Introduction to Accounting

Chapter 2
Double Entry Book Keeping and Books of Original Entry

The duality concept and double entry bookkepping

 Each transaction that a business enters into affects the financial statement in two ways.
 For example: A business buys a non-current asset for cash.

Increase Decrease

 To follow the rules of double entry bookkeeping, each time a transaction is recorded, both effects
must be taken into account.
 These two effects are equal and opposite such that the accounting equation will always prove correct:

Capital = Assets - Liabilities

 Traditionally, one effect is referred to as the debit side (abbreviated to Dr) and the other as the credit
side of the entry (abbreviated to Cr)

Ledger accounts, debits and credits

 Transactions are recorded in a relevant __________________. There is a ledger account for each
asset, liability, revenue and expense item.
 Each account has two sides – the __________ and ________ sides.

Name of Account
Debit (Dr) Credit (Cr)
Date Narrative RM Date Narrative RM

 The duality concept means that each transaction will affect two ledger accounts.
 One account will be debited and the other credited.
 Whether an entry is to the debit or credit of an account and the transaction.

Debit Credit
Increase in: Increase in:
Expense (Income Statement) Liability (Balance Sheet)
Asset (Balance Sheet) Income (Income Statement)
Drawings (Balance Sheet) Capital (Balance Sheet)

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 8
Recording cash transactions
 Cash transactions are those where payment is or received immediately.
 Cheque payments or receipts are classed as cash transactions.
 Double entry involves the bank ledger:
Debit Credit
Funds are received Funds are paid out

 Example:
Show the following transactions in ledger accounts:
(i) Kamran pays RM80 for rent by cheque.
(ii) Kamran sells goods for RM230 cash which he banks.
(iii) He then takes RM70 out of business for his personal living expenses.
(iv) Kamran sells more goods for cash, receiving RM3,400.

Solution:

Bank
RM RM

Sales
RM RM

Rent
RM RM

Drawings
RM RM

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 9
Recording credit and cash/cheque sales and purchases
 Credit sales and purchases are transactions where goods or services change hands immediately, but
payment is not made or received until some time in the future.
 Money that a business is owed is accounted for in the receivables ledger.
 Money that a business is owned is accounted for in the payables ledger.

Example 1: Purchase of inventory on credit

Goods costing RM165 are bought on credit from D. Henry.

Solution:
Double entry: Dr ______________, Cr ________________

Purchases
RM RM

D. Henry (Account Payable)

RM RM

Example 2: Purchase of inventory by cheque

Goods costing RM22 are bought, cheque being paid immediately.

Solution:
Double entry: Dr ______________, Cr ________________

Purchases
RM RM

Bank
RM RM

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 10
 Example 3: Sales of inventory on credit
Goods were sold on credit for RM250 to J. Lee.

Solution:
Double entry: Dr ______________, Cr ________________

Sales
RM RM

J Lee (Account Receivable)

RM RM

Example 4: Sales of inventory for cash

Goods are sold RM55, cash being received immediately upon sale.

Solution:
Double entry: Dr ______________, Cr ________________

Sales
RM RM

Cash
RM RM

Recording sales and purchase returns

 It is normal for customers to return unwanted goods to a business; equally the business will
occasionally have cause to return unwanted goods to their supplier.
 The double entries arising will depend upon whether the returned goods were initially
purchased on credit:
Originally Credit Transaction Originally Cash Transaction
Sales returns Dr Returns Inwards Dr Returns Inwards
(Returns Inwards) Cr Receivables Cr Cash
Purchases returns Dr Payables Dr Cash
(Returns Outwards) Cr Returns Outwards Cr Returns Outwards

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 11
 Example 1: Returns inwards
Goods which had been previously sold to F. Lowe for RM29 are returned to the business.

Solution:
Double entry: Dr ______________, Cr ________________

F Lowe
RM RM

Returns Inwards
RM RM

Example 2: Returns outwards

Goods previously bought for RM96 are returned by the business to K. Howe.

Solution:
Double entry: Dr ______________, Cr ________________

K Howe
RM RM

Returns Outwards
RM RM

Accounting for discounts

 Discounts may be given in the case of credit transactions for prompt payment.
 A business may give its customer a discount – known as discount ___________.
 A business may receive a discount from a supplier – known as discount ______________.
 Double entries for discounts are as follows:
Discount allowed Dr Discount Allowed (Expense)
Cr Receivables
Discount received Dr Payables
Cr Discount Received (Income)
 Example:
George owes a supplier, Herbie, RM2,000 and is owned RM3,400 by a customer, Iris. George offers
a cash discount to his customers of 2.5% if they pay within 14 days and Herbie has offered George a
cash discount of 3% for payment within ten days. George pays Herbie within ten days and Iris takes
advantages of the cash discount offered to her. What ledger entries are required to record these
discounts?

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 12
 Solutions:

Payables (Herbie)
RM RM

Receivables (Iris)
RM RM

Discounts Received
RM

Discounts Allowed
RM

Balancing off a balance sheet ledger account

 Once the transactions for a period have been recorded, it will be necessary to find the balance on the
ledger account:
(i) Total both sides of the T account and find the larger total.
(ii) Put the larger total in the total box on the debit and credit side
(iii) Insert balancing figure to the side of the T account which does not currently add up to the
amount in the total box. Call this balancing figure “bal c/f” (carried forward) or “bal c/d”
(carried down)
(iv) Carry the balance down diagonally and call it “bal b/f (brought forward) or “bal b/d” (brought
down)
 Illustration: Balance off the following account

Cash
RM RM
Capital 10,000 Purchases 200
Sales 250 Rent 150
Electricity 75

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 13
The Trial Balance
 Once the ledger accounts have been balanced off a trial balance is prepared.
 A trial balance is a list of the “bal c/d” on the ledger accounts according to whether they are on the
debit or credit side.
 Format:

Trial Balance as at 31 December 2008

Dr (RM) Cr (RM)
Sales X
Purchases X
Receivables X
Payables X

Notes:
Debit Credit
Assets Liabilities
Expenses Income
Capital

 The purposes of a trial balance :

o To check that for every debit entry made, an equal credit entry has been made.
o As a first step in preparing the financial statements.

Books of Prime Entry

 If ledgers were updated each time a transaction occurred, the ledger accounts would quickly become
cluttered and errors might be made.
 To avoid this, all transactions are initially recorded in a book of prime entry
 Several books of prime entry exist, each recording a different type of transaction:
Books of Prime Entry Transaction Type
Credit sales
Credit purchases
Returns of goods bought on credit
All receipts and payments of cash and cheque
transactions
All small cash transactions
All transactions not recorded elsewhere

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 14
Sources of Information
 All entries into these books of original entry must be supported by one of the following
document:
Sources of Document Transaction Type
Sent by the seller to the buyer to inform the latter
of the amount due on goods or services supplied.
Sent by the seller to the buyer when goods have
been overcharged or when the latter returns
goods.
Sent by the seller to the buyer as an additional
invoice when the latter has been undercharged.
Information such as cheque number, name of
paying bank and amount received are noted
before the cheque is banked in. Likewise,
information such as cheque number, payee’s
name and amount paid are obtained from
counterfoils of cheques that have been paid out.
Acknowledgement of payment made.
Cash receipt that is issued whenever cash is paid
into a cash register.
Document signed by an officer authorising
payment from the company’s petty cash. This is
used as evidence of payment whenever it is not
possible to obtain a receipt.

Purchases Journal / Purchases Day Book

 A list recording all credit purchases.
 Entries are supported by purchase invoice received from suppliers.
 Details in the purchase journal:
o Date
o Name of supplier
o The reference number of the invoice
o Folio column
o Final amount of invoice

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 15
EXAMPLE

Juliana Sdn. Bhd. received the following invoices from Perdana Enterprise and Wira book Center.

ORIGINAL PERDANA ENTERPRISE INVOICE

211, Jalan Muhamad,
84000 Johor Bahru.
To:

Juliana Sdn. Bhd Date: 13 May 2004

470, Jalan Mutiara, Order No: 302/00

60250 Kuantan Invoice No: 5601

Reference No. Particular Quantity Unit Price(RM) Total(RM)

H 401 Pen TR 60 boxes 20 1,200
B 411 Pen CR 50 boxes 30 1,500
Pen KR 100 boxes 10 1,000
Gross Total 3,700
Less trade Discount 10% 370
Net Total 3,330

Term: 5% - 7 days; 2% - 14 days Alan

ORIGINAL WIRA BOOK CENTER INVOICE

30-02, Jalan Leong Seng Hup,
30250 Ipoh.
To:

Juliana Sdn. Bhd Date: 20 May 2004

470, Jalan Mutiara, Order No: 556

60250 Kuantan Invoice No: S368

Particular Quantity Unit Price(RM) Total(RM)

Financial Management – DP 40 56 2,240
Cost Handbook – L Publication 30 66 1,800
4,040
Less trade discount 10% 404
TOTAL 3,636

Terms of Payment: 5% within 15 days John

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 16
Step 1: Record credit purchases in Purchases Journal
JULIANA SDN. BHD.

Purcheses Journal

Page 14
Date Particulars Invoice Folio Details of Amount
No. Invoice (RM)
2004
May 13
5601 PL 30

20
S368 PL 24

31 GL 5

Step 2: Posting of credit purchases from Purchases Journal to the Ledger Account

PURCHASES LEDGER

Perdana Enterprise Page 30

2004 RM
May PJ 14

Wira Book Center Page 24

2004 RM
May PJ 14

GENERAL LEDGER

Purchases Page5
2004 RM
May
PJ 14

OR
Purchases Page 5
2004 RM
May 13 Perdana Enterprise PJ 14 3,330
Wira Book PJ 14 3,636
6,966

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 17
 Dr. Purchases Account (in General Ledger)
Cr. Account Payables (in Purchases Ledger)

Sales, Returns Inwards, Returns Outwards Journals

 The format of the remaining journals is similar to that of the purchases journal. The double
entries arising are:
Returns Outwards Journal Dr. Account Payables (in Purchases Ledger)
Cr. Returns Outwards Account (in General Ledger)
Sales Journal Dr. Account Receivables (in Sales Ledger)
Cr. Sales Account (in General Ledger)
Returns Inwards Journal Dr. Returns Inwards (in General Ledger)
Cr. Account Receivables (in Sales Ledger)

The Journal
 The journal is a book of prime entry which records transactions which are not routine (and not
recorded in any other books of prime entry), for example:
o Year end adjustments:
 Depreciation charge for the year
 Irrecoverable debt write-off
 Record movement in allowance for receivables
 Accruals and prepayments
 Closing inventory
o Acquisitions and disposals of non-current assets
o Opening balances for balance sheet items
o Correction of errors
 Presentation of a General Journal:

General Journal
Date Particulars Folio Debit Credit
2008 RM
June 20

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 18
Example1:Purchase of Non-current Assets
Motor vehicle is bought from Global Motors on credit for RM4,500 on 20 June 2003.

Step 1: Write up the transactions into the General Journal as follows:

Journal
Date Particulars Folio Debit Credit
2003 RM RM
June 20 GL 1 4,500
PL 55 4,500

Step 2: Posting from Journal to the Ledger.

GENERAL LEDGER

Motor Vehicle Page 1

2003 RM
June 20

PURCHASES LEDGER

Global Motors Page 55

2003 RM
June 20

Example 2:Opening Entries

Ali who has been doing business for some time without keeping proper records, now decides to employ a
qualified book-keeper to keep his books for him.

On 1 Jan, he establishes that he has the following:

RM
Assets: Premises 20,000
Motor Van 3,000
A/c receivables – John 100
- Raju 200
Inventory 200
Cash 300
Total 23,800

Liabilities: Bank Overdraft 4,000

A/c payables – Mike 500
- Huang 300
4,800

Suggested Answer:
His capital will consists of: Assets – Liabilities
= RM23,800 – RM4,800
=

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 19
Step 1: To begin writing the books, these items must be entered into the Journal.

Journal Page 5
Date Particulars Folio Debit Credit

Step 2: Posting the Journal entries to the Ledger or cash Book to open the accounts.

GENERAL LEDGER

Premises Page 1
RM

Motor Van Page 4

RM

Inventory Page 7
RM

Capital Page 20
RM

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 20
 SALES LEDGER

John Page 3
RM

Raju Page 5
RM

PURCHASES LEDGER

Mike Page 10
RM

Huang Page 16
RM

Cash Book Page 2

Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank
RM RM RM RM

Example 3:Transactions Not Recorded in Other Journal

a) Stock worth RM50 is taken out as samples for an advertising campaign on Jan 1:

Journal page 1
Date Particulars Folio Debit Credit
RM RM

GENERAL LEDGER
Advertising page 5
RM

Purchases page 9
RM

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 21
b) A debt of RM78 owed by Amanda is written off as a bad debt on 31 Aug 2003.

Journal page 2
Date Particulars Folio Debit Credit

GENERAL LEDGER
Bad Debts page 6
RM

SALES LEDGER
Amanda page 7
RM

Chapter 2: Double Entry Book Keeping and Books of Original Entry Page 22