3.

0 THE DOUBLE-ENTRY SYSTEM AND THE ACCOUNTING PROCESS

3.1 Introduction
In the first lecture notes it was noted that accounting has developed from use of clay tablets,
paper and then to automation but the basic double –entry system/ principle has not changed.
This double-entry system has to be mastered and practised as it is fundamental to the
Accounting practice now and in subsequent studies you will undertake.
It was said that for every transaction One account is credited and another one Debited. Of
course we said Credit the giver and Debit the receiver. In actual fact the transaction involves
Accounts not Hands. It’s a simplification for us all to understand how accounting operates.
You have to realise as well that the accounts are either of Assets, Capital or Liabilities that
we covered earlier on.
3.2 The Double-entry system
When an account is credited, we enter the transaction on the right hand side. When an
account is debited, then the transaction is entered on the left hand side.
Imagine the following transaction took place between Bvuks Services (our business) and
Boterex Services in Shurugwi: Bvuks Services washed Boterex Services’ cars and were paid
cash $56.00 in US Dollars on 2 November 2019 deposited into Bvuks Services bank account.
There are two accounts involved at Bvuks Services: its Fees earned/ Income and Bank. Fees
earned/ Income gave to Bank which received this $56.00. So, Fees earned/Income is Credited
(Cr)and Bank Debited (Dr).We will have this transaction recorded in Bvuks Services books
in what are called T accounts.
The T-account is actually in the shape of a T as follows:
Dr Income (fees) Cr
2019 Bank 56.00
Nov 2

Dr Bank Cr
2019 Income 56.00
Nov 2

The transaction is thus recorded twice, or there is double entry of the same transaction. In the
Income account on the Cr side as it gave to Bank, where it is recorded on the Dr side. This
completes the Double-entry system of recording transactions twice in our books of accounts.
There are a few points to take note of when we record transactions twice in our books of
accounts, that is, for us to complete the Double-entry system.
 Let us closely look at the T-account It has the following columns:
 Dr Name of Account Cr
Date Details Folio Amount Date Detail Folio Amount

 When you record a transaction in the books of accounts you need to identify the
accounts involved in the transaction, which one is to be credited/ the one giving the
monetary value, and the one receiving the same monetary value.

 Record the same amounts on the same date; one on the right/ credit side the other on
the left/ debit side.

 In our recorded transaction in Bvuks Services book, there is what is called the contra
account in one account. For example, if we are in the Bank account, the contra
account is Income. So, once you see Income in the Bank account, it means the second
recording of this same transaction is in the Income account. It is the contra account.

 If we are in the Income account, we see Bank in the Details column. This means the
Bank account is the contra account. One account refers to the other account.

 Notice we have a Folio column. This is the column showing the page on which the
contra account is recorded in the ledger. The ledger is the collection of all the
accounts the entity has. We will deal with this later on.

 A few tips on these accounts: all the income, capital and liability accounts give the
monetary value, so they are credited. All the expense, assets and purchase accounts
receive the monetary values.

 PEARLSC could help you to remember this where we have:

 Purchases of goods for trading

 Expenses of doing business

 Assets that the entity owns and uses to generate income

 Revenue from trading activities for a Retailing entity

 Liabilities the entity acquired to boost its funds for expansion of the business or to
cover pending cash inadequacies (Remember those Deficits? Good)

 Sales made by the entity as it trades

 Capital that the owner(s) brought into the business in expectations of a return in the
form of a profit/ dividend.
3.3 Exercise
The following are the transactions Mandy Bvukururu’s own car washing business went
through when she started this business on 1 September 2019 in Shurugwi town.
Table 3.1 Transactions for Double-entry in Bvuks Services in September 2019

Transaction date Transaction details

01 Mandy Bvukururu realised there was a need for car washing service in
Shurugwi. She withdrew $13,000.00 USD from her personal savings
account and deposited it in the bank account of her new business she
called Bvuks Services

02 Bvuks Services negotiated for a loan from ZB Bank worth $2,500.00

which the bank deposited into Bvuks Services bank account. The
agreement of the loan was that the loan be paid back over more than a
year.

06 Bvuks Services bought car washing equipment from Shurugwi General

Dealers worth $10,000.00 and paid by a cheque.

10 Bvuks Services acquired some second-hand furniture from Takurai

Household Electricals for $200.00 on credit.

11 Bvuks Services paid Takurai Household Electricals’ account of $200.00

12 Mandy Bvukururu withdrew $100.00 for her own use.

13 Bvuks Services car-washed Ndalama’s vehicles for cash and received a

cheque worth $100.00.

16 Bvuks Services paid their employees’ wages by cheque, $80.00

18 Bvuks Services offered car washing services to Tugwi Mukosi on credit.

The service was worth $600,00.

21 Bvuks Services advertised in a local radio station and were charged

$20.00.Payment is expected in 30 days time.

30 Tugwi Mukosi paid $200.00 on his account promising to fully pay the
balance the following month. This was accepted.

Required:
i) Open all the relevant accounts in the ledger and balance them off. The Bank account has
been done for you below.
Answer for Bank account.
i) Dr Bank Cr
Date Details Fol Amount Date Details Fol Amount
1/9/19 Capital 13,000 6/9/19 Equipment 10,000
2/9/19 Loan 2,500 11/9/19 Creditors 200
 13/9/19 Fees earned 100 12/9/19 Drawings 100
30/9/19 Debtors 200 16/9/19 Wages 80
30/9/19 Balance c/d 5,420

15,800 15, 800

1/10/19 Balance b/d 5,420

3.4 The Trial Balance

A Trial Balance is defined as the extracted list of all balances brought down (b/d) for all the
accounts in the general ledger at a given date. Some accounts have Credit balances b/d while
others have Debit b/d. The total of these balances b/d will balance. This is to say the Cr and
Dr balances will be equal.
The reasons for extracting the Trial Balance are:
 To check for arithmetic accuracy of our transactions. If some additions or subtractions
were not done accurately, the Trial Balance will not balance.
 To ascertain that the Double-entries were done accurately and completely. If some
transactions had only one entry, the Trial Balance will not balance.
 Lastly, the Trial Balance is the basis for producing financial statements to be
communicated to interested users for decision-making purposes.

3.5 Bvuks Services

Trial Balance as at 30 September 2019.

Dr Cr

$ $

Bank 5,420.00

Equipment 10,000.00

Furniture 200.00

Debtors 400.00

Capital 13,000.00

Drawings 100.00
Loan 2,500.00

Creditors 20.00

Wages 80.00

Advertisement 20.00

Fees earned/ Income 700.00

16,220.00 16,220.00

Notice that all Assets and Expenses accounts have Dr b/d and are all entered on the debit side
of the Trial Balance. Fees earned/ Income, Liabilities and Capital accounts are credited and
their b/d are entered on the credit side in the Trial Balance.
Drawings are not an expense of doing business but a reduction of the capital invested in the
business by the owner. The owner will be reducing the invested capital, so the business will
owe her/him less capital. No income is generated by the Drawings from the business.
3.5.1 Home work
There are errors that are shown by the Trial Balance. List them
There are errors not shown by the Trial Balance. List them.
3.6 Financial Statements
Now that the Trial Balance has balanced, there is need to produce the financial statements for
interested users to make decisions on. These financial statements are dealt below.

3.6.1 The Statement of Income and Expenditure and Other Comprehensive Income.
The Trial Balance above gives us the information to produce this statement which determines
the performance of the entity for the month of September 2019.
Bvuks Services
Statement of Income and Expenditure and Other Comprehensive Income for the month
ended 30 September 2019.

Note $

Revenue 2 7,00.00

Distribution, administration and other expenses (100.00)

Wages 80.00

Advertisements 20.00
Profit for the month 600.00

Other comprehensive income for the month -----

Total comprehensive income for the month 600.00

The Other comprehensive income could be Rent income, Interest income, profit on disposal
of an asset or Bad debts recovered. Notice that Bvuks Services offers services, not retail
goods, hence we produce a Statement of Income and Expenditure. If Bvuks sold goods/
merchandise/ stock, we would have a Statement of Profit or loss and other Comprehensive
income. Income and expenditure accounts are classified as nominal accounts.
Revise your Accrual, matching and realisation principles again.
The Total Comprehensive Income for the month will be taken to the Statement of Changes in
Equity.
3.6.2 Statement of Changes in Equity.
The owner wants to know whether her/his initial invested capital has increased/ decreased in
the given financial period.

Bvuks Services
Statement of changes in equity for the month ended 30 September 2019.

Balance at 1 September 2019 13,000.00

Additions -----------

Total Comprehensive income for the month 600.00

Drawings (100.00)

Balance at 30 September 2019 13,500.00

Profit increased equity and conversely, a loss decreases equity. If the owner put in more
capital in the form of cash, brought in assets from elsewhere, these assets ( vehicle, furniture
or buildings) will be given a monetary value and her/his capital will be credited and
increased. In our example Mandy Bvukururu did not bring more such capital.
The Balance at end of financial period will be taken to the Statement of Financial Position.
3.6.3 Statement of Financial Position
Remember, we are now doing this for the second time but the statement will not be horizontal
as it will be vertical. Assets = Equity + Liabilities will not change.
The assets are made up of Non-current assets and Current assets $(10,200.00+5,820.00)
Non-currents are expected to be used for a long period exceeding a year but current assets
will be used up in operations within the year. The same explanation will apply to liabilities.
Also, note that the owner is now owed $13,500.00 by the entity whose books we are doing.
Other interested persons are in the form of Loan givers and suppliers of goods and services
on credit.

Bvuks Services
Statement of Financial Position as at 30 September 2019.

ASSETS Note $

Non-current assets 10,200.00

Property, plant and equipment 3 10,200.00

Current assets 5,820.00

Debtors 400.00

Cash and cash equivalents/ Bank 5,420.00

Total assets 16,020.00

EQUITY AND LIABILITIES

Capital 13,500.00

Non-current Liabilities

Long-term borrowings 2,500.00

Current Liabilities
Creditors 20.00

Total Equity and Liabilities 16,020.00

3.6.4 Notes to the financial statements.

The financial statements of Bvuks Services had some notes. Note 2 was on the Statement of
Income and Expenditure and Other Comprehensive Income while Note 3 was on the
Statement of Financial Position. Note 1 is not on any of these statements as it is the
Accounting policy of the entity.
Bvuks Services
Notes for the month ended 30 September 2019.
1. Accounting policy:
The financial statements have been prepared on the historical cost basis and comply with
Generally Accepted Accounting Practice (GAAP).
2. Revenue represents fees earned for services rendered to our clients or third parties.
3.

Property, plant and equipment Equipment Furniture Total

$ $ $

Carrying amount: Beginning of the month ---- ----- -----

Cost ------- ------- -----

Accumulated depreciation (--------) (-------) (-------)

Additions 10,000.00 200.00 10,200.00

Depreciation (-------) (---------) (----------)

Carrying amount: End of month 10,000.00 200.00 10,200.00

Cost 10,000.00 200,00 10,200.00

Accumulated depreciation (--------) (-------) (-------)

Note that no depreciation charges were provided for in this month.

Homework: Suppose Bvuks Services is now producing financial statements in the third year
and it has provided for depreciation for its non-current assets as follows:
For Equipment it provided for depreciation at 20% per annum using the Reducing balance
method and for Furniture at 10% per annum using the straight line method.
Required: Present Note 3 in year three.

3.6.5 Exercise
The following transactions in the month of October 2019 are for Tabve Mvuma, a geologist
in the area of Makuti:

Date Transactions Amount

2019 Oct $

01 T Mvuma, the sole owner, deposited his savings into his 10,000.00
business as his start-up capital.

03 T Mvuma negotiated a bank loan from the Youth Bank. 6,000.00

Payment is due after a year

05 Acquired survey equipment on credit from Karoi Dealers 1,000.00

10 Advertised on Capital Radio and paid by cheque. 200.00

12 Paid by cheque the Internet account. 75.00

14 Got a bank transfer from Pompi yaDonha for services 500.00

rendered.

16 Drew a cheque for his own use. 2,000.00

22 Tabve Mvuma transferred his pick-up into his business to 9,000.00

boost his capital injection in the business

28 Paid salaries by RTGS to his employees 2,000.00

30 Paid by cheque to the Youth Bank as part of his agreed 1,500.00

upon repayment plan on the loan he was advanced.

Required:
a) The appropriate ledger accounts showing the above transactions in the month of October
all properly balanced or closed. You are expected to show the correct contra ledger account.
b) The Trial Balance as at 31 October 2019.
c) The Statement of Income and Expenditure for the month of October 2019.
d) The Statement of Changes in Equity for the month of October 2019.
e) The Statement of Financial Position as at 31 October 2019.
f) The Explanatory Notes to the financial statements.