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Foundations on which to build your knowledge
In the first in a series in which AVADO tutors focus on core syllabus areas from across the exams. Where else could Paul Kirkwood start but with double entry accounting?
Whenever I plan to teach a subject I try to recall my own experiences when I learned that subject (albeit many years ago) and I also talk to others who have been through the learning process more recently.
When I first learned double entry accounting I recall that I really struggled with some basic double entry concepts, so when I now teach ACCA F3 I always start by focusing on the basic building blocks of double entry. If we can get these concepts clear in our minds we’ll have solid foundations on which to build.
The most basic building block of all is the ‘Dual Effect’. Every business transaction has two ‘equal and opposite’ effects on the business. For example, a sole trader starts a business with $10,000 of their own money. From the business perspective, it will have $10,000 cash (an asset) and $10,000 capital (which is a liability from the business to the owner); these two effects are equal and opposite. If the business then spends $2,000 cash on a motor vehicle, the business’ cash balance will reduce by $2,000 and they will have a new motor vehicle worth $2,000. Again, the two effects are equal and opposite as the business assets have gone down by $2,000 with the outflow of cash but the assets of the business have also increased by $2,000 with the acquisition of the motor vehicle.
Once this dual effect concept is clear in our mind we can start to introduce the language of double entry. This language is really quite straightforward but like any new language it does take time to master.
I like to start by just thinking in terms of assets and liabilities. If an asset goes up it is called a debit entry and if an asset goes down it is called a credit entry. The opposite is true of liabilities.
Using our earlier example, rather than saying ‘our cash asset has increased by $10,000’ we simply say ‘Debit Cash’ and rather than saying ‘the business has an increased liability to the owner of $10,000’ we simply say ‘Credit Capital’. For the purchase of the motor vehicle we simply say ‘Debit Motor Vehicles and Credit Cash’ as assets have increased with the acquisition of the motor vehicle but our cash asset has decreased.
Perhaps the most frequent question I am asked in these early stages is ‘why is an increase in income a credit entry?’ Well, if a business makes a cash sale of, say, $1,000 our cash balance will go up, so we ‘Debit Cash’ but who does this income ultimately belong to? Well, yes it belongs to the business, but ultimately it will belong to the owner, and so any business sales will increase the liability of the business to the owner (after taking away any expenses).
In AVADO’s ACCA F3 programme we use a case study in the first four weeks that follows Robert Wilson, who has started a new T-shirt printing business. From first principles we learn about the dual effect of transactions before learning the language and process of double entry accounting.
• Paul Kirkwood is AVADO’s ACCA Lead Tutor
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