DOUBLE ENTRY BOOK-KEEPING SYSTEM

The Accounting Cycle and Records

 An accounting cycle is a “sequence of accounting procedures used to record,
analyse and classify, posting, summarise and reporting accounting information
to the users
 It is a sequence of procedures used to keep track of the transactions that have
taken place in the business and to report the financial effect of those
transactions.
 This cycle however shows the steps for accounting an economic transaction
from the time it occurs until it is ultimately reflected in the financial statements.

Methods of Accounting
Business transactions are recorded in two different ways.

 Single Entry
 Double Entry
Single Entry:
It is incomplete system of recording business transactions. The business organization
maintains only cash book and personal accounts of debtors and so the complete
recording of transactions cannot be made and trail balance cannot be prepared.

Double Entry:
It this system every business transaction is having a twofold effect of benefits giving
and benefit receiving aspects. The recording is made on the basis of both these aspects.
Double Entry is an accounting system that records the effects of transactions and other
events in at-least two accounts with equal debits and credits.

Steps involved in Double entry system

a) Preparation of Journal: Journal is called the book of original entry. It records
the effect of all transactions for the first time. Here the job of recording takes
place.
b) Preparation of Ledger: Ledger is the collection of all accounts used by a
business. Here the grouping of accounts is performed. Journal is posted to
ledger.
c) Trial Balance preparation: Summarizing. It is a summary of ledge balances
prepared in the form of a list.
d) Preparation of Final Account: At the end of the accounting period to know the
achievements of the organization and its financial state of affairs, the final
accounts are prepared.

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 Advantages of Double Entry System
a) Scientific system: This system is the only scientific system of recording business
transactions in a set of accounting records. It helps to attain the objectives of
accounting.
b) Complete record of transactions: This system maintains a complete record of
all business transactions.
c) A check on the accuracy of accounts: By use of this system the accuracy of
accounting book can be established through the device called a Trail balance.
d) Ascertainment of profit or loss: The profit earned or loss suffered during a
period can be ascertained together with details by the preparation of Profit and
Loss Account.
e) Knowledge of the financial position of the business: The financial position of
the firm can be ascertained at the end of each period, through the preparation
of statement of financial position.
f) Full details for purposes of control: This system permits accounts to be
prepared or kept in as much detail as necessary and, therefore, affords
significant information for purposes of control etc.
g) Comparative study is possible: Results of one year may be compared with those
of the precious year and reasons for the change may be ascertained.
h) Helps management in decision making: The management may be also to obtain
good information for its work, especially for making decisions.
i) No scope for fraud: The firm is saved from frauds and misappropriations since
full information about all assets and liabilities will be available.

Meaning of Debit and Credit

The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from
‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit.

Recording of transactions require a thorough understanding of the rules of debit and

credit relating to accounts. Both debit and credit may represent either increase or
decrease, depending upon the nature of account.

Types of Accounts
The object of book-keeping is to keep a complete record of all the transactions that
take place in the business. To achieve this object, business transactions have been
classified into three categories:

a) Transactions relating to persons.

b) Transactions relating to properties and assets
c) Transactions relating to incomes and expenses.

The accounts falling under the first heading are known as ‘personal Accounts’. The
accounts falling under the second heading are known as ‘Real Accounts’. The accounts

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 falling under the third heading are called ‘Nominal Accounts’. The accounts can also
be classified as personal and impersonal. The following chart will show the various
types of accounts:

Accounts

Personal Impersonal

Natural Artificial/L Group/ Real Nominal

egal Representative

Tangible Intangible Revenue Expense

Personal Accounts:
Accounts recording transactions with a person or group of persons are known as
personal accounts. These accounts are necessary, in particular, to record credit
transactions. Personal accounts are of the following types:

a) Natural persons: An account recording transactions with an individual human

being is termed as a natural persons’ personal account. e.g., Kamal’s account,
Mala’s account, Sharma’s accounts. Both males and females are included in it
b) Artificial or legal persons: An account recording financial transactions with an
artificial person created by law or otherwise is termed as an artificial person,
personal account, e.g. Firms’ accounts, limited companies’ accounts,
educational institutions’ accounts, Co-operative society account.
c) Groups/Representative personal Accounts: An account indirectly
representing a person or persons is known as representative personal account.
When accounts are of a similar nature and their number is large, it is better tot
group them under one head and open a representative personal account. e.g.,
prepaid insurance, outstanding salaries, rent, wages etc.

When a person starts a business, he is known as proprietor. This proprietor is

represented by capital account for that entire he invests in business and by drawings

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accounts for all that which he withdraws from business. So, capital accounts and
drawings account are also personal accounts.

The rule for personal accounts is: Debit the receiver

Credit the giver

Real Accounts
Accounts relating to properties or assets are known as ‘Real Accounts’, A separate
account is maintained for each asset e.g., Cash Machinery, Building, etc.,

Real accounts can be further classified into tangible and intangible.

a) Tangible Real Accounts: These accounts represent assets and properties which
can be seen, touched, felt, measured, purchased and sold. e.g. Machinery
account Cash account, Furniture account, stock/inventory account etc.
b) Intangible Real Accounts: These accounts represent assets and properties
which cannot be seen, touched or felt but they can be measured in terms of
money. e.g., Goodwill accounts, patents account, Trademarks account,
Copyrights account, etc.
The rule for Real accounts is: Debit what comes in

Credit what goes out

Nominal Accounts
Accounts relating to income, revenue, gain expenses and losses are termed as nominal
accounts. These accounts are also known as fictitious accounts as they do not
represent any tangible asset. A separate account is maintained for each head or
expense or loss and gain or income. Wages account, Rent account Commission
account, Interest received account are some examples of nominal account.

The rule for Nominal accounts is: Debit all expenses and losses

Credit all incomes and gains

Accounting Equation
As indicated earlier, every business transaction has two aspects. One aspect is debited
other aspect is credited. Both the aspects have to be recorded in accounts
appropriately. American Accountants have derived the rules of debit and credit
through a ‘novel’ medium, i.e., accounting equation. The equation is as follows:

Assets = Equities

The equation is based on the principle that accounting deals with property and rights
to property and the sum of the properties owned is equal to the sum of the rights to
the properties. The properties owned by a business are called assets and the rights to

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properties are known as liabilities or equities of the business. Equities can be
subdivided into equity of the owners which is known as capital and equity of creditors
who represent the debts of the business know as liabilities. These equities may also
be called internal equity and external equity. Internal equity represents the owner’s
equity in the assets and external represents the outsider’s interest in the asset. Based
on the bifurcation of equity, the accounting equation can be restated as follows:

ASSETS = LIABILITIES + CAPITAL

(Or)
Capital = Assets – Liabilities
(Or)
Liabilities = Assets – Capital.
The equation is fundamental in the sense that it gives a foundation to the double entry
book-keeping system. This equation holds good for all transaction and events and at
all periods of time since every transaction and events has two aspects.

Rules for accounting equation:

Following rules help in making the accounting equation:

a) Assets: If there is increase in assets, this increase is debited in assets account. If

there is decrease in assets, this decrease credited in assets account.
b) Liabilities: When liabilities increase, outsider’s equities are credited and when
liabilities are decreased, outsider’s equities are debited.
c) Capital: When capital is increased, it is credited and when capital is
withdrawn, it is debited.
d) Expenses: Owner’s equity is decreased by the amount of revenue expenses.
e) Income or profits: Owner’s equity is increased by the amount of revenue
income.

Illustration
Transactions Effect Action
2008 Increases Asset of Bank. Debit: Bank account
May 1. Started a domestic Increases Capital of Credit: Capital account
machines business putting Owner.
T.shs 25,000 into a business
bank account.
3. Bought equipment on credit Increases Asset of Debit: Equipment
from House supplies T.shs Equipment account
12,000. Increases Liability to Credit: House supplies
House Supplies. account

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 4. Withdrew T.shs 150 cash from Increases Asset of Cash. Debit: Cash account
the bank and placed it in the Decreases Asset of Credit: Bank account
cash box Bank.

7. Bought a van paying by Increases Asset of Van. Debit: Van account

cheque T.shs 6,800. Decreases Asset of Credit: Bank account
Bank.
10. Sold some equipment that Increases Asset of Debit: J. Rose account
was not needed at coast of Money Owing From J. Credit: Equipment
T.shs 1,100 on credit to J.Rose. Rose. account
Decreases Asset of
Equipment.
21. Returned some of the Decreases Liability to Debit: House supplier
equipment costing T.shs 2,300 House Supplier. account
to House supplies Decreases Asset of Credit: Equipment
Equipment. account
28. J.Rose pays the firm the Increases Asset of Bank. Debit: Bank account
amount owing T.shs 1,100 by Decreases Asset of Credit: Rose account
cheque. Money Owing by J
Rose.

30. Bought another van paying by Increases Asset of Vans. Debit: Van account
cheque T.shs 4,300. Decreases Asset of Credit: Bank account
Bank.
31. Paid T.shs 9,700 to House Decreases Liability to Debit: House supplies
supplies by cheque. House Supplies. account
Decreases Asset of Credit: Bank account
Bank.

Journal and Ledger

Introduction
When the business transactions take place, the first step is to record the same in the
books of original entry or subsidiary books or books of prime or journal. Thus journal
is a simple book of accounts in which all the business transactions are originally
recorded in chronological order and from which they are posted to the ledger accounts
at any convenient time.

Journal
Journalising refers to the act of recording each transaction in the journal and the form
in which it is recorded, is known as a journal entry.

Advantages of Journal
The following are the inherent advantages of using journal, though the transactions
can also be directly recorded in the respective ledger accounts;

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 a) As all the transactions are entered in the journal chronologically, a date wise
record can easily be maintained;
b) All the necessary information and the required explanations regarding all
transactions can be obtained from the journal; and
c) Errors can be easily located and prevented by the use of journal or book of
prime entry.
The specimen journal is as follows:

Date Particulars L.F Dr (shs) Cr (shs)

The journal has five columns, viz. (1) Date; (2) Particulars; (3) Ledger Folio; (4) Amount
(Debit); and (5) Amount (Credit) and a brief explanation of the transaction by way of
narration is given after passing the journal entry.

Ledger
Ledger is a main book of account in which various accounts of personal, real and
nominal nature, are opened and maintained. In journal, as all the business transactions
are recorded chronologically, it is very difficult to obtain all the transactions
pertaining to one head of account together at one place. But, the preparation of
different ledger accounts helps to get a consolidated picture of the transactions
pertaining to one ledger account at a time. Thus, a ledger account may be defined as
a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows
their net effect ultimately. From the above definition, it is clear that when transactions
take place, they are first entered in the journal and subsequently posted to the
concerned accounts in the ledger. Posting refers to the process of entering in the ledger
the information given in the journal.

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Ruling of ledger account
The ruling of a ledger account is as follows:

Date Particulars J.F Amount Date Particulars J.F Amount

To name of the By name of
account to be the account to
credited be debited
*J.F – Journal Folio

Sub-division of ledger
In a big business, the number of accounts is numerous and it is found necessary to
maintain a separate ledger for customers, suppliers and for others. Usually, the
following three types of ledgers are maintained in such big business concerns.

a) Debtors’ Ledger: It contains accounts of all customers to whom goods have

been sold on credit. From the Sales Day Book, Sales Returns Book and Cash
Book, the entries are made in this ledger. This ledger is also known as sales
ledger.
b) Creditors’ Ledger: It contains accounts of all suppliers from whom goods have
been bought on credit. From the Purchases Day Book, Purchases Returns Book
and Cash Book, the entries are made in this ledger. This ledger is also known
as Purchase Ledger.
c) General Ledger: It contains all the residual accounts of real and nominal
nature. It is also known as Nominal Ledger.

Distinction between Journal and Ledger

a) Journal is a book of prime entry, whereas ledger is a book of final entry.
b) Transactions are recorded daily in the journal, whereas posting in the ledger is
made periodically.
c) In the journal, information about a particular account is not found at one place,
whereas in the ledger information about a particular account is found at one
place only.
d) Recording of transactions in the journal is called journalising and recording of
transactions in the ledger is called posting.
e) A journal entry shows both the aspects debit as well as credit but each entry in
the ledger shows only one aspect.
f) Narration is written after each entry in the journal but no narration is given in
the ledger.
g) Vouchers, receipts, debit notes, credit notes etc., from the basic documents form
journal entry, whereas journal constitutes basic record for ledger entries.

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Illustration
You are to show the journal entries necessary to record the following items:
May 1. Bought a van on credit from Deedon Garage for T.shs5,395,000.
May 3. A debt of T.shs81,000 owing from P Knight was written off as a bad debt.
May 8. Office furniture bought by us for T.shs610,000 was returned to the
supplier Time Ltd, as it was unsuitable. Full allowance will be given to
us.
May 12. We are owed T.shs320,000 by R Twig. He is declared bankrupt and we
received T.shs51,000 in full settlement of the debt.
May 14. We take goods costing T.shs22,000 out of the business stock without
paying for them.
May 28. Some time ago we paid an insurance bill thinking that it was all in
respect of the business. We now discover that T.shs62,000 of the amount
paid was in fact insurance of our private house.
May 28. Bought machinery for T.shs1,260,000 on credit from Electrotime Ltd.

Feedback
Journal entries
Date Details Folio Debit Credit
May 1 Van account 5,395,000
Deedon Garage account 5,395,000

May 3 Bad debt account 81,000

P knight account 81,000

May 8 Time Ltd account 610,000

Office furniture account 610,000

May 12 Cash account 51,000

Bad debt account 269,000
R. twig account 320,000

May 14 Drawings account 22,000

Purchases (stock) account 22,000

May 28 Drawings 62,000

Insurance 62,000

May 28 Machinery account 1,260,000

Electrotime Ltd 1,260,000

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Test Yourself
Enter the following transactions in the appropriate accounts:
2006
Aug 1. Started in business with T.shs7,400,000 cash.
1. Paid T.shs7,000,000 of the opening cash into the bank.
2. Bought goods on credit T.shs410,000 from J Watson.
3. Bought a van by cheque T.shs4,920,000.
7. Bought goods for cash T.shs362,000.
10. Sold goods on credit T.shs218,000 to L Less.
12. Returned goods to J Watson T.shs42,000.
19. Sold goods for cash T.shs54,000.
22. Bought fixtures on credit from Firelighters Ltd T.shs820,000.
24. F Holmes lent us T.shs1,500,000 paying us the money by cheque.
29. We paid J Watson his account by cheque T.shs368,000.
31. We paid Firelighters Ltd by cheque T.shs820,000.

Feedback

DR CASH ACCOUNT CR

Aug. 1 Capital 7,400,000 Aug. 3 Bank 7,000,000

Aug. 19 Sales 54,000 Aug. 7 Purchases 362,000
Aug. 31 Balance c/d 92,000

7,454,000 7,454,000

DR BANK ACCOUNT CR

Aug. 3 Cash 7,000,000 Aug 5. Van 4,920,000

Aug. 24 F. Holmes 1,500,000 Aug. 29 J. Watson 368,000
Aug. 31 Firelighters ltd 820,000
Aug. 31 Balance c/d 2,392,000
8,500,000 8,500,000

DR CAPITAL ACCOUNT CR

Aug. 31 Balance c/d 7,400,000 Aug. 1 Cash 7,400,000

7,400,000 7,400,000

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 DR PURCHASES ACCOUNT CR

Aug. 4 J.Watson 410,000 Aug. 31 Balance c/d 772,000

Aug. 7 Cash 362,000
772,000 772,000

DR J.WATSON ACCOUNT CR

Aug. 12 Returns outwards 42,000 Aug. 4 Purchases 410,000

Aug 29. Bank 368,000
410,000 410,000

DR VAN ACCOUNT CR

Aug. 5 Bank 4,920,000 Aug. 31 Balance c/d 4,920,000

4,920,000 4,920,000

DR L.LESS ACCOUNT CR

Aug. 10 Sales 218,000 Aug. 31 Balance c/d 218,000

218,000 218,000

DR SALES ACCOUNT CR

Aug. 31 balance c/d 272,000 Aug.10 L.less 218,000

Aug. 19 Cash 54,000

272,000 272,000

DR RETURNS OUTWARD ACCOUNT CR

Aug.31 balance c/d 42,000 Aug. 12 J. Watson 42,000

42,000 42,000
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 DR. FIXTURES ACCOUNT CR

Aug. 22 Firelighters Ltd 820,000 Aug. 31 Balance c/d 820,000

820,000 820,000

DR FIRELIGHTERS LTD CR

Aug. 31 Bank 820,000 Aug. 22 Fixtures 820,000

820,000 820,000

DR F. HOLMES (LOAN) ACCOUNT CR

Aug.31 Balance c/d 1,500,000 Aug. 24 Bank 1,500,000

1,500,000 1,500,000

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