The Double Entry System

Double-Entry Accounting
Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance. Scale or Balance T account Left Side Receive DEBIT Receive DEBIT Give CREDIT Right Side Give CREDIT

Luca Pacioli Developer of Double-Entry Accounting

The Double-Entry System The Double Entry System

Each transaction is recorded with at least: One debit One credit

Total debits must equal total credits.

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The Double Entry System The Double-Entry System

Each transaction must still be analyzed to determine which accounts are involved, whether the accounts increase or decrease, and how much the balance will change.

The Double Entry System The Double-Entry system

Some businesses enter into thousands of transactions daily or even hourly.
Accountants must carefully keep track of and record these transactions in a systematic manner.

Accountants use a double-entry accounting system in which at least two accounts are always affected by each transaction.
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Double Entry System

Much better and reliable Two aspects of a transaction Weight should be maintained equally Has subsidiary ledger accounts

Double Entry System

Both Debit and Credit aspects of a transaction are recorded Ledger contains real and nominal accounts Transactions are recorded in systematical manner Trial balance is present, accuracy can be checked

Double Entry System

Financial position can be checked by making balance sheet Income and expenditure accounts are present

Advantages Of Double Entry System

Complete Record Arithmetic Accuracy Correct Finding Of Results Up-to-date Information Reliability Of Accounts

Disadvantages Of Double Entry System

It is costly as it involves elaborate books and work It requires special knowledge and skills

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CLASSIFICATION OF ACCOUNTS AND THE RULES OF DEBIT OR CREDIT

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Classification of Accounts
There are some asset accounts? Cash Notes Receivable Accounts Receivable Prepaid Expenses Land Building Equipment
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Classification of Accounts
There are some liability accounts? Notes Payable Accounts Payable Accrued Liabilities (for expenses incurred but not paid) Long-term Liabilities (bonds)
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Classification of Accounts
There are some owners equity accounts? Capital or owners interest in the business Withdrawals Revenues Expenses

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Approaches
Traditional / British Approach Accounting / American Approach

Traditional / British Approach

We need to classify the accounts into real account, personal A/c and nominal A/c Transactions are recorded in the books of accounts by applying following golden rules of accounting

Real Account =

Debit What comes in Credit- what goes out Personal Account = Debit Receiver Credit - Giver Nominal Account =Debit Expenses/Losses Credit- Incomes/Gains

Accounting / American Approach

Under this approach, transactions are recorded based on accounting equation i.e. Assets =Liabilities + Capital The accounting equation is a statement of equality between debits and credits The rules of debits and credits depend on the nature of account.

The Rules For Accounting Equation

Assets accounts= debit increases credit decreases Liability account = debit decreases credit increases Capital account = debit decreases credit increases Incomes & gains = debit decreases credit increases Expenses & losses= debit increases credit decreases

Classification of Accounts
Personal account Real account Nominal account

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Personal account
Are accounts of persons with whom a concern carries business. 3 types a) Natural personal account e.g Rams a/c b) Artificial personal account e.g. banks, clubs , institutions, etc c) Representative personal a/c : accrued expenses, prepaid expenses, o/s expenses & incomes, etc
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Real account
Are accounts of properties, assets, or things owned by a concern in or with business is carried out. Two types Tangible assets e.g. furniture, machinery etc.. Intangible assets e.g. goodwill, patent etc..

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Nominal Account
Are accounts of expenses & losses incurred and incomes & gains earned by a concern. They are nominal as they do not really exist and they cannot be seen or touched

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Classification of Accounts
Real Account = Debit What comes in Credit- what goes out Personal Account = Debit Receiver Credit - Giver Nominal Account =Debit Expenses/Losses Credit- Incomes/Gains
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The Double-Entry system The Double Entry System

The system records the two-sided effect of transactions
Transaction
Bought furniture for cash

Two-sided effect
Decrease in one asset Increase in another asset

Took a loan in cash

Increase in an asset Increase in a liability

The Double Entry System

Note that the accounting equation equality is maintained after recording each transaction.

XYZ Ltd. A Sole Proprietorship

On November 1, 2002, A started a sole proprietorship called XYZ Ltd. The following double-entry transactions show how amounts received (debits) always equal amounts given (credits).

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Business Transactions
Entry A. Amit deposits Rs25,000 in a bank account for XYZ Ltd..
receive Debit

Amit (investor)

XYZ Ltd (investee)

give give Credit Credit

Journal
Date Description Debit Credit

11/1

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Business Transactions
Entry A. Amit deposits Rs25,000 in a bank account for XYZ Ltd.. Cash Amit (investor)

receive Debit

XYZ Ltd.(investee)

give give Credit Credit

l Journal
Date Description Debit Credit

11/1

Cash

25,000

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Business Transactions
Entry A. Amit deposits Rs 25,000 in a bank account for XYZ Ltd.. Cash Amit (investor)

A promise to the owner XYZ Ltd.(investee)

give give Credit Credit

receive Debit

Journal
Date Description Debit Credit

11/1

Cash Amit, Capital

25,000 25,000

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Business Transactions
Entry B. XYZ Ltd. buys land for Rs20,000. Land Owner (seller)

receive Debit

XYZ Ltd(buyer)

give give Credit Credit

Journal
Date Description Debit Credit

11/5

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Business Transactions
Entry B. XYZ Ltd. buys land for Rs20,000. Land Land Owner (seller)

receive Debit

XYZ Ltd(buyer)

give give Credit Credit

General Journal
Date Description Debit Credit

11/5

Land

20,000

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Business Transactions
Entry B. XYZ Ltd. buys land for Rs 20,000. Land Land Owner (seller)

Cash

receive Debit

XYZ Ltd(buyer)

give give Credit Credit

Journal
Date Description Debit Credit

11/5

Land Cash

20,000 20,000

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Business Transactions
Entry C. XYZ Ltd. buys supplies for Rs1,350, agreeing to pay in the near future.
receive Debit

Supplier (seller)

XYZ Ltd (buyer)

give give Credit Credit

Journal
Date Description Debit Credit

11/10

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Business Transactions
Entry C. XYZ Ltd. buys goods for Rs1,350, agreeing to pay in the near future. Supplies Supplier (seller)

receive Debit

XYZ Ltd. (buyer)

give give Credit Credit

General Journal
Date Description Debit Credit

11/10

Purchases

1,350

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Business Transactions
Entry C. XYZ Ltd. buys goods for Rs1,350, agreeing to pay in the near future. Supplies Supplier (seller)

A promise to pay later

receive Debit

XYZ Ltd. (buyer)

give give Credit Credit

Journal
Date Description Debit Credit

11/10

purchases Accounts Payable

1,350 1,350

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Business Transactions
Entry D. XYZ Ltd. earns fees of Rs7,500, receiving cash.
give give Credit Credit

Customer (buyer)

receive Debit

XYZ Ltd. (seller)

Journal
Date Description Debit Credit

11/18

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Business Transactions
Entry D. XYZ Ltd. earns fees of Rs7,500, receiving cash. Cash Customer (buyer)

receive Debit

XYZ Ltd. (seller)

give give Credit Credit

Journal
Date Description Debit Credit

11/18

Cash

7,500

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Business Transactions
Entry D. XYZ Ltd. earns fees of Rs7,500, receiving cash. Cash Customer (buyer)

Services

receive Debit

XYZ Ltd. (seller)

give give Credit Credit

Journal
Date Description Debit Credit

11/18

Cash Fees Earned

7,500 7,500

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Business Transactions
Entry E. XYZ Ltd. paid: wages, Rs 2,125; rent, Rs 800; commissions, Rs450; and misc, Rs275. Journal
Date Description Debit Credit

Various suppliers

receive Debit

XYZ Ltd. (buyer)

give give Credit Credit

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Business Transactions
Entry E. XYZ Ltd. paid: wages, Rs 2,125; rent, Rs 800; commissions, Rs450; and miscellaneous, Rs275. Services, benefits Various suppliers

receive Debit

XYZ Ltd. (buyer)

give give Credit Credit

Journal
Date Description Debit Credit

11/18

Wages Expense Rent Expense Commission Misc. Expense

2,125 800 450 275

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Business Transactions
Entry E. XYZ Ltd. paid: wages, Rs 2,125; rent, Rs 800; commissions, Rs 450; and misc Rs 275. Journal
Date Description Debit Credit

Various suppliers Services, benefits

Cash

receive Debit

XYZ Ltd. (buyer)

give give Credit Credit

11/18

Wages Expense Rent Expense Commission Misc. Expense Cash

2,125 800 450 275 3,650

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Business Transactions
Entry F. XYZ Ltd. pays Rs950 to creditors on account.
give give Credit Credit

Supplier (payee)

receive Debit

XYZ Ltd. (payor)

Journal
Date Description Debit Credit

11/30

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Business Transactions
Entry F. XYZ Ltd. pays Rs950 to creditors on account. Supplier (payee) Reduction in obligation

receive Debit

XYZ Ltd. (payor)

give give Credit Credit

Journal
Date Description Debit Credit

11/30

Accounts Payable

950

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Business Transactions
Entry F. XYZ Ltd. pays Rs950 to creditors on account. Supplier (payee) Reduction in obligation

Cash

receive Debit

XYZ Ltd. (payor)

give give Credit Credit

Journal
Date Description Debit Credit

11/30

Accounts Payable Cash

950 950

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Business Transactions
Entry H. Amit withdraws Rs 2,000 in cash. Amit (payee)

receive Debit

XYZ Ltd. (payor)

give give Credit Credit

Journal
Date Description Debit Credit

11/30

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Business Transactions
Entry H. Amit withdraws Rs 2,000 in cash. Reduction in obligation Amit (payee)

receive Debit

XYZ Ltd. (payor)

give give Credit Credit

Journal
Date Description Debit Credit

11/30

Amit, Drawing

2,000

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Business Transactions
Entry H. Amit withdraws Rs 2,000 in cash. Reduction in obligation Amit (payee)

Cash

receive Debit

XYZ Ltd. (payor)

give give Credit Credit

Journal
Date Description Debit Credit

11/30

Amit, Drawing Cash

2,000 2,000

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The Accounting Cycle

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The Accounting Cycle: Steps

1. Analyze the transaction 2. Journalize the transaction 3. Post the transaction to accounts in ledger 4. Prepare the trial balance 5. Prepare financial statements

The Recording Process

The sequence of steps in recording transactions:
Transactions Documentation Journal

Financial Statements

Trial Balance

Ledger

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The Recording Process

The process starts with source documents, which are the supporting original records of any transaction.
Examples are sales slips or invoices, check stubs, purchase orders, receiving reports, and cash receipt slips.

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The Recording Process

In the second step, an analysis of the transaction is placed in the book of original entry, which is a chronological record of how the transactions affect the balances of applicable accounts.
The most common example is the general journal - a diary of all events (transactions) in an entitys life.
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The Recording Process

In the third step, transactions are entered into the ledger.
Remember that a transaction is not entered in just one place; it must be entered in each account that it affects. Depending on the nature of the organization, analysis of the transactions could occur continuously or periodically.
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The Recording Process

The fourth step includes the preparation of the trial balance, which is a simple listing of all accounts from the ledger with their balances.
Aids in verifying accuracy and in preparing the financial statements Prepared periodically as necessary
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The Recording Process

In the final step, the financial statements are prepared.
Financial statements may be prepared after each quarter of the year. December 2002 the companies may prepare financial statements at various other intervals to meet the needs of their users.
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Journal, Ledger, Trial Balance

1. Transactions are analyzed and recorded in journal.
Documents Journal

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Journal, Ledger, Trial Balance

1. Transactions are analyzed and recorded in journal.
Documents Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

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Journal, Ledger, Trial Balance

1. Transactions are analyzed and recorded in journal.
Documents Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared.

Trial Balance

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared, Trial balance

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared,

4. Financial statements are prepared and distributed.

IS

SOE

BS

Financial Statements
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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

2. Preliminary reports are analyzed, adjustments are prepared and entered in the computer.

Computer Reports

Computer

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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

2. Preliminary reports are analyzed, adjustments are prepared and entered in the computer.

Computer Reports

Computer

3. Financial statements are printed and distributed.

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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

2. Preliminary reports are analyzed, adjustments are prepared and entered in the computer.

Computer Reports

Computer

3. Financial statements are printed and distributed.

4. Reports are analyzed and interpreted for decisionmaking purposes.

IS

SOE

BS

SCF

Financial Statements

?
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JOURNAL

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Journal
What is a journal? It is a list in chronological order of all the transactions for a business. 1 Identify transaction from source documents. 2 Specify accounts affected. 3 Apply debit/credit rules. 4 Record transaction with description.
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Journal entry
Journal entry - an analysis of the effects of a transaction on the accounts, usually accompanied by an explanation of the transaction
This analysis identifies the accounts to be debited and credited.

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Journal entry
What does a journal entry include? date of the transaction title of the account debited title of the account credited amount of the debit and credit description of the transaction (narration)
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Record transactions in the journal.

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Journalizing
Journalizing
It is the process of entering transactions into the journal

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JOURNALIZING TRANSACTIONS
THE JOURNAL IS A CHRONOLOGICAL LISTING OF TRANSACTIONS. ENTER DATE IN FIRST COLUMN IDENTIFY APPROPRIATE ACCOUNTS ENTER THE TITLE OF THE ACCOUNT DEBITED ENTER THE TITLE OF THE ACCOUNT TO BE CREDITED INSERT APPROPRIATE AMOUNTS IN DEBIT AND CREDIT COLUMN INSERT A BRIEF DESCRIPTION OF TRANSACTION
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Recording Transactions
On April 2, Garge invested Rs 30,000 in Gillen Travel. What is the journal entry? Date Particulars Debit Credit April Rs 2 Cash Account Dr 30,000 To Garge Capital 30,000 (Received initial investment from owner)
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Types of journal entries:

Types of journal entries:
Simple entry - an entry for a transaction that affects only two accounts Compound entry - an entry for a transaction that affects more than two accounts

Remember: whether the entry is simple or compound, the debits (left side) and credits (right side) must always equal.
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