Double-entry Accounting System

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This tutorial is devoted to the technique used by most accountants in the world. The technique is called
the©

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 . To understand it better we are introducing a T account:

ccis an individual accounting record that shows information about increases and decreases in
one balance sheet or income statement account. T account is so called because it has the form of letter
T.

On the top of the horizontal bar there is the account title. Account decreases and increases are placed on
the either side of the vertical bar:
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Decreases Increases
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Increases Decreases
The left side of the T account is called a ©’ and the right side is called a ©.

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cis the left side of a T account.

cis the right side of a T account.

Often these two terms are abbreviated as Dr and Cr. It is common to say that an account has
been ©©when an amount is placed on the left side of an account’ and ©© if an amount is placed
on the right side of the account.

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is the difference between the debit side and the credit side of a T account.

Now we can define the double-entry system:

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 provides for the equality of total debits and total credits.
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The double-entry rules can be helpful when we need to find a mistake in financial records. If total debits
do not equal total credits’ there must be a mistake. However’ this system cannot ensure complete
accuracy. For example’ even if debit balances equal credit ones’ an error may still be present because a
wrong account was debited (or credited) when the entry was made.

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The two important rules about the double-entry recording system are as follows:

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Let us see how debits and credits affect accounts. As we mentioned earlier’ a debit is the left side and a
credit is the right side of an account. Increases and decreases are recorded differently for asset and claim
accounts. Here is what we mean:
1. Debit entries increase asset accounts’ and decrease liability and equity accounts.
2. Credit entries increase liability and equity accounts’ and decrease asset accounts.
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An easy way to remember these rules is to learn that increases are posted on the outsides (see plus
signs above) and decreases are posted on the insides (see minus signs above). That rule holds true for
asset as well as liability and equity accounts.

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 is a set of rules for recording financial information in a financial
accounting system in which every transaction or event changes at least two different ledger accounts.

When each financial transaction is closely analysed’ it reveals two aspects. One aspect will be ³receiving
aspect´ or ³incoming aspect´ or ³expenses/loss aspect´. This is termed as the ³Debit aspect´. The other
aspect will be ³giving aspect´ or ³outgoing aspect´ or ³income/gain aspect´. This is termed as the
³Credit aspect´. These two aspects namely ³Debit aspect´ and ³Credit aspect´ form the basis of Double
Entry System. The double entry system is so named since it records both the aspects of a transaction (as
opposed to single-entry bookkeeping system where both aspects are not always recorded). In short’ the
basic principle of this system is’ for every debit’ there must be a corresponding credit of equal amount
and for every credit’ there must be a corresponding debit of equal amount.

It was first codified in the 15th century by Luca Pacioli. In deciding which account has to be debited and
which account has to be credited’ the 
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done using debits and credits within the accounting equation:Equity = Assets - Liabilities. The accounting
equation serves as an error detection tool. If at any point the sum of debits does not equal the
corresponding sum of credits’ an error has occurred. It follows that the sum of debits and credits must be
equal.

Double-entry bookkeeping is not a guarantee that no errors have been made - for example’ the
wrong ledger account may have been debited or credited’ or the entries completely reversed.

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Accounting entries

The double-entry accounting system records financial transactions in relation to asset’ liability’ income or
expense related to it through accounting entries. Any accounting entry in the double-entry accounting
system will result in the recording of equal debit and credit amounts; that is’ debits must equal credits. If
the accounting entries are recorded without error’ at any point in time the aggregate balance of all
accounts having positive balances will be equal to the aggregate balance of all accounts having negative
balances. The double-entry bookkeeping system ensures that the financial transaction has equal and
opposite effects in at least two different accounts. Accounting entries use terms such as debit and
credit to avoid confusion regarding the opposite effect of the accounting entry e.g. If an accounting entry
debits a particular account’ the opposite account will be credited and vice versa. The rules for formulating
accounting entries are known as "Golden Rules of Accounting". The accounting entries are recorded in
the "Books of Accounts". Regardless of which accounts and how many are impacted by a given
transaction’ the fundamental accounting equation A = L + OE will hold.

History

The earliest extant records that follow the modern double-entry form are those of Amatino Manucci’
a Florentine merchant at the end of the 13th century.[1] Some sources suggest thatGiovanni di Bicci de'
Medici introduced this method for the Medici bank in the 14th century. By the end of the 15th century’ the

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merchant venturers of Venice used this system widely.Luca Pacioli’ a Franciscan friar and collaborator
[2]
of Leonardo da Vinci’ first codified the system in a mathematics textbook of 1494. Pacioli is often called
the "father of accounting" because he was the first to publish a detailed description of the double-entry
[3][4]
system’ thus enabling others to study and use it. There is however controversy among scholars lately
that Benedikt Kotruljević wrote the first manual on a double-entry bookkeeping system in his 1458
treatise ?



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[edit]Approaches

There are two different approaches to the double entry system of bookkeeping. They are Traditional
Approach and Accounting Equation Approach. Irrespective of the two approaches the effect on the books
of accounts remain the same.

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This approach is also called as the British Approach. Recording of business transactions under this
method are formed on the basis of the existence of two aspects (debit and credit) in each of the
transactions. Under the traditional approach’ the transactions are entered in the books of accounts by
following the golden rules of accounting. Under traditional approach the accounts are classified based on
their nature as real’ personal and nominal accounts. After classifying the accounts’ the following golden
rules of accounting are applied to record the financial transaction:

1. Real account: Debit what comes in and credit what goes out
2. Personal account: Debit the receiver and Credit the giver
3. Nominal account: Debit all expenses & losses and Credit all incomes & gains[11]
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This approach is also called as the American Approach. Under this approach transactions are recorded
based on the accounting equation’ i.e.’ Assets = Liabilities + Capital. The accounting equation is a
statement of equality between the debits and the credits. The rules of debit and credit depend on the
nature of an account. For this purpose of accounting equation approach’ all the accounts are classified
into the following five types based on periodicity of flow as: Assets Accounts’ Capital Account’ Liabilities
Accounts’ Revenues or Incomes Accounts and Expenses or Losses Accounts.

If there is an increase or decrease in one account’ there will be equal decrease or increase in another
account. Accordingly’ the following rules of debit and credit in respect of the various categories of
accounts can be obtained. The rules may be summarised as below :-

1. Assets Accounts: debit increases in assets and credit decreases in assets

2. Capital Account: credit increases in capital and debit decreases in capital

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 3. Liabilities Accounts: credit increases in liabilities and debit decreases in liabilities
4. Revenues or Incomes Accounts: credits increases in incomes and gains and debit decreases in
incomes and gains
5. Expenses or Losses Accounts: debit increases in expenses and losses and credit decreases in
expenses and losses
Books of accounts

It does this by ensuring that each individual financial transaction is recorded in at least two different
nominal ledger accounts within the financial accounting system. The two entries have equal amounts and
opposite signs’ so that when all entries in the accounts are summed’ the total is exactly the same: the
accounts balance. This is a partial check that each and every transaction has been correctly recorded.
The transaction is recorded as a "debit record" (Dr.) in one account’ and a "credit record" (Cr.) entry in the
other account. The debit entry will be recorded on the debit side (left-hand side) of a General ledger and
the credit entry will be recorded on the credit side (right-hand side) of a General ledger account. A
General ledger has a Debit (left) side and a Credit (right) side. If the total of the entries on the debit side is
greater than the total on the credit side of the nominal ledger account’ that account is said to have a debit
balance..

Double entry is used only in nominal ledgers. It is not used in daybooks’ which normally do not form part
of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it
is the nominal ledgers that will ensure the integrity of the resulting financial information created from the
daybooks (provided that the information recorded in the daybooks is correct).

(The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be
totalled before they are entered in the nominal ledger. If there are only a relatively small number of
transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and
thus of the double-entry system.)

However as can be seen from the examples of daybooks shown below’ it is still necessary to check’
within each daybook’ that the postings from the daybook balance.

The double entry system uses nominal ledger accounts. From these nominal ledger accounts a trial
balance can be created. The trial balance lists all the nominal ledger account balances. The list is split
into two columns’ with debit balances placed in the left hand column and credit balances placed in the
right hand column. Another column will contain the name of the nominal ledger account describing what
each value is for. The total of the debit column must equal the total of the credit column.

Debits and Credits

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Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses’ the
following (basic) equation must be true:








For the accounts to remain in balance’ a change in one account must be matched with a change in
another account. These changes are made by debits and credits to the accounts. Note that the usage
of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or
credit to increase or decrease an account depends on the normal balance of the account. Assets’
Expenses’ and Drawings accounts (on the left side of the equation) have a normal balance of ©.
Liability’ Revenue’ and Capital accounts (on the right side of the equation) have a normal balance
of ©. On a general ledger’ debits are recorded on the left side and credits on the right side for
each account. Since the accounts must always balance’ for each transaction there will be a debit
made to one or several accounts and a credit made to one or several accounts. The sum of all debits
made in any transaction must equal the sum of all credits made. After a series of transactions’
therefore’ the sum of all the accounts with a debit balance will equal the sum of all the accounts with
a credit balance.

Debits and credits are then defined as follows:

Ë ?: A debit is recorded on the left hand side of a T account. it can also be defined as increase
in asset and expenses while decrease in liability’ revenue and capital.
Ë 0©: A credit balance is recorded on the right hand side of a 'T' account Credit can also be
defined as increase in liability’ revenue and capital and decrease in assets and expenses.
Ë ?

 = Asset and Expenses (also debit money received into bank accounts)
Ë 0©

 = Gains (income) and Liabilities (also credit money paid out of bank accounts)
Debit Credit

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 Double entry example 1

In this example the following will be used:

Books of prime entry (Books of original entry)

Ë Sales Invoice Daybook (records customer invoices)

Ë Bank Receipts Daybook (records customer & non customer receipts)
Ë Cash book
Ë Return inwards day book
Ë Return outwards day book
Ë Purchase Invoice Daybook (records supplier invoices)
Ë Bank Payments Daybook (records supplier & non supplier payments)

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Ledger Cards

Ë Customer Ledger Cards

Ë Supplier Ledger Cards
Ë General Ledger (Nominal Ledger)
Ë Bank Account Ledger
Ë Trade Creditors Ledger
Ë Trade Debtors Ledger
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Î rchase Invoice Daybook

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ier Name Reference Amo nt Eectricity Widgets

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Each individual line is posted as follows:

Ë The amount value is posted as a credit to the individual 


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Ë The analysis amount is posted as a debit to the relevant 
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From example above:

Ë Line 1 - u
 value 1000 is posted as a credit to the 
 ledger a/c ELE01-Electricity
Company
Ë Line 2 - u
 value 1600 is posted as a credit to the 
 ledger a/c WID01-Widget
Company

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 total value 2600 posted as a credit to the d©

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Ë - total value 1000 posted as a debit to the -

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Ë [©  total value 1600 posted as a debit to the [© 

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  has been observed because Dr = 2600 and Cr = 2600.
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The payments book is not part of the double-entry system.

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iers Wages

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Each individual line is posted as follows:

Ë The amount value is posted as a debit to the individual 


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Ë The analysis amount is posted as a credit to the relevant 
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From example above:

Ë Line 1 - u
 value 1000 is posted as a debit to the 
 ledger a/c ELE01-Electricity
Company.
Ë Line 2 - u
 value 900 is posted as a debit to the 
 ledger a/c WID01-Widget
Company.

The totals of each column are posted as follows:

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 total value 2300 posted as a credit to the #

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Ë d©
0©  total value 1900 posted as a debit to the d©
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Ë ë  total value 400 posted as a debit to the [ 
  
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 has been observed because Dr = 2300 and Cr = 2300.

The daybooks are the key documents (books) to the double entry system. From these daybooks we
create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.

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ier Ledger Cards

A/c Code: ELE01 - Eectricity Com
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A/c Code: WID01 - Widget Com
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Each individual line is posted as follows:

Ë The amount value is posted as a debit to the individual 
 

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From example above:

Ë Line 1 - u
 value 2500 is posted as a debit to the 0
  ledger a/c JJM01-JJ
Manufacturing.
Ë Line 2 - u
 value 3200 is posted as a debit to the 0
  ledger a/c JJM01-JJ
Manufacturing.

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 The totals of each column are posted as follows:

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 total value 5700 posted as a debit to the d©

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Ë ! total value 3200 posted as a credit to the 
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 has been observed because Dr = 5700 and Cr = 5700.


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Customer Ledger cards are not part of the Double-entry system. They are for memorandum purposes
only. They allow you to know the total amount an individual customer owes you.

CUSTOMER LEDGER CARDS

A/c Code: JJM01 - JJ Man fact ring

Date Detais Reference Amo nt Date Detais Reference Amo nt

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GENERAL (NOMINAL) LEDGER

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Date Detais Reference Amo nt Date Detais Reference Amo nt

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Saes service

Date Detais Reference Amo nt Date Detais Reference Amo nt

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Eectricity

Date Detais Reference Amo nt Date Detais Reference Amo nt

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Date Detais Reference Amo nt Date Detais Reference Amo nt

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Date Detais Reference Amo nt Date Detais Reference Amo nt

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†ank Contro A/c

Date Detais Reference Amo nt Date Detais Reference Amo nt

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Trade Debtors Contro A/c

Date Detais Reference Amo nt Date Detais Reference Amo nt

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Trade Creditors Contro A/c

Date Detais Reference Amo nt Date Detais Reference Amo nt

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The customers ledger cards shows the breakdown of how the trade debtors control a/c is made up.
The trade debtors control a/c is the total of outstanding debtors and the customer ledger cards shows
the amount due for each individual customer. The total of each individual customer account added
together should equal the total in the trade debtors control a/c.

The supplier ledger cards shows the breakdown of how the trade creditors control a/c is made up.
The trade creditors control a/c is the total of outstanding creditors and the suppliers ledger cards
shows the amount due for each individual supplier. The total of each individual supplier account
added together should equal the total in the trade creditors control a/c.

Each Bank a/c shows all the money in and out through a bank. If you have more than one bank
account for your company you will have to maintain separate bank account ledgers in order to
complete bank reconciliation statements and be able to see how much is left in each account.

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Tria baance as at D1 J y 2006

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Debits = Credits.

The individual customer accounts are not to be listed in the trial balance’ as the Trade debtors control
a/c is the summary of each individual customer a/c......

The individual supplier accounts are not to be listed in the trial balance’ as the Trade creditors control
a/c is the summary of each individual supplier a/c.

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: this example is designed to show double entry. There are methods of creating a trial
balance that significantly reduce the time it takes to record entries in the general ledger and trial
balance.

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for the month ending D1 J y 2006

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Double Entry Example 2

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XYZ Company is closing its books for the end of the month. Each of the daily journals has been
summarized and the amounts are ready to be transferred to the general ledger. The amounts to be
transferred are:

Ë Purchase raw materials on trade credit: 500’000

Ë Pay workers from cash in bank to make goods: 1’500’000
Ë Pay sales force from cash in bank to sell goods: 1’000’000
Ë Sell goods for cash: 3’500’000

To close the books for the month’ we will adjust expenses and revenue to zero by appropriately
crediting and debiting the income summary and then closing the income summary toretained
earnings (part of equity).

These items are entered in the ledger below; each matching credit and debit have been numbered to
make finding them in the ledger easier.



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enses


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Tota a
1D500 1D500
acco nts:

The amount in equity (in the form of retained earnings) has changed with a net credit of 500’000.
Since equity has a normal balance of credit’ this means there is now 500’000   in equity than at
the beginning of the month.

See also

Ë Nostro and vostro accounts

Ë Single-entry accounting system
Ë Momentum Accounting and Triple-Entry Bookkeeping
Double Entry in Medical Research Databases

While double data entry is considered to be the gold standard approach in rectifying erroneous
entries in medical research database. However’ as double-entry needs to be carried out by two
separate data entry officers’ the expenses associated with double data entry are substantial.
Moreover’ in some institutional setup this could not be possible. Therefore M Khushi et al. suggests
[12]
another semi automatic techniques called 'eAuditor'. Using eAuditor’ it was identified that human
entry errors range from 0.01% when entering donor's clinical follow-up details’ to 0.53% when
entering pathological details’ highlighting the importance of an audit protocol tool such as eAuditor in
a medical research database[13].

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 Notes and references

1. ƒ G. A. Lee (1977)’ "The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of
1299-1300"’ u

$ 
%
’ o%: 79-95
2. ƒ Luca Pacioli: The Father of Accounting
3. ƒ La Riegola De Libro
4. ƒ Livio’ Mario (2002). d 
 ©
& . New York: Broadway Books. pp. 130±131. ISBN 0-
7679-0816-3.
5. ƒ of Croatian Science’ 15th-19th centuries
6. ƒ Essay title - Financial Accounting And Accountants
7. ƒ SIESC 2007 in CROATIA
8. ƒ Accounting History
9. ƒ SIESC 2007 in CROATIA
10. ƒ 

 


  
 

'  

 ©
  Alfieri’ Vittorio (Prof.)’ 


© 




©
 
(©

!(" G.B.
Paravia’ 1891’ Original from Columbia University’ Alfieri’ Chapter XIII’p. 117
11. ƒ u
 
$ 
 ©
)
* (First ed.). Tamil Nadu Textbooks Corporation.
2004. pp. 28-34. Retrieved 12 July 2011.
12. ƒ M. Khushi; J. Carpenter; R. Balleine; C. Clarke (2011). "Development of a data entry
auditing protocol and quality assurance for a tissue bank database.". 0
©
d


# . doi:10.1007/s10561-011-9240-x. PMID 21331789.

13. ƒ M. Khushi; J. Carpenter; R. Balleine; C. Clarke (2011). "Development of a data entry
auditing protocol and quality assurance for a tissue bank database.". 0
©
d


# . doi:10.1007/s10561-011-9240-x. PMID 21331789.

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