Introduction to Accounting

Lecture 2: Duality effects and

double entry bookkeeping
Dr Minmin Xi
mx419@[Link]
office hour: Thursday 14:15-16:05
room 10e 2.81 1
 Where we are
Accounting as a system/process
• translating financial records of an entity into financial reports

1 2 3 4 5
Post transactions Close T accounts Construct a Trial Construct a Construct a
to T accounts at the end of the Balance Statement of Statement of
period Profit or Loss Financial Position

2
 Learning objectives: Lecture 2
• Duality effects
o understand the duality concept that govern bookkeeping
o understand the dual effects of common transactions in an entity

• Double bookkeeping
o How the dual effects of transactions translate into double entries
in the ledger, i.e., Debit and Credit entries
o Rules for Debit accounts and Credit accounts
o Recording transactions using double bookkeeping
2
RECAP: KEY ELEMENTS OF THE
INCOME STATEMENT AND THE
BALANCE SHEET

AKA “FINANCIAL STATEMENT ELEMENTS”

4
 The Balance Sheet
The Balance Sheet in the form of the Accounting Equation:

Assets = Liabilities + Equity

Resources Funding of the entity

of the entity =
Claims over the resources

5
Assets = Liabilities + Equity

Capital (+)

Drawings (-)

Retained profit/loss (+)

Profit/loss is transferred from
Income Statement to the
Balance Sheet at period end:

Income (+)
Expenses (-)
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 1 2

Assets = Liabilities + Equity

Capital (+) 3

Drawings (-) 4

Six key financial Retained profit/loss (+)

statement elements
Profit/loss is transferred from
from Lecture 1 Income Statement to the
Balance Sheet at period end:
Elements 3, 4, 5 and 6 are sub-
elements of Equity
Income (+) 5
Expenses (-) 6
7
Assets 1 Liabilities 2

Drawings 4 Capital 3

Expenses 6 Income 5

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THE DUALITY CONCEPT &
DOUBLE ENTRY BOOKKEEPING

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Bookkeeping and the financial statements
The financial statements are the end products of
bookkeeping

Bookkeeping is the process of recording transactions of a

business

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Source: M&S 2023 Annual Report,
p.146

11
 Bookkeeping and the financial statements
How bookkeeping is carried out is not obviously visible from the Income
Statement and the Balance Sheet (sometimes called “final accounts“).
Take the Balance Sheet of M&S for example:

What we don’t see:

What we see on the Balance
Sheet: • Transactions that led to the
changes in cash position
Cash and cash equivalents throughout the financial year
• £1.07 billion as at 1 April 2023 • Where the cash receipts come
• £1.2 billion as at 2 April 2022 from (their “source”)
• Where the cash payments go to
(their “destination”) 12
 Bookkeeping terminology
Before finding their way onto
the financial statements,
transactions are first recorded
in the general ledger

The general ledger is divided

into individual sections called
“accounts”

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 What are accounts? Examples
• Cash/bank
• Office equipment
• Office cleaning
• Trade receivables Note: Cash and Bank are
• Trade payables used interchangeably
throughout the unit to
• Sales
refer to the liquid funds
• Purchases available to the business
• Bank loan
• Interest on loan
• Capital
• Drawings
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 Bookkeeping terminology
Each account in the ledger corresponds to one of the key
financial statement elements:

• Asset
Task:
• Liability Go through the list of accounts on the
• Income previous slide* and label the financial
statement element that each account
• Expense corresponds to
• Capital
*Except for Capital and Drawings where
• Drawings are no other accounts that sit underneath
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 What are accounts? Examples
Asset
• Cash/bank
Asset
• Office equipment
• Office cleaning Expense
• Trade receivables Asset
• Trade payables Liability
• Sales Income
• Purchases Expenses
• Bank loan Liability

• Interest on loan Expense

• Capital
• Drawings
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 Double-entry bookkeeping
For companies and entities that follow accounting standards,
bookkeeping is performed on a double-entry basis:

Each transaction is recorded in two accounts in the

ledger

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The logic of double entry bookkeeping:
Source-destination
Why does each transaction affect two accounts?

Each transaction results in an economic flow from a “source”

to a “destination”
• Each transaction needs to be recorded in both the
“source” account and the “destination” account so that
both effects are accounted for
• This is the Duality/Dual Effect concept

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 Double-entry bookkeeping and
the Accounting Equation
Which two accounts to involve?

Depends on the “source” and “destination” of the transaction.

Or the effects of the transaction on the Accounting Equation

The Accounting Equation itself reflects the “source-destination”

idea; every resource of the business must come from
someone/somewhere

Assets = Liabilities + Equity 19

IDENTIFYING THE DUAL EFFECTS OF
TRANSACTIONS

PEGGY’S PET FOOD BUSINESS

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 What do we mean by “effect”?
For each Effect, describe:
The increase or decrease
to a particular account
and by how much (the amount)

How do I know I have identified the correct dual effects?

One way of doing so is to check if the Accounting Equation still
balances after the two effects are recorded in the accounts:

Assets = Liabilities + Equity 21

 Peggy’s pet food business: 1 Oct
Peggy starts a pet food business on 1st October 2023 by This is an example of
putting £5,000 of her own money into the business. a transaction with
the owner. To make
sense of this,
What are the two effects of this transaction? remember that we are
recording this and all
other transactions
Increase in cash/bank £5,000 Asset +£5,000 from the business’
Increase in capital £5,000 Equity +£5,000 point of view.

22
Peggy’s pet food business: 2 Oct
On 2nd October 2023, Peggy pays £130 for a food blender

What are the two effects of this transaction?

Increase in Equipment £130 Asset +£130

Asset -£130
Decrease in Cash £130

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 Peggy’s pet food business: 3 Oct
When a business buys
goods for resale (or
On 3rd October, Peggy pays £450 for ingredients from
materials/other inputs to
BarkShop
make goods for sale), this is
recorded as Purchases,
which is an Expense.
What are the two effects of this transaction?
When a business pays for
Equity - £450
Increase in Purchases £450 (expense + £450) Purchases in cash, this is
Asset -£450 known as a cash purchase.
Decrease in Cash £450
Cf. credit purchases where
the business buys the goods
now and pays later
 Peggy’s pet food business: 4 Oct
On 4th October, Peggy pays £5,000 for car to use for Like the blender on 2nd
customer deliveries Oct, the car is a resource
bought with the intention to
be used to generate sales
What are the two effects of this transaction? for many years. It is
treated as an Asset.
Increase in Motor Vehicle £5,000 Asset +£5,000
Contrast this with the
Decrease in Cash £5,000 Asset -£5,000 purchase of goods for resale,
which is an Expense and
recorded in the Purchases
account

25
 Peggy’s pet food business: 5 Oct
On 5th October, Peggy pays £25 for cleaning products. Cleaning
expenditure is a
common operating
What are the two effects of this transaction? Expense - a cost
necessary to keep
Equity -£25 the business
Increase in Cleaning £25 (Expenses +£25) operations running
Decrease in Cash £25 Asset -£25

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 Peggy’s pet food business: 6 Oct
On 6th October, Peggy invoices Cat Ltd for When a sale is made on credit:
meals sold £200 the business allows the customer
to make payment at a later date
after the sale.
What are the two effects of this transaction?
At the point of sale, the business
Equity +£200 issues an invoice to the
Increase in Sales £200 (Income +£200) customer stating how much the
customer needs to pay.
Increase in Trade Receivables £200 Asset £200

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 Peggy’s pet food business: 7 Oct
On 7th Oct, Peggy makes a cash sale of £80 to
Rabbit Ltd When a cash sale is
made, the business
receives payment from the
What are the two effects of this transaction? customer at the point of
sale.
Equity +£80
Increase in Sales £80 (Income +£80) C.f. creditsale on 6th Oct
Increase in Cash £80 Asset +£80

28
Peggy’s pet food business: 8 Oct
On 8th Oct, Peggy pays £35 for car petrol

What are the two effects of this transaction?

Equity -£35
Increase in Petrol/Motor Vehicle Expenses £35 (Expenses +£35)
Decrease in Cash £35 Asset -£35

Note: petrol and other expenditure of keeping the motor vehicle in running
condition is treated as an Expense, not an Asset. Motor vehicle expenses are
therefore recorded in an Expense account, not the Motor Vehicle Asset account. 29
Peggy’s pet food business: 9 Oct
On 9th Oct, Peggy invoices Dog Ltd for meals sold £300

What are the two effects of this transaction?

Equity £300
Increase in Sales £300 (Income +£300)

Increase in Trade Receivables £300 Asset

£300

30
Peggy’s pet food business: 10 Oct
On 10th Oct, Peggy pays £60 for a food hygiene course

What are the two effects of this transaction?

Equity -£60
Increase in Training Expenses £60 (Expenses +£60)
Decrease in Cash £60 Asset -£60

31
 Peggy’s pet food business: 11 Oct

On 11th Oct, Peggy withdraws £40 from the

business bank account to pay for her own Similar to the transaction
on 1st Oct, this is another
groceries
transaction with the owner.

This time, however, the

What are the two effects of this transaction? owner withdraws a
resource from the
Equity -£40 business
Increase in Drawings £40 (Drawings +£40)
Decrease in Cash £40 Asset -£40

32
 Peggy’s pet food business: 15 Oct
On 15th Oct, Peggy takes out a small business loan of
The business
£25,000 receives funding from
the bank, an external
third party who must
What are the two effects of this transaction? be repaid at a later
date
Increase in Cash £25,000 Asset +£25,000

Increase in Bank Loan £25,000 Liability +£25,000

Note that the Cash/Bank account is an Asset; it records the funds available to the
business. The Bank Loan account on the other hand is a Liability and used to
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record what is owed to the lender(s) of the business.
From Dual Effects to Double Entries
What is the purpose of identifying the dual effects of
each transaction?

The dual effects will determine:

• The two accounts you need to involve to record the
transaction in the ledger
• Whether you should Debit or Credit the accounts in
question, and by how much

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 Duality effects of transactions
What do we mean by ‘effect’?

For each Effect, describe:

The increase or decrease
to a particular account
and by how much (the amount)

How do I know I have identified the correct dual effects?

One way of doing so is to check if the Accounting Equation still
balances after the two effects are recorded in the accounts:

Assets = Liabilities + Equity 35

 Peggy’s pet food business: 1 Oct
Peggy starts a pet food business on 1st October 2023 by This is an example of
putting £5,000 of her own money into the business. a transaction with
the owner. To make
sense of this,
What are the two effects of this transaction? remember that we are
recording this and all
other transactions
Increase in cash/bank £5,000 Asset +£5,000 from the business’
Increase in capital £5,000 Equity +£5,000 point of view.

36
 Double-entry bookkeeping
For entities that adopt accounting standards, bookkeeping is
performed on a double-entry basis

Each transaction is recorded in two accounts in the ledger:

• Debit (DR) Account 1, £xxx Double entries on 1st Oct:

• Credit (CR) Account 2, £xxx DR Cash/bank £5,000

CR Capital £5,000

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 Double-entry bookkeeping
Which two accounts?
Each transaction is recorded in two The two accounts impacted by the
accounts in the ledger: transaction – refer to the dual
effects of the transaction
• Debit (DR) Account 1, £xxx
• Credit (CR) Account 2, £xxx What does it mean to “Debit” or
“Credit” an account?
It could mean increase or decrease
to the account, depending on the
type of account involved
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 Debit and Credit rules:
Asset, Drawings, Expenses

If the account involved is

an Asset, Drawings, or Expenses, then:

Increases are Debited (DR)

Decreases are Credited (CR)

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 Debit and Credit rules:
Liability, Capital, Income

If the account involved is

a Liability, Capital, or Income, then:

Increases are Credited (CR)

Decreases are Debited (DR)

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 Assets Liabilities

Drawings Capital

Expenses Income

Debit to Increase Credit to Increase

Credit to Decrease Debit to Decrease

Known as Known as
Debit accounts Credit accounts
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Let’s apply the rules of Debit and Credit accounts
to the Peggy’s pet food business example from
duality effects.

In previous session, we have identified the dual

effects of each transaction in the Peggy exercise.

Now go through each transaction and translate

the dual effects into Double Entries, i.e.,

DR Account 1 £xxx
CR Account 2 £xxx
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 Peggy’s pet food business: 1 Oct
Peggy starts a pet food business on 1st October 2023 by
putting £5,000 of her own money into the business.

What are the two effects of this transaction?

Double entries on 1st Oct:

Increase in cash/bank £5,000 Asset +£5,000 DR Cash/bank £5,000

Increase in capital £5,000 Equity +£5,000 CR Capital £5,000

43
 Peggy’s pet food business: 2 Oct
On 2nd October 2023, Peggy pays £130 for a food blender

What are the two effects of this transaction?

Double entries on 2nd Oct:

Increase in Equipment £130 Asset +£130 DR Equipment £130

Decrease in Cash £130 Asset -£130 CR Cash £130

44
 Debits and Credits:
what do they represent?
Debits and Credits do not automatically translate to
Increases and Decreases respectively

They represent the flow of economic benefit from one side

(Credit) to the other (Debit) in the business entity
• A Debit entry represents the Destination of economic
benefit in a given transaction
• A Credit entry represents the Source of economic benefit
in a given transaction
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“Destination” account (Debits) “Source” account (Credits)
Usually the following: Usually the following:
• An asset, in transactions where the • A liability, in transactions where
entity gains a resource cash is sourced from a third party
who the entity is now indebted to
• An expense, in transactions where • An income, in transactions
the entity makes payment to a where sales revenue (or other
supplier or a service provider revenue e.g., rental income) is
• Drawings, where withdrawals of the source of cash or receivables
business assets are made by the • Capital, where the owner is the
owner (the destination) source of the cash or other
assets

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 Assets Liabilities

Drawings Capital

Expenses Income

These accounts are These accounts are

usually the Destination usually the Source of a
of a given transaction, given transaction, therefore
therefore usually Debited usually Credited 47
 Assets Liabilities

Drawings Capital

Expenses Income

Known as “Debit” accounts Known as “Credit” accounts

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Are “Debit” accounts always Debited?
No.

“Debit” accounts (Assets, Expenses and Drawings) are

usually Destination accounts and thus usually Debited
• However, there are transactions where such accounts are
the Source of the flow of economic benefit, in which case
they are Credited
• Over a given period, such accounts usually accumulate
more Debit than Credit entries, thus ending up with a
Debit balance at period end 49
Credit entry to a “Debit” account: example
Cash is an Asset and a Debit account.
On 2nd October 2022, Peggy
pays £130 for a food blender However, when the entity makes cash
payments to someone/for something, cash
becomes the Source of the transaction - there
is an outflow from the cash account. Hence, it
What are the two effects of should be Credited (i.e., decreased).
this transaction?
Double entries on 2nd Oct:

DR Equipment £130
CR Cash £130
50
Are “Credit” accounts always Credited?
No.

“Credit” accounts (Liabilities, Income and Capital) are

usually Source accounts, thus usually Credited
• However, there are transactions where such accounts are
the Destination of the flow of economic benefit, in which
case they should then be Debited
• Over a given period, such accounts usually accumulate
more Credit than Debit entries, thus ending up with a
Credit balance at period end 51
Debit entry to a “Credit” account: example
No relevant example from the Peggy Bank Loan is a Liability and a Credit
exercise. account.
However, for illustration purposes, let’s
say that the small business loan taken But here, £200 of the loan is repaid
out in Oct 2022 is to be repaid in with business cash – it is the
installments, with the first one £200 due Destination of the cash payment. So
and paid on 15 Nov 2022. the Loan a/c is Debited and the Cash
a/c Credited
What would be the effects of the
transaction on 15th Nov?

• Decrease in Bank loan £200

Double entries on 15 th Nov:
(Destination) DR Bank Loan £200
• Decrease in Cash £200 (Source) CR Cash £200
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Double entry: the “rules” approach
Identify the financial statement element that each account correspond to
– is it a “Debit” or a “Credit” account? Then follow the “rules” depending
on account type:

“Debit” accounts: “Credit” accounts:

Assets, Expenses and Liabilities, Income and
Drawings Capital

Increases are Debited Increases are Credited

Decreases are Credited Decreases are Debited
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 1 2

Assets = Liabilities + Equity

Capital (+) 3
The “rules” of the Debit and
Credit accounts correspond to Drawings (-) 4
their opposite positions in the
Accounting Equation:
Retained profit/loss (+)
Expenses and Drawings are Profit/loss is transferred from
sub-elements of Equity, but they Income Statement to the
cause Equity to decrease. Balance Sheet at period end:
Therefore, they follow the rules
of “Debit” accounts, which are Income (+) 5
the opposite rules of “Credit” Expenses (-) 6
accounts 54
 Assets 1 Liabilities 2

Drawings 4 Capital 3

Expenses 6 Income 5

Known as “Debit” accounts Known as “Credit” accounts

Debit to Increase Credit to Increase

Credit to Decrease Debit to Decrease 55
Dual effects and double entries of the
remaining transactions in Peggy’s pet food
business

56
 Peggy’s pet food business: 3 Oct
On 3rd October, Peggy pays £450 for ingredients from
BarkShop

What are the two effects of this transaction?

Double entries on 3rd Oct:
Equity - £450
Increase in Purchases £450 (expense + £450) DR Purchases £450
Decrease in Cash £450 Asset -£450 CR Cash £450

57
 Peggy’s pet food business: 4 Oct
On 4th October, Peggy pays £5,000 for car to use for
customer deliveries

What are the two effects of this transaction?

Double entries on 4th Oct:

Increase in Motor Vehicle £5,000 Asset +£5,000 DR Motor vehicles £5,000

Decrease in Cash £5,000 Asset -£5,000 CR Cash £5,000

58
 Peggy’s pet food business: 5 Oct
On 5th October, Peggy pays £25 for cleaning products.

What are the two effects of this transaction?

Equity -£25 Double entries on 5th Oct:
Increase in Cleaning expense £25 (Expenses +£25)
Decrease in Cash £25 Asset -£25 DR Cleaning expense £25
CR Cash £25

59
 Peggy’s pet food business: 6 Oct
On 6th October, Peggy invoices Cat Ltd for
meals sold £200

What are the two effects of this transaction?

Double entries on 6th Oct:
Equity +£200
Increase in Sales £200 (Income +£200) DR Trade Receivables £200
Increase in Trade Receivables £200 Asset £200
CR Sales £200

60
 Peggy’s pet food business: 7 Oct
On 7th Oct, Peggy makes a cash sale of £80 to
Rabbit Ltd

What are the two effects of this transaction?

Double entries on 7th Oct:
Equity +£80
Increase in Sales £80 (Income +£80) DR Cash £80
Increase in Cash £80 Asset +£80 CR Sales £80

61
 Peggy’s pet food business: 8 Oct
On 8th Oct, Peggy pays £35 for car petrol

What are the two effects of this transaction?

Equity -£35
Increase in Petrol/Motor Vehicle Expenses £35 (Expenses +£35)
Decrease in Cash £35 Asset -£35

Double entries on 8th Oct:

DR Motor vehicle expenses £35
CR Cash £35
62
 Peggy’s pet food business: 9 Oct
On 9th Oct, Peggy invoices Dog Ltd for meals sold £300

What are the two effects of this transaction?

Double entries on 9th Oct:
Equity £300
Increase in Sales £300 (Income +£300) DR Trade receivables £300
Increase in Trade Receivables £300 Asset CR Sales £300
£300

63
Peggy’s pet food business: 10 Oct
On 10th Oct, Peggy pays £60 for a food hygiene course

What are the two effects of this transaction?

Equity -£60
Increase in Training Expenses £60
(Expenses +£60)
Decrease in Cash £60 Asset -£60

Double entries on 10th Oct:

DR Training Expenses £60
CR Cash £60
64
 Peggy’s pet food business: 11 Oct

On 11th Oct, Peggy withdraws £40 from the

business bank account to pay for her own
groceries

What are the two effects of this transaction?

Double entries on 11th Oct:
Equity -£40
Increase in Drawings £40 (Drawings +£40)
DR Drawings £40
Decrease in Cash £40 Asset -£40 CR Cash £40
65
 Peggy’s pet food business: 15 Oct
On 15th Oct, Peggy takes out a small business loan of
£25,000

What are the two effects of this transaction?

Double entries on 15th Oct:

Increase in Cash £25,000 Asset +£25,000 DR Cash £25,000

Increase in Bank Loan £25,000 Liability +£25,000 CR Bank loan £25,000

66
 Lecture 2: Summary
Translating the dual effects of a given transaction into Debit
(DR) and Credit (CR) entries

Rules of Debit accounts and Credit accounts

Alternative to the “rules”: identifying the source (CR) and

destination (DR) accounts of a given transaction

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 Next lecture: Lecture 3
Consolidating Lecture 2 and practicing Double Entries
• Cash and credit transactions
• Cash discount vs trade discount
• Asset (capital expenditure) vs Expense (revenue
expenditure)
• Taking out vs repaying a loan

And:
• Introduction to the Trial Balance
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