Double Entry Accounting

Note that the three basic books for recording accounting transactions are:

(a) The Journal

(b) The Cash Book
(c) The Ledger

These books display the Double Entry System

The following example seeks to illustrate the application of this system:

Example 1.0

A-L = C Accounting equation

W.James is in business as a sole trader. On January 1, 2000 his position was as follows:

Assets: Cash at bank $685; Debtors-L.Peart, $260; C.Pinky, $124; Stock $986; Motor van, $180;
Shop fittings, $200.

Liabilities: Creditors: W.Snow, $320; D.Powell, $490.

Note: All money transaction will go directly into the cash book/cash account.

All non-money transactions will be journalized and then entered in the ledgers

Jan 3 Purchased on credit from C. Hall goods valued at $213. Purchases

4 Sold on credit to C. Brown goods valued at $105.

5 Paid wages $48 cash.

5 Paid rent $38 cash.

6 Paid W.Snow on account $220 cash.

8 Sold to C.Pinky on credit goods valued at $555.

8 Received $200 on account from L.Peart.

10 Purchased on credit from W.Snow goods valued at $66.50

12 Purchased from D. Powell on credit goods valued at $85.30.

12 Paid wages $48 cash.

 12 C.Pinky paid off his account cash.

12 Paid sundry expenses $8.50

Required:

Enter the above transactions in W.James Journal, Cash Book and Ledger. Balance the books on

January 12, 2000, bring down the balances and extract a Trial Balance as at that date.

Note:

1. Every transaction must have a debit and an equalizing credit entry or entries and vice
versa.
2. Asset/expenses/losses-Dr
3. Liabilities/revenue/income/capital/gains-Cr
4. Dr receiving acct; Cr giving up acct.

Step 1

On January 1, 2000 W.James had a number of assets and liabilities. We need to determine at

this point the value (net worth/capital) of W.James business. How do we do this? We do an

Opening Journal to determine this figure. In this opening journal the assets will be debited and

the liabilities will be credited. The difference will be his capital which will also be credited as

shown below:

Step 2

Open T Accounts for all the items in the opening journal. The asset balances will be brought
forward as debit balances as shown below and the liabilities as credit balances.
Open a transaction Journal to debit and credit the non-cash transactions. Pass the transactions

through the accounts. You will need to open accounts for transactions requiring new accounts.

Pass the cash transactions through the Cash Book and Ledger.

Step 3

After passing all the transaction through the Cash Book and Ledger balance off the accounts

and bring down the balances as shown. Add up the larger side and deduct the total of the

smaller side. Place the difference on the smaller side so that both sides add up to the same

figure. Bring forward the balance on the opposite side for the new period.

Step 4

Prepare a Trial Balance by picking up the debit and credit balances. Add up the two sides of the

Trial Balance. If all the debit and credit balances have been recorded correctly then the two

sides of the Trial Balance should agree. If they do not agree then it could be as a result of one or

more errors that could be present but cannot be detected by the Trial Balance.
 Opening Journal
Date Details/Accounts Dr $ Cr $

01/01/00 Cash at bank 685.00

Debtors: L.Peart 260.00

C.Pinky 124.00

Stock 986.00

Motor van 180.00

Shop fittings 200.00

W.Snow 320.00

D.Powell 490.00

Capital/Net Worth/Equity 1625.00

2435.00 2435.00

So, W. James business is worth $1625 on January 1, 2000.

Dr W.Snow Cr
06/01/00 cash 220 01/01/00 bal. b/f 320

12/01/00 bal. c/d 166.50 10/01/00 purchases 66.50

386.50 386.50

13/01/00 bal. b/f 166.50

Dr D.Powell Account Cr
01/01/00 bal. b/f 490

01/01/00 bal. c /d 575.30 Purchases 85.30

575.30 575.30

13/01/00 bal. b/f 575.30

Dr Stock Account Cr
01/01/00 bal. b/f 986

Dr Motor Van Account Cr

01/01/00 bal. b/f 180

Dr Shop Fittings Account Cr

01/01/00 bal. b/f 200

Dr Cash Account/Cash Book Cr

01/01/00 bal. b/f b/d 685 05/01/00 wages 48

08/01/00 L.Peart 200 05/00/00 rent 38

12/01/00 C.Pinky 679 06/01/00 W.Snow 220

12/01/00 wages 48

12/01/00 sundry expenses 8.50

12/01/00 bal. c/d OR c/f 1201.50

1564 1564

13/01/00 bal. b/f 1201.50

Dr L.Peart Account Cr
01/01/00 bal. b/f 260 08/01/00 cash 200

12/01/00 bal c/d 60

260 260

13/01/00 bal. b/f 60

Dr C.Pinkey Account Cr
01/01/00 bal. b/f 124 12/01/00 cash 679

08/01/00 sales 555

679 679

Non-monetary Transaction Journal

Date Details/Accounts Dr $ Cr $

03/01/00 Purchases 213

C.Hall 213

Purchase of goods on
credit

04/01/00 C.Brown 105

Sales 105

Sold goods on credit

08/01/00 C.Pinky 555

Sales 555

Sold goods on credit

10/01/00 Purchases 66.50

W.Snow 66.50

Purchases goods on
credit

12/01/00 Purchases 85.30

D.Powell 85.30

Purchase goods on credit

Dr Purchases Account Cr
03/01/00 C.Hall 213

10/01/00 W.Snow 66.50

12/01/00 D.Powell 85.30 12/01/00 bal. c/d 364.80

364.80
364.80

13/01/00 bal. b/f 364.80

Dr sundry expenses CR
12/01/00 CASH 8.50

Dr C.Hall Cr
03/01/00 purchase 213

Dr Sales Account Cr
12/01/00 bal. c/d 660 04/01/00 C.Brown 105

08/01/00 C.Pinky 555

660 660

13/01/00 bal. b/f 660

Dr C.Brown Dr
04/01/00 sales 105
Dr Wages Cr
05/01/00 cash 48 12/01/00 bal. c/d 96

12/01/00 cash 48

96 96

13/01/00 bal. b/f 96

Dr Rent Account Cr
05/01/00 cash 38

Dr Capital Account Cr
01/01/00 bal. b/f 1625
 W. James
Trial Balance as at January 12, 2000
Date Details/Accounts Dr Cr

12/01/00 Stock 986

Motor van 180

Shop fittings 200

Cash 1201.50

L.Peart 60

Purchases 364.80

C.Brown 105

Wages 96

Sundry Expenses 8.50

Rent 38

D.Powell 575.30

D.Snow 166.50

C.Hall 213

Sales 660

Capital 1,625

3239.80 3,239.80

The Trial Balance

The Trial Balance is a statement that tests the arithmetical accuracy of the entries that you pass

through the ledger. If all the entries have been made correctly then when you pick up all the

debit and credit balances and add them, the two sides of the Trial Balance should be equal.

However, we will find out later that the two sides of the Trial Balance could be equal but there

are errors in the accounts.

Errors that a Trial Balance will not detect

(1) Errors of omission or duplication- Theses errors relate respectively to transactions the

entries for which are completely omitted or are entered twice in the books.

(2) Errors of commission- These errors arise when the wrong account of the same class is

debited or credited. Example debiting or crediting Joan Smith Account instead of John

Smith Account

(3) Errors in original entry-These errors arise when an error is made in a book of original

entry and the error is transferred to the ledger.

(4) Complete reversal of entry-This type of error occurs when an account is debited instead

of being credited and vice versa.

(5) Errors of principle-This error will arise when a transaction is entered in the wrong class

of account e.g. debiting or crediting an asset account instead of an expense account.

(6) Compensating errors- These are errors which counteract each other and will not affect

the balancing of the Trial Balance, example an error made by over debiting an account

by $100 will be compensated if another error is made by over crediting another account

by $100.
 Adjustments at the end of an accounting period

Personal Accounts and Bad debts

Personal accounts record transactions between individuals, companies or partnerships. A debt

is considered bad when the debtor fails to pay all or part of an amount that is due from him or

her. When this happens the debt cannot be kept in the books as an asst. It has to be written to

show the true state of affairs. The personal account must be closed by transferring the debt to

the debit of a Bad Debts Account where it will stay until it is transferred to the debit of the

Profit and Loss Account. A debt will be written off when this happens, but sometimes a turn of

takes place and the debtor is able to pay at a later date. In such instances the following

treatment can be applied as shown in the example below.

Example

On January 1, 2011 B.Coley owed the sum of $400,000 for goods delivered to him. He becomes

bankrupt on March 4, 2011 and is able to pay 20% on liquidation. Another debtor J.King has

owed the sum of $300,000 for a considerable time and letters requesting payment have been

unanswered, the last returned marked “don’t know where he is”. On September 25, 2011 it is

decided to write off the debt as bad, and this is done. However, on December 15, 2011 J.King

paid his debt in cash.

Required:

(a) The Journal entries recording the above transactions.

(b) THE Bad Debts Account.

 (c) The Personal Accounts and Cash Book.

(d) A Profit and Loss Account Extract.

Solution

(a) Journal

Date Details/Accounts Dr Cr

04/03/11 Bad Debts 320,000

04/03/11 J.Coley 320,000

Bad debts w/off

25/09/11 Bad debts 300,000

25/09/11 J.King 300,000

Bad debts w/off

31/12/11 P&L 320,000

31/12/11 Bad debts 320,000

Bad debts w/off

(b) Dr Bad Debts Account

Cr

04/03/11 B.Coley 320,000 15/12/11 cash 300,000

25/09/11 J.King 300,000 31/12/11 P&L 320,000

620,000 620,000
(c) Dr B.Coley Account

Cr

01/01/11 bal. b/f 400,000 04/03/11 bad debt 320,000

04/03/11 cash 80,000

400,000 400,000

Dr J.King Cr

01/01/11 bal. b/f 300,000 25/09/11 bad debts 300,000

Dr Cash Account Cr

04/03/11 J.Coley 80,000

15/12/11 bad debt 300,000 31/12/11 bal. c/d 380,000

380,000 380,000

01/01/12 bal. b/f 380,000

(d) Dr Profit and Loss Account Extract

Cr
31/12/11 bad debt 320,000

Real Accounts and depreciation

Real accounts contain a record of the assets owned by a business and are debited at the start

with the original cost price of those assets. Most assets diminish in value over time for varied

reasons which include wear and tear as a result of usage, obsolescence, etc. Depreciation is the

loss in value of an asset as time passes. In calculating the total depreciation three factors need

to be considered. These are (1) the cost of the asset which is known; (2) The useful life of the

asset which is a matter of estimation; and (3) the residual value which is also a matter of

estimation. In the books of accounts the capital expenditure represented by the cost of the

asset will be debited to the asset account. At the end of each financial period the depreciation

for that period which represents an expense against the business will be recorded in the books

for the following reasons:

(1) In order that the true profit or loss for the period to be determined.

(2) In order that the Balance Sheet may show what part of the original capital expenditure

remains.

Depreciation Methods
There are several ways of calculating the depreciation due for a period. However the two

methods that we will focus on are the Straight Line Method and the Reducing Balance Method.

The Straight Line Method

This method is also called the Fixed Installment Method and requires that an equal amount be

written off for each accounting period. Under this method the annual charge for depreciation is

determined by dividing the cost of the asset, less the residual value by the number of years

estimated to be the useful life of the asset. This allows for an equal amount to be written off to

the Profit and Loss Account each period by debiting the Profit and Loss Account and crediting a

Provision for Depreciation Account.

An alternative method is to debit Depreciation Account and credit the asset account; then

transferring the amounts to Profit and Loss Account by debiting The Profit and Loss Account

and crediting Depreciation Account. The two methods will be explored.

EXAMPLE

On January 1, 2010 K.Singh bought a motor truck for $2,000,000. He estimates that at the end

of ten (10) years the truck will be worth only about $200,000. He decides to provide for

depreciation using the straight line method. Set out the Journal entries providing for

depreciation for the first four years and show the relevant accounts for the first four years

assuming that Singh closes his books on December 31 each year.

Depreciation Calculation
Cost of asset= $2,000,000

Less: Residual value = ($200,000)

Depreciation over ten years $1,800,000

Annual depreciation= $1,800,000/10 = $180,000 per annum

Journal

Date Details/Accounts Dr Cr

31/12/10 P&L 180,000

31/12/10 Provision for depreciation 180,000

Year 1 provision

31/12/11 P&L 180,000

31/12/11 Provision for 180,000

depreciation

Year 2 provision

31/12/12 P&L 180,000

31/12/12 Provision for depreciation 180,000

Year 3 provision

31/12/13 P&L 180,000

31/12/13 Provision for 180,000

depreciation

Year 4 provision

The following accounts will be opened:

Dr Motor Truck Account Cr

01/01/10 cash 2,000,000

Dr Provision for Depreciation Account Cr

31/12/10 bal. c/d 180,000 31/12/10 p&L 180,000

31/12/11 bl. c/d 360,000 01/01/11 bal. b/f 180,000

31/12/11 P&L 180,000

360,000 360,000

31/12/12 bal. c/d 540,000 01/01/12 bal. b/f 360,000

31/12/12 p&L 180,000

540,000 540,000

31/12/13 bal. c/d 720,000 01/01/13 bal. b/f 540,000

31/12/13 P& L 180,000

720,000 720,000

01/01/14 bal. b/f 720,000

The asset value will be determined as follows:

Balance Sheet Extract

Cost $ Accumulated depreciation $ Net Book Value$
2,000,000 720,000 1,280,000

The alternate treatment would be as follows. The depreciation calculations would be the same
as above.

Journal
Date Details/Accounts Dr Cr
 31/12/10 Depreciation 180,000

31/12/10 Motor truck 180,000

Dep. w/off truck

31/12/10 P&L 180,000

31/12/10 Depreciation 180,000

w/off dep. to P & L

31/12/11 Depreciation 180,000

31/12/11 Motor truck 180,000

Dep. w/off truck

31/12/11 P&L 180,000

31/12/11 Depreciation 180,000

w/off dep. To P & L

31/12/12 Depreciation 180,000

31/12/12 Motor truck 180,000

Dep. w/off truck

31/12/12 P&L 180,000

31/12/12 Depreciation 180,000

w/off dep. to P & L

31/12/13 Depreciation 180,000

31/12/13 Motor truck 180,000

Dep. w/off truck

31/12/13 P&L 180,000

31/12/13 Depreciation 180,000

w/off dep. to P & L

Dr Depreciation Account Cr
31/12/10 motor truck 180,000 31/12/10 P&L 180,000
31/12/11 motor truck 180,000 31/12/11 P&L 180,000

31/12/12 motor truck 180,000 31/12/11 P&L 180,000

31/12/13 motor truck 180,000 31/12/11 P&L 180,000

Dr Motor Truck Account Cr

01/01/10 cash 2,000,000 31/12/10 Depreciation 180,000

31/12/10 bal c/d 1,820,000

2,000,000 2,000,000

01/01/11 bal. b/f 1,820,000 31/12/11 Depreciation 180,000

31/12/11 bal. c/d 1,640,000

1,820,000 1,820,000

01/01/12 bal. b/f 1,640,000 31/12/12 Depreciation 180,000

31/12/12 bal. c/d 1,460,000

1,640,000 1,640,000

01/01/13 bal. b/f 1,460,000 31/12/13 Depreciation 180,000

31/12/13 bal. c/d 1,280,000

1,460,000 1,460,000

01/01/14 bal. b/f 1,280,000

In the second method above the asset value can be ascertained by looking directly intro the

asset account at the end of the accounting period i.e. $1,280,000 in Motor Truck Account.

The Reducing Balance method

This method was formerly known as the Reducing Installment Method. Its use allows for a fixed

percentage to be taken from the book value of the asset each period over the useful life of the

asset. An example will illustrate the application of this method.

Example

On January 1, 2010, ABC Co. Ltd bought a machine for $900,000. The company adds two other

machines costing $300,000 each on June 1, 2011 and February 1, 2012. It is decided to provide

for depreciation using the Reducing Balance Method at 20% per annum. Show the journal

entries providing for depreciation for the first three years, and the relevant accounts to

December 31, year three. Let us Label the three machines A, B and C

Annual Depreciation Workings

A B C

Net Book Value(01/01/10) 900,000

Depreciation (31/12/10) (20%) 180,000

Net book value (01/01/11) 720,000 (01/06/11) 300,000

Depreciation (31/12/11) (20%)144,000 7/12 x 60,000 35,000

Net book value (01/01/12) 576,000 265,000 (01/02/13) 300,000

Depreciation (31/12/12)(20%) 115,200 53,000 11/12 x 60,000 55,000

Net Book Value 01/01/13 460,800 212,000 245,000

Note:

Depreciation 2010= $180,000

Depreciation 2011= $144,000 + $35,000= $179,000

Depreciation 2012= $115,200+ $53,000+$55,000=$223,200

The Journal entries will appear as follows:

Journal
Date Details/Accounts Dr Cr

31/12/10 P&L 180,000

31/12/10 Prov .for dep. of mach. 180,000

Dep. prov. for 2010

31/12/11 P&L 179,000

Prov. for dep. of mach. 179,000

Dep. prov. for 2011

31/12/12 P&L 223,200

Prov. for dep. of mach. 223,200

Dep. prov. for 2011

The accounts would appear as follows:

Dr Machine Account Cr

01/01/10 Cash (A) 900,000 31/12/12 bal. c/d 1,500,000

01/06/11 Cash (B) 300,000

01/02/12 Cash (C) 300,000

1,500,000 1,500,000

01/01/13 bal. b/f 1,500,000

Dr Provision for Depreciation of Machine Account Cr

31/12/10 bal. c/d 180,000 31/12/10 P&L 180,000

31/12/11 bal. c/d 359,000 01/01/11 bal. b/f 180,000

31/12/11 P&L 179,000

359,000 359,000

31/12/12 bal. c/d 582,200 01/01/12 bal. b/f 359,000

31/12/12 P&L 223,200

582,200 582,200

01/01/13 bal. b/f 582,200

The asset values would appear in the Balance Sheet as follows:

Balance Sheet Extract

Machine Cost $ Accumulated Depreciation $ Net Book Value $

A 900,000 439,200(180,000+144,000+115,200) 460,800

B 300,000 88,000 (35,000+53,000) 212,000

C 300,000 55,000 245,000

Total 1,500,000 582,200 917,800

As an exercise use the above example to record the depreciation provisions, this time opening a

Depreciation Account. Show the Journal entries.