DOUBLE ENTRY ACCOUNTING

2.1 The Account

An account record on a day by day basis information concerning a particular item. For example, a cash account records the daily receipt and payment for the business entity.

2.2

The Ledger
A ledger is simply a book containing a group of related accounts. For example, the General Ledger is a book recording all the nominal accounts.

2.3

Business Entity Concept

The first thing that has to be made clear in recording business transactions is that every business is considered as an entity separate and distinct from its owner. ince the business is a separate unit, therefore, each business has its own financial records. Thus when recording business transactions, they must be recorded from the point of view of the business unit.

2.4

Double Entry Accounting System

!very financial transaction affects at least two accounts in the ledger " an account in which a debit is recorded and an account in which a credit is recorded. This is known as #ual aspect rule or double entry rule. The double entry rules are summarised as follow$ Asset Account #ebit increase in assets %redit decrease in assets &ersonal Accounts #ebit decrease in liabilities %redit increase in liabilities 'ominal Accounts For expenses #ebit increase in expenses %redit decrease in expenses For income #ebit decrease in revenue

2-1

%redit increase in revenue

2.

B!l!ncing An Account
!ach transaction will be entered in the appropriate column according to whether it is a debit or credit entry. At periodic intervals each account will be balanced. The procedure is as follows$ (alancing date )* #ecember +,,-. if the debit side exceeds the credit sides$ %ash Account #ec * (alance b/d ) 0eceivables *, 0evenue *,,,, 2,,,,, *1,,,, 15,,,, #ec + 0ent 2 alary +, !ntertainment )* (alance c/d 1,, 3,, 4,, 12,,,, 15,,,,

2."

#e!sons $or B!l!ncing Accounts

To have up6to6date information about the overall state of each account To enable a trial balance to be prepared

2.%

#ecording Business Tr!ns!ctions

E&!mple 1 7r Tee invests 81,,,,, of his personal savings in a new business known as Tee !nterprise. The amount is banked with %hartered (ank on * 9anuary +,,-. The above transaction is recorded as follows$ (ank Account * 9anuary +,,- %apital 1,,,,,

Tee %apital Account * 9anuary (ank 1,,,,,

Comment The effect of this transaction is that the asset :i.e. bank account; has been increased by the investment and hence is debited. The %apital Account is credited to increase the contribution by the owner. E&!mple 2 7r Tee borrowed 8+1,,,, from #( (ank on +nd 9anuary +,,The entries are as follows$ (ank Account * 9anuary +,,+ 9anuary +,,%apital Loan 1,,,,, +1,,,,

Loan " #( (ank + 9anuary +,,- (ank Account +1,,,, Comment 'otice the same bank account is used to record this transaction. This is because the transaction has the same effect of increasing the balance in the bank account. <ence, the account is debited. 'otice also that the term, loan is used instead of %apital. This is because the asset :i.e. bank; is obtained from external source and not from the owner. The transaction also has the effect of increasing liabilities :debt;, hence Loan is credited.

E&!mple 3 7r Tee purchases goods costing 81,,,, and paid by che=ue on 1 9anuary +,,-. The transaction is recorded as follows$ (ank Account * 9an +,,+ 9an +,,%apital Loan 1,,,,, +1,,,, 1 9an +,,- &urchases 1,,,,

2-3

&urchase Account 1 9an +,,(ank 5,,,,

Comment This transaction has the effect of reducing the asset :i.e. bank balance; because payment has been made by che=ue. Therefore, the bank account is credited with the amount paid. A purchase account is used to record all purchases of goods for resale. ince it is an expense account, the account is debited to increase the amount.

E&!mple 4 7r Tee ac=uired office e=uipment for 8),,,,, from (eta furniture on credit on 3 9anuary +,,-. The entries are as follows$ >ffice !=uipment Account 3 9an +,,- (eta Furniture ),,,,,

(eta Furniture Account 3 9an Comment This transaction has the effect of increasing an asset :i.e. e=uipment;. <ence, the >ffice e=uipment is debited. The purchase amount is not used as the item purchased is for used in the business and not for resale. As payment has not been made, the bank account is not credited with the amount. ?nstead, a payables account is opened to record the transaction. (eta Furniture is credited to reflect the increase in liabilities :i.e. the amount due to payables;. E&!mple The firm paid 8),5,, by che=ue to cover three months rent on *+ 9an +,,-. The transaction is recorded as follows$ +,,- >ffice !=uipment ),,,,,

(ank Account 1 Jan 2009 Capital 50,000 2 Jan 2009 Loan 25,000 5 Jan 2009 Purchases 5,000 12 Jan 2009 Rent 3,600

0ent Account 12 Jan 2009 Bank Comment The bank account is debited to reduce the asset :i.e. bank balance; since payment has been made. As the payment is for an expense, a 0ent account is used. The account is debited as expense has increased. 3,600

E&!mple " 7r Tee took out 81,, from business bank account to purchase a television for personal use on *1 9an +,,-. The transaction is recorded as follows$6 (ank Account * 9an +,,+ 9an +,,%apital 1,,,,, Loan +1,,,, 1 9an +,,*+ 9an +,,*1 9an +,,#rawing Account *1 9an +,,- (ank 1,, &urchases 0ent #rawings 1,,,, ),5,, 1,,

Comment As the cash withdrawn is for personal use, a drawing account is opened to record the transaction. #rawing account is debited to reflect the increase in private expense.

E&!mple % The firm sold goods to (eta plc for 84,,,, on credit on +, 9anuary +,,-. The transaction is recorded as follows$6
2-5

(eta plc Account +, 9an +,,ales 0evenue 4,,,, ales 0evenue Account +, 9an +,,Comment ince the sales is made on credit, a receivable account :i.e. (eta plc account; is opened to record the debt owed by the customer. (eta plc account is debited to reflect the increase in asset :receivable is an asset;. ales 0evenue is an income, hence the ale revenue account is credited to reflect the increase in income. (eta plc 4,,,,

E&!mple ' 0eceived 82,5,, from (eta plac on account on +* 9an +,,- by che=ue. (ank Account * 9an +,,- %apital + 9an +,,- Loan +* 9an +,,- (eta plc 1,,,,, +1,,,, 2,5,, 1 9an +,,*+ 9an +,,*1 9an +,,&urchases 0ent #rawings 1,,,, ),5,, 1,,

(eta plc Account +, 9an +,,ales 0evenue 4,,,, +* 9an +,,- (ank 2,5,,

Comment The receivable account :i.e. (eta plc; is credited to reduce the asset representing the amount owing by the receivables. The bank account :asset; is debited to reflect the increase in bank balance.

(llustr!tion 1
Tee commenced business on * 9anuary +,,- with$ %ash %ar Furniture 8 *,,,,, 8 1,,,, 8 +,,,,

<e intends to trade in furniture with view to profit. <is transactions for the month of 9anuary are as follows$6 9anuary ,* %ommencement of business ,) (ought furniture worth ,1 ales 0evenue 85,,,, on a cash basis 82,,,,

,5 (ought furniture from %ourts Ltd worth 8+,,,, which is for use in the operation of business ,3 &aid wages ** old goods to @en Ltd 8*,,,, 8),,,,

*+ @en Ltd returned some goods bought on the **th which were badly scratched. They are worth 81,, *2 Tee sold his private yacht for 82,,,, and decide to invest the money in the business *- (ought furniture on credit from @oodcraft Ltd 83,,,, +, &aid %ourts Ltd 8+,,,, ++ 0eturned a set of furniture to @oodcraft worth 8*,1,, +) %ash drawings +2 @en Ltd paid Tee +- 0eceived commission 8+1, 8*,1,, 851,

), Tee took a set of chairs from the business warehouse, for his <.#.(. flat worth 8*,+,, )* old a set of dining set to Ahmad on credit 8+,3,, (ought two delivery vans for 8),,,, each from A7@ 7otors

#e)uired* Bou are to record the above transactions in ledger accounts, balance all the accounts at the end of the month and extract a Trial (alance as at )* 9anuary +,,-.

2-7

Tee %ash
9an ,* %apital ,1 ales 0evenue *2 %apital +4 @en Ltd +- %ommission *,,,,, 9an ,) &urchase 2,,,, 2,,,, *,1,, 51, +,,*1, ,3 @ages +, %ourts Ltd +) #rawings )* (al c/d 5,,,, *,,,, +,,,, +1, *,,-,, +,,*1, +*,,,, (al c/d +*,,,, 9an/%ash %ar Furniture 9an *2 %ash *,,,,, 1,,,, +,,,, 2,,,, +*,,,,

ales
9an %ash ** @en Ltd )* Ahmad 2,,,, ),,,, +,3,,

&urchases
9an ,) %ash *- @oodcraft Ltd

5,,,, 3,,,,

), #rawings

*,+,1

Furniture
9an * %apital %ourts Ltd +,,,, +,,,, 9an +, %ash

%ourts Ltd
+,,,, 9an ,5 +,,,,

@ages
9an ,3 %ash *,,,, 9an ** ales

@en Ltd
),,,, 9an *+ 0eturns ?nwards 1,, +4 %ash *,1,,

0eturn ?nwards
9an *+ @en Ltd 1,,

@oodcraft Ltd
9an ++ 0eturn >utwards *,1,, 9an *- &urchases 3,,,,

0eturn >utwards
9an ++ @oodcraft Ltd *,1,, 9an

#rawings
+) %ash ), &urchase +1, *,+,,

%ommission
9an +- %ash 51, 9an

Ahmad
)* ales +,3,,

#elivery Can
9an )* A7@ 7otors 5,,,,

A7@ 7otors
9an )* #elivery Can 5,,,,

2.'

E&ercise
#ouble !ntry &ostings / Trial (alance

7ar

* + 5 *1 +, )* )*

7r @ong commenced business as sole trader dealing in toys with capital in cash (ought goods for cash %ash ales &aid insurance premium %ash ales &aid Telecoms (ills &aid sundry expenses

+,,,,, 1,,,, 1,, *,,,, *,,,, *,, *1,

2-9