The Double Entry System

Accounting

Accounting has been defined as the art of recording business transactions in a regular and

systematic manner. In doing this, the following factors need to be attended to:

 Details of each separate transaction must be recorded

 Details of each group of separate transaction must be recorded

 Details of all of the transactions must be recorded

In carrying out business transactions there has to be two parties for this to be done. In like

manner to every transaction carried out there are two sides. When for example Tom sells

a pen to Jim for $100 cash on January 1, 2011, two things happen to both Tom and Jim.

Let us look at what happens to Tom:

1. He gives up 1 pen

2. He receives $100 cash

On the other hand the opposite happens to Jim:

1. He receives I pen $100

2. He gives up $100

So let us assume that both Tom and Jim keep accounting records. What will we see in

Tom and Jim books?

Tom will have to show that he has one pen less as a result of the sale; but he will have to

show also that he now has $100 more in cash. Jim will have to show in his books that he

has one pen more but $100 less in cash.

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The above example indicates that for every transaction there are two sides affecting each

party, each of which must be recorded in each party’s books if accounting is to be

credible. So in our simple example Tom will record two aspects about the sale of the pen

and Jim will record two aspects also. This example provides an explanation of the

fundamental principle on which accounting is grounded and must never be lost sight of

by accounting practitioners. It is the principle of Double Entry Accounting. This principle

originated by merchants in Venice Italy during the fifteenth century allows for the

recording of the two fold aspect of every transaction. It advocates that “for every debit

entry there has to be a corresponding credit entry and vice versa”. But what is meant by

debit and credit? We use what are called T Accounts to record accounting transactions.

The typical T Account has two sides:

 The left hand side is called the debit side and entries placed on this side are said

to be debited.

 The right hand side is called the credit side and entries placed on this side are

said to be credited.

Basic rules for recording using Double Entry Principle:

In recording transaction using the Principle of Double Entry the following fundamental

principle holds true every time. It is to be learned and followed precisely.

(a) The receiver (receiving account) is charged or debited with the money value of

whatever he or it receives. An account can be “it” as we will see later.

(b) The giver (giving account) is credited with the same amount which is the money

value of whatever he or it gives up.

Let us now see how we would record the above transaction in the books of Tom and Jim:

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In Tom’s Books

 Debit Cash Account(the receiving account)

 Credit Sales Account (the giving account)

In Jim’s Books the entries will be:

 Debit Purchases Account (the receiving account)

 Credit Cash Account (the giving account)

Now, if we follow this principle we cannot go wrong as all accounting transaction is

guided by this principle. The T Accounts would appear in Tom and Jim’s books as

follows:

Debtor/creditor

Tom’s Ledger

Dr Cash Account Cr

01/01/11 sales 100

Dr Sales Account Cr

01/01/11 Cash 100

Jim’s Ledger

Dr Purchases Account Cr

01/01/11 cash 100

Dr Cash Account Cr

01/01/11 purchases 100

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Note: Pay attention to the details of the T Account:

 The abbreviations Dr for debit and Cr for credit

 The date

 The narration in each T account that refers to the other account or accounts which

complete the double entry

Treatment of credit transactions:

Business transactions are carried out either for cash or for credit. When transactions are

done for cash it is dealt with as above. There is no need to open any account in the name

of the buyer or the seller as the deal is sealed with cash. However, if the transaction is

done for credit a different scenario arises. The fact that one party now owes the other

party creates a debtor and creditor relationship. A debtor is one who owes money while a

creditor is someone to whom money is owed. A credit transaction is one in which

someone receives goods or service and pays at a later date.

Let us assume that on January 1, 2011 Tom sold a pen to Jim on Credit for $100 and that

Jim paid the $100 in cash on January 25, 2011. What will now be the entries necessary to

record these transactions? It must be noted that there are now two transactions involved

in each party’s books in this scenario:

In Tom’s Books:

1. When the sale was made.

2. When cash was received.

These are two separate transactions that must be dealt with individually.

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In Jim’s Books Purchases; Tom (creditor)

Dr $100 ; Cr $100

In Tom Book Sales Jim (debtor)

Cr $100 Dr $100

Jim Ledger

Dr Purchases Cr Dr Tom Cr

1/1/11 Tom 100 25/1/11 cash 100 1/1/11 Pur 100

Dr Cash Cr

25/1/11 Tom 100

Toms Ledger

Dr Sales Cr Dr Jim Cr

1/1/11 Jim 100 1/1/11 sales 100 25/1/11 cash 100

Dr Cash Cr

1/1/11 Jim 100

1. When the purchase was made

2. When cash was paid.

These are two separate transactions that must be dealt with individually

How will these transactions be recorded in each party’s books? We will first look at the

debit and credit entries that will have to be made:

In Tom’s Books:

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 (a) When making the sale: Debit Jim’s Account with $100 (Jim is the receiving

account) and Credit the Sales Account with $100 (the Sales Account is the

account giving up the pen).

(b) When receiving payment in cash for the pen: Debit Cash Account with $100 (the

Cash Account is the receiving Account) and Credit Jim’s Account with $100

(Tim’s Account is the giving account).

Note: When the above entries are completed Jim will no longer be a debtor in Tom’s

books.

In Jim’s Books:

(a) When making the purchase: Debit Purchases Account with $100 (the receiving

account) and Credit Tom’s Account with $100 (the giving account).

(b) When making payment in cash: Debit Tom’s Account $100 (the receiving

account) and Credit the Cash Account with $100 (the giving account)

Note: When the above entries are made Tom will no longer be a creditor in Jim’s books.

The accounts would appear as follows in each party’s books:

In Tom’s Ledger

Dr Sales Account Cr

01/01/11 Jim 100

Dr Cash Account Cr

25/01/11 Jim 100

Dr Jim’s Account Cr

01/01/11 Sales 100 25/01/11 Cash 100

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 In Jim’s Ledger

Dr Purchases Account Cr

01/01/11 Tom 100

Dr Cash Account Cr

25/01/11 Tom 100

Dr Tom’s Account Cr

25/01/11 Cash 100 01/01/11 Purchases 100

Note: Follow the double entry from one account to the other.

Books of Original Entry: the cash book; the ledger; the journal

A book of original entry is an accounting record in which transactions are recorded

before being transferred to another record. For effective recording and presentation of

business transactions there are three essential books which will be briefly described here.

These are:

1. The Journal

This is a book of original entry in which are made the initial or originating or prime

entries excluding cash. It records transactions in chronological or date order and

indicates which accounts are to be debited and the ones to be credited. The journal

will indicate the debit and credit aspects of all transactions which are of a non-cash

nature. When a business is small it is convenient to keep just one Journal file in which

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 everything is recorded (a General Journal). However, as business expands the number

of transactions also expands tremendously. To accommodate the increase in the

number of transactions the Journal may be broken down into subsidiary Journals such

as the following:

 Sales Journal: Recording sales transactions with debtors.

 Purchases Journal: Recording credit purchases transactions with creditors

 Nominal Journal: Recording all other transactions.

2. The Ledger

The ledger is the book of accounts in which the double entry is completed. It works in

solidarity with the Journal. So entries are journalized and then entered in the ledger where

you will see the actual debit and credit aspect of each transaction. In essence what is

being said is that this is where you will find the T Accounts. The Ledger just like the

Journal can be subdivided to accommodate the expanding nature of business. The sub-

division may be thus:

 Sales Ledger: Recording only transactions with debtors.

 Purchases Ledger: recording only transactions with creditors.

 Nominal Ledger: Recording all other transactions.

3. The Cash Book

The cash book is a ledger account which because of its size is kept as a separate account.

It records only cash receipts and cash payments. It is where items affected by cash are

posted. It contains the cash side of a transaction.

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 Types of Accounts and Rules for Debiting and Crediting

Part of the role of the accounting function is the classification of transactions of a similar

nature into appropriate ledger accounts. This demands extreme accuracy on the part of

the accounting practitioner. This demands that accounts be classified in a way that allows

for similar items to be placed in similar types of accounts. To this end accounts may be

classified as follows:

1. Personal Account: these are accounts bearing the names of individuals,

partnerships or companies e.g. Tom Account; Courts Jamaica Ltd Account; Price,

Waterhouse, Coopers Partnership Account.

2. Impersonal Accounts: these are all other accounts and may be sub-divided into

(a) Real Accounts: These accounts record transactions in assets e.g. land

account, machine account, stock account, buildings account, furniture and

fittings account, etc.

(b) Nominal Accounts: These accounts record expenses and losses, income

and gains e.g. wages account, electricity account, insurance account, sales

account, purchases account, etc.

Rules for debiting and crediting:

(1) Personal Accounts

(a) DR-the receiver (receiving account)

(b) Cr- the giver (giving account)

Examples of personal account are Tom and Jim in our example above.

(2) Real Accounts

(a) Dr- asset bought/appreciate

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 (b) Cr- asset sold or depreciated

Bought motor vehicle for $5,000,000 on January 15, 2010; sold motor vehicle on

December 31, 2011 for $4,000,000

Entries: Jan 1, 2010-Dr motor vehicle account $5,000,000

Cr- cash account $5,000,000

December 31, 2011- Dr Cash account $4,000,000: Cr motor vehicle $4,000,000;

Dr Depreciation account $1,000,000; Cr-motor vehicle account $1,000,000.

(3) The Cash Book/ Cash Account

This is a real account and is treated as follows:

(a) Dr- cash receipts

(b) Cr-cash payments

Received $5,000 cash from B.Bolt on February 20, 2011.

Paid $10,000 for wages on March 15, 2011.

Entries: February 20, 2011: Dr Cash account $5,000; Cr-B.Bolt Account $5,000

March 15, 2011: Dr Wages account $10,000; Cr cash account $10,000.

(4) Nominal Accounts

(a) Dr- expenses paid and losses incurred.

(b) Cr- income and gains realized.

Paid electricity $12,000 on March 31, 2011. Rent received $30,000 on April 30, 2011.

Entries: March 31-Dr Electricity account $12,000; Cr-Cash account $12,000.

April 30, 2011- Dr Cash Account $30,000; Credit Rent Received Account $30,000.

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