Double Entry for Other Transactions (Cambridge International AS Accounting)

Contra entries

What are contra entries?

• A person or business may be both a credit customer and a credit supplier

• If a business owes some money to a person but is also owed money by that person then they can agree to offset the common balance

  • This is known as a contra entry

• The offset is done without any exchange of money

How do I record contra entries in the ledger accounts?

• Debit the trade payables account

  • The liability is decreasing

• Credit the trade receivables account

  • The asset is decreasing

Case Study Aadam owes Brie $500. Brie owes Aadam $300.

Instead of paying each other $300, they agree to offset Brie's balance against Aadam's. This means they each reduce their balance by $300 without exchanging any money.

Aadam now owes Brie $200. Brie now does not owe any money to Aadam.

Purchase of a non-current asset

Spec point — preparation of ledger accounts

How do I record the purchase of a non-current asset in the ledger accounts?

• Debit the non-current asset account in the nominal ledger

  • The asset is increasing

• Either credit the cash or bank account in the nominal ledger

  • If the business pays upfront
  • The **asset **is decreasing

• Or credit a** liability account** in the nominal ledger

  • If the business buys the asset on credit
  • The name of the account is the name of the lender
  • The liability is increasing

Exam Hint Note that a purchase of a non-current asset is not entered into the purchases account. This is because the purchases account is just for purchases of goods for trading.

What other transactions are included in a non-current asset account?

• The only other transaction that is included in a non-current asset account is its sale or disposal

  • It will be credited with the original cost of the non-current asset
  • A disposal account will be needed to show the profit or loss of the sale

• Depreciation will be recorded in a separate account

Taking out a loan

Spec point — preparation of ledger accounts

How do I record taking out a loan in the ledger accounts?

• Debit the bank account

  • The asset is increasing

• Credit a loan account

  • The liability is increasing

How do I record interest on a loan in the ledger accounts?

• Loan interest is an expense

• Credit the bank account

  • The asset is decreasing

• Debit the loan interest account

  • The profit is decreasing
  • The capital is decreasing

• Do not make any entries for this in the loan account

  • The amount borrowed has not changed

Receiving incomes & paying expenses

Spec point — preparation of ledger accounts

What types of income could a business receive?

• A business will receive income from their sales of goods or services

• A business can also receive other income such as:

  • Rent
  • Commission

How do I record the receipt of an income in the ledger accounts?

• Debit the cash or bank account

  • The asset is increasing

• Credit the income account

  • The profit is increasing
  • The capital is increasing

What types of expenses could a business pay?

• The purchase of goods is an expense to a business

• A business can also incur other expenses such as:

  • Rent
  • Commission
  • Rates
  • Wages
  • General expenses

• If a business receives income from rent and also pays rent then separate accounts are used

  • Rent payable is the expense account
  • Rent receivable is the income account

How do I record the payment of an expense in the ledger accounts?

• Credit the cash or bank account

  • The asset is decreasing

• Debit the expense account

  • The profit is decreasing
  • The capital is decreasing

Worked Example Frank is a sole trader. Frank rents a building for part of his business. Frank also owns a building as part of his business and rents out a room to another sole trader, Karen.

• On 1 February 2024, Frank pays $300 rent by a standing order.
• On 3 February 2024, Frank receives $200 in rent from Karen by bank transfer.

Enter these transactions into Frank’s accounts.

Answer:

Bank Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Feb 3	Final answer: Rent receivable	Final answer: 200	Final answer: 2024 Final answer: Feb 1	Final answer: Rent payable	Final answer: 300

Rent Payable Account

Date	Details	$	Date	Details	$
Final answer: 2024 Final answer: Feb 1	Final answer: Bank	Final answer: 300

Rent Receivable Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Feb 3	Final answer: Bank	Final answer: 200

Taking drawings & introducing capital

Spec point — preparation of ledger accounts

How do I record the owner taking drawings in the ledger accounts?

• The owner could take assets from the business for personal use:

  • Money

  • Goods

  • Non-current assets

    • Such as vehicles

• Credit the relevant account

  • Cash or bank account if money is taken

  • Purchases account if goods are taken

  • Non-current asset account if a vehicle or machinery is taken

    • The **asset **is decreasing

• Debit the** drawings account**

  • The capital is decreasing

How do I record the owner introducing capital in the ledger accounts?

• The owner might put some of their own money into the business or donate an asset to the business

• Debit the cash, bank or asset account

  • The asset is increasing

• Credit the capital account

  • The capital is increasing

Worked Example Ahmed is a sole trader.

• On 1 January 2024, Ahmed puts $20 000 into the business bank account from his personal bank account.
• On 1 February 2024, Ahmed withdraws $5 000 from the business bank account for personal use.

Record these transactions in ledger accounts for Ahmed’s business.

Answer:

Bank Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 1	Final answer: Capital	Final answer: 20 000	Final answer: 2024 Final answer: Feb 1	Final answer: Drawings	Final answer: 5 000

Capital Account

Date	Details	$	Date	Details	$
			Final answer: 2024 Final answer: Jan 1	Final answer: Bank	Final answer: 20 000

Drawings Account

Date	Details	$	Date	Details	**$
Final answer: 2024 Final answer: Feb 1	Final answer: Bank	Final answer: 5 000