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Chapter 2
Double Entry System in
International Accounting
System
Movement of Accounting Equation
At the beginning of the accounting period:
Assets=liabilities+Owner’s equity
During the accounting period
Assets’=liabilities’+Owner’s equity+(Incomecost or expenses)
Because: Income-cost or expenses=profit
And profit∈Owner’s equity
∴at the end of the accounting period
the accounting equation is show as:
Assets’=liabilities’+ Owner’s equity’
Rules of debit and credit entries
The rules of debit and credit entries are quite similar
with that we have learned in Chinese accounting
system. That is:
1. Increases in assets and expense accounts are debit
entries, while increases in liability, owners’ equity
and revenue accounts are credit entries.
2. Decreases are logically recorded on the side opposite
increases.
3. The normal balance of any account appears on the
side for recording increases.
Steps In Accounting Cycle
Analyze transactions from Source
documents
 Record in journals
 Post to general (and subsidiary) ledger
accounts
 Adjust the general ledger accounts
 Prepare financial statement
 Close temporary accounts

Journals
General journal and special journals
 Most common special journals

Most Common Special Journals
Purchase journal or invoice register
 Sales journal
 Cash receipt journal
 Cash disbursement journal

Function of the Special Journals
Sales journal
 Cash receipt journal
 Purchase journal
(invoice register)

Sales on credit term
 Receipts of cash
(including cash sales)
 Purchase of
merchandise and
other items (supplies,
fixed assets, etc) on
credit terms

Function of Special Journal

Cash disbursement
journal

Payment of cash
(including cash
purchases
Ledgers
Assets
 liabilities
 Owner’s equity
 Revenue
 Costs and expenses
 Suspense account

Conventional Book Structure
Two side account that is debit and credit side.
The terms debit and credit are used to describe
the left-hand and right-hand sides of any “twocolumn” account.
 Use a term as “balance b/d” that means balance
brought down to describe the beginning balance
and “balance c/d” that means balance carried
down for ending balance
 “balance b/d “ and balance c/d” are usually in
opposite side in an account.

Purchase
Let it be absolutely clear about what is mean by the
term of “purchase”
1. Bought with the intention of selling them as part of
the business trading activities. Good or stock in
British English and inventory in American English
can be used to describe what we purchased.
2. Bought in order to use them in the manufacture of
other goods (eg raw materials).
Settlement for purchase
Purchase for cash or “cash purchase”
 Purchase on credit
In the case of “purchase on credit”, it is always
associated with concept of “purchase discount”
and “credit period”, both of them are described
by a serials of number such as “2/10, 1/20 and
n/30.” or “2/10, and n/20”.

Sales
Transaction of sales can be fallen into following two
categories:
1. Sales for cash or cash sales
2. Sales on credit.
Conventionally, there is no special distinguish between
term of “cash” and “bank” in international
accounting community, so, in the case of cash sale,
it will include sales for actual cash as well as where
payment is received immediately into the business
bank account (eg payment by chegue)
Two types of “expense”
If money is spend on buying an asset, such as office
equipment, it is debited to the asset account. Money
has been spent on owning a resource. It is called as
Capital Expenditure. In the case of it, we can use the
concept of “cost”, “depreciation”, and “net cost” to
describe what we have brought and how we used it.
If money is paid for rent, wages, telephone, etc, it is to
obtain the use of a resource, but paying for it “as you
go” rather than long in advance. It is therefore
consistent to debit the expense a/c. It is called
Revenue Expenditure.
Profit or loss
To determine profit or loss would be a
simple matter if we can determine sale as
revenue and expense and cost.
To determine the revenue and expense, it
should be not only depend on the accrual
accounting system, but also on the
whether it is revenue expenditure or
whether it is capital expenditure.
Adjustment Procedures
1) Apportioning recorded costs to period
benefited.
 2)
Apportioning recorded revenue to
period in which it is earned.
 3) Accruing unrecorded expenses.
 4) Accruing unrecorded revenue.

Cost
There are serial concepts concerned with cost,
which are cost of purchase or net purchase,
production cost, cost of products or cost of
completed products, cost of sold goods, but
only the cost of sold can be taken into our
consideration to obtain our profit during an
accounting period although all kinds of cost is
related and influential one by one.
Illustration of influence of costs
Cost of purchased
Cost of raw materials
Cost of completed products
Production Cost
Cost of sold goods
Merchandise Inventory Adjustment
In accounting for the inventories system,
there would be tow kinds of inventories
system that are:
 Periodic inventory system and perpetual
inventory system

Periodic Inventory System

Under a periodic inventory system, a firm
determines it merchandise only at the end
of each accounting period and adjust its
records through the Income summary
account.
Treatment of end inventory
adjustment

Transfer beginning inventory to Income summary
Dr
Income summary
Inventory

To record ending inventory
Dr
Inventory
Income summary

Cr
XXXX
Cr
yyyyy
XXXX
yyyyy
To close purchase and related a/c
Dr
Income summary
Purchase returns and allowance
Purchase discounts
Purchase
ZZZZ
ZZZZ
ZZZZ
Cr
ZZZZ
Perpetual Inventory System
Under perpetual inventory system,
accounting treatment is quite similar with
that in Chinese accounting system.
 Set up an account that called “Cost of
goods sold” to determine cost of goods
sold in the accounting period.
 “Cost of goods sold” is one of temporary
account.

Cost of sold
There are several methods to calculate the
cost of sold if the cost of completed
products is known in the case of
periodical inventory system. Which are:
1. First in first out (FIFO)
2. Last in first out (LIFO)
3. Average weight running
4. Average methods
5. Particular methods
Trial Balance
To determine all debit entry equal to all credit
entry in all journal entries.
 To determine all debit balances equal to all
credit balance in the double entry system
 If trial balance is out of balance, it necessary to
search for the error.
 Even the trial balance is balanced, we can not
sure there is no error in the accounting
procedure.

Errors Trial Balance con not
Detected
Failing to record or enter a particular
transaction.
 Entering a transaction more than once.
 Entering one or more amounts in the
wrong a/c.
 Making a compensating error that exactly
offsets the effect of another error.

How to use trial balance
The following is the trial balance of
Wedburn after his first years trading. You
are required to draw up a trading and
profit and loss account for the year ended
31 December year 6
Financial Statement
Balance sheet
 Income statement or profit and loss
account or P/L a/c
 Cash flow statement

Case study 1
Mr. Lee, who won in a lottery, earned 1 million dollars from
a lottery after payment of individual income tax for this
event. With the amount of money, he purchased a
grocery at a price $600,000 on January 1,2002, the
grocery, which including inventories amount to $200,000
and business equipments $50,000, will be dismantled in
7 year because of occupation of new express way. With
the grocery, Mr. Lee began his business. As usually, credit
transactions always occurred in both his purchase and
sale, and recorded by himself. All cash transactions,
without any record, has been controlled by Mr. Lee, At
the end of 2002, the tax authority urged him to pay
business income tax. But he can not provide any date of
his annually profit. He had to ask you to help. When you
agree to do so. How to start your accounting job for Mr.
Lee’s grocery?
Case study 1 (continued)








After your physical check and interview with Mr.
Lee, you obtained following information
Cash in hand
$160,000
Inventories
$380,000
Business Debtors
$120,000
Business Creditors
$30,000
Loan to his relatives
$150,000
Water and electric bills
$15,000
Mr. Lee’s Consumption in this year
$100,000
Case Study 2

Next year, Mr. Lee continue his business, and do not want to
employ any accountant, because he believe that accountant’ job
would be redundant to his business and bank records could help
him as accountant. Therefore, he put all his remained cash into
a bank and open a checking account in the bank. On July 1, he
purchased a van, which is expected to use in 10 years (no
residual value after 10 years), at a price of $80,000 for his
business transportation, On the same day, he paid $20,000 for it
comprehensive insurance for one year. On September 1, he
employed a shop assistant with agreed monthly salaries of
$1,000, but will pay him each month salaries in next month. At
the end of this year, his grocery had $180,000 of inventories,
$530,000 of cash in bank, (but among it, bank claimed that
$30,000 are put into, in mistake, his checking account). Trade
debtors were stand at $400,000 and trade creditors $250,000,
and both debtors and creditors were occurred in current year.
And Mr. Lee acknowledged that he had consumed $40,000 of
his inventories in this year.
Case study 2 (continued)
After check Mr. Lee’s checking a/c in the bank, you
obtain:
 All expenses for the van during this year were
$3,000
 All business expenses in this year were $12,000,
excluded any amount of salaries.
 Cash receiving from proceeds in this year were
$800,000
 Cash disbursement for purchasing inventories in this
year were $390,000
 Cash receiving from collection of the loan of last
year were $80,000
Suppose that income tax rate is 33%
You are required to calculate:
1. Profit before tax during this year
2. To justify the bank’s claiming