Acca f3 Financial Accounting (int) Study Text

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5: Ledger accounts and double entry   Part C  The use of double entry and accounting systems 

CASH AT BANK ACCOUNT 

 $ 

 

$ 

 

Trade accounts payable a/c 

100

TRADE ACCOUNTS PAYABLE

  $  $ 

Cash a/c 

100

If we now bring together the two parts of this example, the original purchase of goods on credit and the 

eventual settlement in cash, we find that the accounts appear as follows. 

CASH AT BANK ACCOUNT 

 $ 

 

$ 

 

Trade accounts payable a/c 

100 

PURCHASES ACCOUNT 

  $  $ 

Trade accounts payable a/c 

100

TRADE ACCOUNTS PAYABLE

  $  $ 

Cash at bank a/c 

100 

Purchases a/c 

100

The two entries in trade accounts payable cancel each other out, indicating that no money is owing to 

suppliers any more. We are left with a credit entry of $100 in the cash at bank account and a debit entry of 

$100 in the purchases account. These are exactly the same as the entries used to record a 

cash purchase 

of $100 (compare example above). This is what we would expect: after the business has paid off its trade 

accounts payable, it is in exactly the same position as if it had made a cash purchase, and the accounting 

records reflect this similarity. 

Similar reasoning applies when a customer settles his debt. In the example above when Mr A pays his 

debt of $2,000 the two sides of the transaction are: 

(a) 

Cash is received (debit entry in the cash at bank account). 

(b) 

The amount owed by trade accounts receivable is reduced (credit entry in the trade accounts 

receivable account). 

CASH AT BANK ACCOUNT 

  $  $ 

Trade accounts receivable a/c 

2,000 

TRADE ACCOUNTS RECEIVABLE 

  $  $ 

 

Cash at bank a/c 

2,000

The accounts recording this sale to, and payment by, Mr A now appear as follows. 

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Part C  The use of double entry and accounting systems

  5:  Ledger accounts and double entry

87

CASH AT BANK ACCOUNT 

 $ 

 

$ 

Trade accounts receivable a/c 

2,000 

SALES ACCOUNT 

 $ 

 

$ 

 

Trade accounts receivable a/c 

2,000 

TRADE ACCOUNTS RECEIVABLE 

 $ 

 

$ 

Sales a/c 

2,000  Cash at bank a/c 

2,000

The two entries in trade accounts receivable cancel each other out; while the entries in the cash at bank 

account and sales account reflect the same position as if the sale had been made for cash (see above). 

Now try the following questions. 

Question 

Debit and credit 

See if you can identify the debit and credit entries in the following transactions. 

(a) 

Bought a machine on credit from A, cost $8,000. 

(b) 

Bought goods on credit from B, cost $500. 

(c) 

Sold goods on credit to C, value $1,200. 

(d) 

Paid D (a credit supplier) $300. 

(e) 

Collected $180 from E, a credit customer. 

(f) 

Paid wages $4,000. 

(g) 

Received rent bill of $700 from landlord G. 

(h) 

Paid rent of $700 to landlord G. 

(i) 

Paid insurance premium $90. 

(j) 

Received a credit note for $450 from supplier, H 

(k) 

Sent out a credit note for $200 to customer, I 

Answer

  

 

$  $ 

(a) 

DEBIT 

Machine account (non-current asset) 

8,000 

 

 

CREDIT 

Trade accounts payable  

 

8,000 

(b) DEBIT 

Purchases 

account 

500 

 

 

CREDIT 

Trade accounts payable  

 

500 

(c) 

DEBIT 

Trade accounts receivable

1,200 

 

 CREDIT 

Sales 

 

1,200 

(d) 

DEBIT 

Trade accounts payable

300 

 

 

CREDIT 

Cash at bank 

 

300 

(e) 

DEBIT 

Cash at bank 

180 

 

 

CREDIT 

Trade accounts receivable  

 

180 

(f) DEBIT 

Wages 

account 

4,000 

 

 

CREDIT 

Cash at bank 

 

4,000 

(g) DEBIT 

Rent 

account 

700 

 

 

CREDIT 

Trade accounts payable  

 

700 

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5: Ledger accounts and double entry   Part C  The use of double entry and accounting systems 

$ $ 

(h) 

DEBIT 

Trade accounts payable

700 

 

 

CREDIT 

Cash at bank 

 

700 

(i) DEBIT 

Insurance 

costs 

90 

 

 

CREDIT 

Cash at bank 

 

90 

(j) 

DEBIT 

Trade accounts payable 

450 

 

 CREDIT 

Purchase 

returns 

 450 

(k) DEBIT 

Sales 

returns 

200 

 

 

CREDIT 

Trade accounts receivable 

 

200 

Question

Ledger entries 

See now whether you can record the ledger entries for the following transactions. Ron Knuckle set up a 

business selling keep fit equipment, trading under the name of Buy Your Biceps Shop. He put $7,000 of 

his own money into a business bank account (transaction A) and in his first period of trading, the 

following transactions occurred. 

Transaction

   $

B 

Paid rent of shop for the period 

3,500

C 

Purchased equipment (inventories) on credit 

5,000

D 

Raised loan from bank 

1,000

E 

Purchase of shop fittings (for cash) 

2,000

F 

Sales of equipment: cash 

10,000

G 

Sales of equipment: on credit 

2,500

H 

Payments for trade accounts payable 

5,000

I 

Payments from trade accounts receivable 

2,500

J 

Interest on loan (paid) 

100

K 

Other expenses (all paid in cash) 

1,900

L Drawings 

1,500

Try to do as much of this question as you can by yourself before reading the solution. 

Answer

Clearly, there should be an account for cash at bank, trade accounts receivable, trade accounts payable, 

purchases, a shop fittings account, sales, a loan account and a proprietor's capital account. It is also 

useful to keep a separate account for

  drawings until the end of each accounting period. Other accounts 

should be set up as they seem appropriate and in this exercise, accounts for rent, bank interest and other 

expenses would seem appropriate. 

It has been suggested to you that the cash at bank account is a good place to start, if possible. You should 

notice that cash transactions include the initial input of capital by Ron Knuckle, subsequent drawings, the 

payment of rent, the loan from the bank, the interest, some cash sales and cash purchases, and payments 

for trade accounts payable and from trade accounts receivable. (The transactions are identified below by 

their reference, to help you to find them.) 

CASH AT BANK 

$

$

Capital – Ron Knuckle (A)

7,000

Rent (B)

3,500

Bank loan (D)

1,000

Shop fittings (E)

2,000

Sales (F)

10,000

Trade accounts payable (H)

5,000

Trade accounts receivable (I)

2,500

Bank loan interest (J)

100

Other expenses (K)

1,900

Drawings (L)

  1,500

 

 

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