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Understanding Double Entry Bookkeeping

The document explains the double-entry bookkeeping system, which records each business transaction with equal and opposite effects through debits and credits. It emphasizes the importance of maintaining the balance sheet equation (Assets = Capital + Liabilities) and provides rules for determining which accounts to debit or credit. Additionally, it mentions the necessity of producing profit and loss accounts alongside balance sheets to assess a firm's financial performance.

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8 views5 pages

Understanding Double Entry Bookkeeping

The document explains the double-entry bookkeeping system, which records each business transaction with equal and opposite effects through debits and credits. It emphasizes the importance of maintaining the balance sheet equation (Assets = Capital + Liabilities) and provides rules for determining which accounts to debit or credit. Additionally, it mentions the necessity of producing profit and loss accounts alongside balance sheets to assess a firm's financial performance.

Uploaded by

albailimahmoud
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

Business transactions are carried out every day and so they have to be recorded accordingly

in what are known as books of account. A system called the double-entry system is used
for this purpose wherein each business transaction is recorded as having two equal, but
opposite, effects.

Golden Rule for the Double Entry System

For each debit entry in the ledger accounts, there must be a corresponding
credit entry.

For each credit entry in the ledger accounts, there must be a corresponding
debit entry.

In identifying which account is to be debited or credited the following rule may be


followed:

Debit the receiver

Credit the giver

An extract from a set of books of account appears on the following page. Please note that in
this extract personal accounts appear in the General Ledger. Whilst this is acceptable for
simplicity's sake, in reality individual transactions carried out with individual clients and
suppliers are kept in separate ledgers, namely, SALES LEDGER and PURCHASE
LEDGER. Such transactions are, however, replicated in what are known as a DEBTORS
CONTROL ACCOUNT and CREDITORS CONTROL ACCOUNT.

This will be explained thoroughly with the help of a practical example SMILEY which will
be handed out during the lecture. However, this session is necessary to explain how a trial
balance is extracted
Source: Introduction to Accounting by Karl Harper 2nd Edition page 39
Double Entry Book-Keeping

The system of double entry bookkeeping is based on the interlocking effect that emanates
from the balance sheet equation i.e.: -

A (assets) = C (capital) + L (liabilities)


The system of double entry bookkeeping is based on this interlocking effect and, to
maintain the relationship A=C+L, each transaction must be
accounted for as having two equal, but opposite, effects .
These are known as “debits” and “credits”

Debit entries Credit entries

↑ASSETS ↑LIABILITIES
↓LIABILITIES ↓ASSETS
↓CAPITAL ↑CAPITAL

The accounting system must enable the production of a profit and loss account as well as
the balance sheet, so the double entry effect of a transaction on the former document must
also be considered.

Debit entries Credit entries

↑EXPENSES ↑REVENUE
↓REVENUE ↓EXPENSES

Periodically the effects of revenues and expenses are compared to calculate the firm’s net
profit or loss. A net profit is then added to capital, while any net loss is deducted from it.

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