business or non business activities. BOOKING KEEPING IS recording and balancing of financing transactions of an institution. TRANSACTION means the transmission of information between two parties to carry out financial or administrative activities related to health care. TRANSACTION MEANS The entry or liquidation of a trade.

It includes the following types of information transmissions:

  • Health care claims or equivalent encounter information.
  • Health care payment and remittance advice.
  • Coordination of benefits.
  • Health care claim status.
  • Enrollment and dis enrollment in a health plan.
  • Eligibility for a health plan.
  • Health plan premium payments.
  • Referral certification and authorization.
  • First report of injury.
  • Health claims attachments.
  • Other transactions that the Secretary may prescribe by regulation.

A transaction is a unit of work that an Objectivity/DB application can apply to a database. It contains one or more logically related operations that create, access, or modify persistent objects. Every interaction with persistent objects must occur within a transaction. Transaction involves exchange of money, goods, property or services example sales, purchase, cash/cheque receipt or payment.

Double Entry Book Keeping

Double-entry book-keeping is the standard accounting practice for recording financial transactions.

Double-entry book-keeping is the standard accounting practice for recording financial transactions. It was “invented” by the merchant venturers of Venice and codified for the first time by Luca Pacioli, a close friend of Leonardo da Vinci, in a 1494 footnote to a scientific paper. Double entry bookkeeping explained as simply as possible. Double entry book keeping is a method of recording transactions, which allows a check on accuracy of the recording. Bookkeeping entries are divided into DEBITS and CREDITS. The DEBIT side is at the left of the ledger page, the CREDITS on the right. DEBITS record transactions relating to purchases, expenses and an increase in the assets of the company. CREDITS record transactions relating to revenues and an increase in the liabilities of the company. Recording a transaction always requires a DEBIT and a CREDIT entry. Providing the entries have been correctly recorded, when both sides of the ledger totaled should therefore agree.

Examples:

  • A refrigerator bought for cash for $300.
  • Entry = DEBIT Purchases $300 (purchase)
  • CREDIT Bank $300 (increase in liabilities)
  • The refrigerator sold for cash for $350
  • Entry = CREDIT Sales $350 (revenues)
  • DEBIT Bank $350 (increase in assets)
  • On completion of these two transactions the Balance Sheet of the company would be:
  • ASSETS
  • Cash at Bank $50
  • LIABILITIES
  • Retained Profit $50

Retained profit is owed to the shareholders and is therefore a liability to them. Conversely, in the balance sheet, losses are recorded as assets; on the principle the company will require a input of funds from the shareholders in order to continue trading When the giving or receiving of credit is introduced into a transaction, accounting requires that the asset or liability resulting from such a credit transaction is recorded. Recording a transaction, in these circumstances requires 4 booking entries as follows:

  • A refrigerator bought on credit for $300.
  • Entry = DEBIT Purchases $300 (purchase)
  • CREDIT Supplier $300 (increase in liabilities)
  • Cash Payment
  • Entry = DEBIT Supplier $300 (increase in assets, by Reducing liabilities)
  • CREDIT Bank $300 (increase in liabilities)
  • The refrigerator sold on credit for $350
  • Entry = CREDIT Sales $350 (revenues)
  • DEBIT Customer $350 (increase in assets)
  • Cash Payment
  • CREDIT Customer $350 (increase in liabilities by reducing the assets)
  • DEBIT Bank $350 (Increase in assets).

To take the exercise further, shown below are the entries relating to the following:

A private company is started up, the shareholders put $1000 dollars into the company, $500 in share capital and $500 in loans. They also negotiate bank facilities. The transactions during the year are as follows.

  1. 6 refrigerators purchased on credit for $300 dollars each. 5 refrigerators paid for:

  2. 3 refrigerators sold for $350 each. 2 refrigerators paid for:

Records of Entry

The entries would be recorded as follows:

  • START UP
  • CREDIT Share Capital Account $500 (liability to shareholders)
  • CREDIT Shareholders Loan Account $500 (liability to shareholders)
  • DEBIT Bank Account $1, 000 (asset)
  • PURCHASE OF REFRIGERATORS
  • DEBIT Purchases $1, 800 (purchase)
  • CREDIT Supplier $1, 800 (liability)
  • DEBIT Supplier (Payments) $1, 500 (reduces liability)
  • CREDIT Bank Account $1, 500 (increases liabilities)
  • SALE OF REFRIGERATORS
  • CREDIT Sales $1, 050 (revenue)
  • DEBIT Customers $1, 050 (asset)
  • CREDIT Customers (Receipts) $700 (reduction in assets)
  • DEBIT Bank Account $700 (increase in assets)
  • At the end of the year the number of refrigerators in stock will be 3 with a value of $900. The book keeping entries are:
  • STOCK
  • CREDIT Stock Revenue Account $900 (offsetting purchases)
  • DEBIT Stock Account $900 (Asset).