DEADCLIC - Double entry dilemmas now a thing of the past!

Understand the importance of the DEADCLIC rule, and how it can save your life!

DEADCLIC

Why is DEADCLIC useful?

DEADCLIC is a clever acronym to help you remember what to debit, and what to credit BY DEFAULT.

Remembering this golden rule can help you to resolve any bookkeeping problem in the practical working environment. You will become an accounting pro in no time with this skill under your belt!

What do you mean by "default"?

Before you try and figure out whether you need to debit or credit, check if your entry is increasing or decreasing to your account total.

If your entry is going to increase your account total, then you need to apply the default treatment.

If your entry is going to decrease your account total, then you need to apply the opposite to the default treatment.

Let's break it down...

DEADCLIC is actually broken into two parts.

D-EAD

D stands for "debit". We usually debit when we have increases in Expenses, Assets or Drawings. 

C-LIC

C stands for "credit". We usually credit when we have increases in Liabilities, Income or Capital

It's easier to remember as two columns...

Debit

Expenses

Assets

Drawings


Credit

Liabilities

Income

Credit

Test your understanding 1 - What items do we Debit by default?

  • Capital
  • Expenses
  • Income
  • Assets
  • Drawings
  • Liabilities

Test your understanding 2 - What items do we Credit by default?

  • Assets
  • Capital
  • Income
  • Drawings
  • Expenses
  • Liabilities

Example 1

Rental Expense

Suppose we have this bill for the period May 2017 for office rent for a total of £1800 inclusive of VAT.

In order to account this, we need to consider 3 entries; the rent charge, the VAT element and the total sum of the bill.

Let's consider each item of the bill in turn...

Rent - £1500

Firstly, the bill is for a rent charge for £1500. Rent is a charge to occupy an office or other type of premises to carry out our business purpose.

1) Is this going to increase or decrease our rent account total? It will increase, because our rent charges have gone up by another month.

2) What is rent? Rent is an expense and by default is debited.

3) Can we apply default treatment? Yes

So our entry is:

DR: Rent Expense £1500

VAT - £300

VAT is a tax that is charged on the supply of goods and services by a business. For a VAT registered business, there are two forms of VAT; input and output. VAT output which is charged as a value adding levy on your sales increases your overall tax liability. However, VAT input arises when you purchase goods or services and so has the opposite effect i.e. reducing your overall VAT obligation. (Please refer to the VAT course for more detail).

1) Is this going to increase or decrease our VAT account total? It will decrease (as explained above).

2) What is VAT? VAT is a liability and by default is credited.

3) Can we apply default treatment? No - we need to debit instead

So our entry is:

DR: VAT Expense £300

Total Bill - £1800

Now the final bill, including the rent and the VAT comes to £1800. This is ultimately what we need to pay therefore this becomes a trade payable. A payable is a short term liability as we are obliged to pay this.

1) Is this going to increase or decrease our Payable account total? It will increase, because we have another bill to pay.

2) What is a Payable? It is a liability and by default is credited.

3) Can we apply default treatment? Yes

So our entry is:

CR: Trade Payables £1800

Remember, debits and credits have to balance! Let's check!

Debits

Rent Expense £1500

VAT Expense £300


Total debits £1800

Credits

Trade Payables £1800



Total credits £1800


Example 2

Director's Drawings

Now suppose there has been a drawing of £1000 from the company.

There are two impacts from this business transaction. First, the drawing itself and second, the depletion of the company's cash.

Drawings £1000

A drawing occurs when a director of the company (usually a sole trader of partnership type setup) withdraws cash from the business for his own personal needs. 

1) Is this going to increase or decrease our drawings account total? It will increase, because the director is making another withdrawal from the company. 

2) What are drawings? Pretty self explanatory and by default are debited.

3) Can we apply default treatment? Yes

So our entry is:

DR: Drawings £1000

Cash £1000

The drawings will mean taking out £1000 from the company's bank account.

1) Is this going to increase or decrease our cash account total? It will decrease, because the funds are going out of the business for a personal need.

2) What is cash? Cash is an asset and by default is debited.

3) Can we apply default treatment? No - we need to credit instead.

So our entry is:

CR: Cash £1000


Remember, debits and credits have to balance! Let's check!

Debits

Drawings £1000

Credits

Cash £1000

Test your understanding 3 - Fill in the blanks

We apply the treatment when our entry has an impact on an account total.

Test your understanding 4 - Fill in the blanks

An invoice for stationery purchased is an example of and therefore should be  to the stationery account.

Test your understanding 5 - Fill in the blanks

An invoice for a sale is an example of and therefore should be to the sales account.

Exercise - Sale Scenario - Part 1

  • CR: Sales £250, CR: VAT £50, DR: Accounts Receivable (Alfie) £300
  • CR: Sales £250, CR: VAT £50, DR: Cash £90, DR: Accounts Receivable (Alfie) £210
  • CR: Sales £250, DR: VAT £50, CR: Cash £90, DR: Accounts Receivable (Alfie) £210
  • DR: Sales £250, CR: VAT £50, DR: Cash £90, CR: Accounts Receivable (Alfie) £210
Company ABC sold Alfie a camera for £300 (inclusive of VAT). Alfie was only able to pay 30% in cash upfront, and requested the rest on credit. How would ABC account  for this sale?

Solution - Sale Scenario- Part 1

Correct answer B: CR: Sales £250, CR: VAT £50,  DR: Cash £90, DR: Accounts Receivable (Alfie) £210

The scenario had four entries to consider:

Sale recognised: £300/1.2 = £250

VAT = £250 x 20% = £50

Amount paid in cash: £300 x 30% = £90

Amount charged on credit: £300-£90 = £210

Sale Recognised - £250

1) Is this going to increase or decrease our sales account total? Increase - it's another sale

2) What is a sale? A form of income which by default is credited.

3) Can we apply default treatment? Yes

So our entry is:

CR: Sales £250

VAT £50

1) Is this going to increase or decrease our VAT account total? Increase - it's additional VAT output which we are liable on.

2) What is VAT? A liability which by default is credited.

3) Can we apply default treatment? Yes

So our entry is:

CR: VAT £50

Amount paid in cash £90

1) Is this going to increase or decrease our Cash account total? Increase - it's more money in the bank from a sale we just did!

2) What is cash? A asset which by default is debited.

3) Can we apply default treatment? Yes

So our entry is:

DR: Cash £90

Amount charged on credit £210

1) Is this going to increase or decrease our Receivables account total? Increase - it's money we need to collect from our customer in the future.

2) What are Receivables? A asset which by default is debited.

3) Can we apply default treatment? Yes

So our entry is:

DR: Receivables £210

Debits

Cash £90

Receivables £210


Total debits £300

Credits

Sales £250

VAT £50


Total credits £300

Exercise - Sale Scenario- Part 2

  • DR: Bad Debt Provision £300, CR: Bad Debt Expense £300
  • DR: Bad Debt Expense £300, CR: Bad Debt Provision £300
  • DR: Bad Debt Provision £210, CR: Bad Debt Expense £210
  • DR: Bad Debt Expense £210, CR: Bad Debt Provision £210
A month later, Alfie informs ABC that he may not be able to settle the amount he owes to them. He asks for more time to gather cash in order to settle the debt. ABC agree but decide that it would be wise to create a bad debt provision in the mean time. How would this be accounted for?

Solution - Sale Scenario- Part 2

Correct answer D: DR: Bad Debt Expense £210, CR: Bad Debt Provision £210

This scenario only has two entries to consider. The amount to consider was £210, as this was the sum outstanding to settle.


Bad Debt Expense £210

The accounting concept of prudence means we should recognize a loss that we foresee as soon as possible. ABC foresee they are going to potentially lose £210. Note that VAT rules state if a debt is written off in less than six months, you cannot reclaim the VAT that originally was paid on the sale. 

1) Is this going to increase or decrease our bad debt expense account total? Increase - it's another debt to write off.

2) What is a bad debt expense? Self explanatory! And is usually debited.

3) Can we apply default treatment?  Yes

So our entry is:

DR: Bad Debt Expense £210

Bad Debt Provision £210

A bad debt provision is an amount set aside (or reserve) in the balance sheet to cover any actual losses that may arise in the future.

1) Is this going to increase or decrease our bad debt provision account total? Increase - it's another debt to write off.

2) What is a bad debt provision? A liability and is usually credited.

3) Can we apply default treatment?  Yes

So our entry is:

CR: Bad Debt Provision £210

Debits

Bad Debt Expense £210

Credits

Bad Debt Provision £210

Exercise - Sale Scenario- Part 3

  • CR: Bank £150, DR: Receivables £210, DR: Bad Debt Provision £60
  • DR: Bank £150, CR: Receivables £210, DR: Bad Debt Provision £60
  • DR: Bank £150, CR: Receivables £210, DR: Bad Debt Expense £60
  • DR: Bank £150, CR: Receivables £210, CR: Bad Debt Expense £60
Alfie finally informs ABC that he will only be able to pay back £150 of the final outstanding sum. How will this be accounted for in ABC's books?

Solution - Sale Scenario- Part 3

Correct answer B: DR: Bank £150, CR: Receivables £210, DR: Bad Debt Provision £60

This scenario has three entries to consider from Alfie's information. 


Bank £150

The happy thing is that ABC get some of their money back but only £150.

1) Is this going to increase or decrease our cash account total? Increase - it's more money in the bank regardless of the sum.

2) What is cash? An asset and is usually debited.

3) Can we apply default treatment?  Yes

So our entry is:

DR: Bank £150

Receivables £210

We know now that the receivable we were holding for £210 is now part settled by cash, and will be partly written off. Therefore we no longer need to hold the receivable.

1) Is this going to increase or decrease our receivable account total? Decrease - as explained above.

2) What is a receivable? An asset and is usually debited.

3) Can we apply default treatment?  No - we have to credit instead

So our entry is:

CR: Receivables £210

Bad Debt Provision £60

So of the £210 that was outstanding, £60 will not be settled. We therefore need to write this off. Normally, when you right off a debt, you will expense it (i.e. debit) to the P&L. But remember, that ABC had already foreseen this in part 2, so the expense part has already been taken care of. They have set aside a provision in the balance sheet that essentially can be "eaten into" or debited into within the balance sheet instead (see course on Accruals for further detail)

1) Is this going to increase or decrease our bad debt provision account total? Decrease - as explained above.

2) What is a bad debt provision? A liability and is usually credited.

3) Can we apply default treatment?  No - we have to debit instead

So our entry is:

DR: Bad Debt Provision £60

Debits

Cash £150

Bad Debt Provision £60


Total Debits £210

Credits

Receivables £210



Total Credits £210

Exercise - Purchase Scenario - Part 1

  • DR: Assets (Furniture) £1500, DR: Office Expenses £60, DR: VAT £312, CR: Payables £1872
  • DR: Assets (Furniture) £1560, DR: VAT £312, CR: Payables £1872
  • DR: Office Expenses £1500, DR: Assets (Furniture) £60, DR: VAT £312, CR: Payables £1872
  • CR: Assets (Furniture) £1500, CR: Office Expenses £60, CR: VAT £312, DR: Payables £1872
Company ABC decided to purchase some new furniture for their brand spanking new office. They buy ten new desks and chairs for the total sum of £1500 ex VAT, and two lamps costing £30 each ex VAT. ABC's capitalisation threshold is £300. How would this be accounted for?

Solution - Purchase Scenario- Part 1

Correct answer A: DR: Assets (Furniture) £1500, DR: Office Expenses £60, DR: VAT £312, CR: Payables £1872.

This scenario has four entries to consider: 


Bank £150

The happy thing is that ABC get some of their money back but only £150.

1) Is this going to increase or decrease our cash account total? Increase - it's more money in the bank regardless of the sum.

2) What is cash? An asset and is usually debited.

3) Can we apply default treatment?  Yes

So our entry is:

DR: Bank £150

Receivables £210

We know now that the receivable we were holding for £210 is now part settled by cash, and will be partly written off. Therefore we no longer need to hold the receivable.

1) Is this going to increase or decrease our receivable account total? Decrease - as explained above.

2) What is a receivable? An asset and is usually debited.

3) Can we apply default treatment?  No - we have to credit instead

So our entry is:

CR: Receivables £210

Bad Debt Provision £60

So of the £210 that was outstanding, £60 will not be settled. We therefore need to write this off. Normally, when you right off a debt, you will expense it (i.e. debit) to the P&L. But remember, that ABC had already foreseen this in part 2, so the expense part has already been taken care of. They have set aside a provision in the balance sheet that essentially can be "eaten into" or debited into within the balance sheet instead (see course on Accruals for further detail)

1) Is this going to increase or decrease our bad debt provision account total? Decrease - as explained above.

2) What is a bad debt provision? A liability and is usually credited.

3) Can we apply default treatment?  No - we have to debit instead

So our entry is:

DR: Bad Debt Provision £60

Debits

Cash £150

Bad Debt Provision £60


Total Debits £210

Credits

Receivables £210



Total Credits £210