Wednesday, 13 July 2016

AN INTERMEDIATE LEVEL TEST ON YOUR DOUBLE ENTRY

Scenario:
On 20th April 20XX, Jemm Ltd bought a machine for £30,000 net for company use and paid VAT on the purchase and half of the total amount was paid through the bank account immediately and the balance will be paid at the end of next month. What will be the double entry posting for this across the two periods?


1. Double entry posting:
20/04/XX
DR: Machine account                     £30,000
DR: VAT account                            £6,000
CR: Bank account                           £18,000
CR: PLCA                                       £18,000

Reason:
The machine account has been debited because machines are increasing and if an asset is increasing we debit the relevant asset account and we have debited VAT account with 20% of £30000; because VAT on purchases is an asset which can be claimed back from HMRC and the amount to be claimed back is obviously increasing due to this additional purchase.

We have credited bank with half of the total amount because bank account is paying out only £18,000 now and the balance in the bank account is reducing; if an asset is decreasing, we credit the relevant asset account. 

2. Double entry posting:
31/05/XX
DR: PLCA                           £18,000
CR: Bank account               £18,000

Reason:
The PLCA is being debited because a liability being owed has now been paid, so the creditors balance is reducing and if a liability is reducing we debit. We have credited bank because bank account is now paying out the outstanding balance of £18,000 and the balance in the bank account is reducing; if an asset is decreasing, we credit the relevant asset account.

REMEMBER:
DEAD/CLIC

Yours Sincerely,
The Friendly Team

The Training Place of Excellence Limited


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