Week 3 :The double entry system for assets, liabilities and

capital
Learning outcomes; By the end of this session , you should;
 understand what is meant by the double entry system
 understand how the double entry system follows the rules of the basic
accounting equation / concept of duality.
 be able to enter transactions using the double entry system, balance
the accounts and extract a trial balance.
 be able to prepare a statement of comprehensive income from a sole
trader’s trial balance.
Double-Entry Book-keeping System.
 Book-keeping: the recording of accounting data in the ledger
accounts
 Double-entry: based on concept of duality
 for every transaction two entries are made in the accounts
 a debit transaction (dr.) and
 a credit transaction (cr.)
In the 13th century, the monk Amatino Manucci, invented
the double-entry system of book-keeping. Manucci was a partner
in Giovanni Farolfi & Company, a merchant partnership based
in Florence.
The double entry system for assets, liabilities and capital
Main points to remember
1 Double entry maintains the principle that every debit has
a corresponding credit entry.
2 Each different kind of asset and liability has its own
separate account, as does capital.
3 A debit entry is made to show an addition to an asset
account or an expense account
4 A credit entry is made to show an addition to a liability,
capital or income account
The effect of profit or loss on capital and the double entry
system for expenses and revenue
Main points to remember
1 Every different type of expense will be shown in a separate
account, specially named for that type of expense.

2 Expenses are shown as debit entries in the various expense

accounts.

3 Revenues are shown as credit entries in the various revenue

accounts.
Basic Rule of Double Entry
 Debit the account that receives value

 Credit the account that gives value

Example of Double Entry Transactions for Cash

e.g. Our business sold goods for £100 cash

Enter transaction in ledger accounts:

 Debit cash account (value received)

 Credit sales account (value given)
Example of Double Entry Credit Transactions
Transaction 1.
May 1st, we sold goods on credit to J. Bloggs for £400
Entries in ledger accounts
 Credit sales account
 Debit J. Blogg’s account ( a ‘trade receivable’ account )

Transaction 2
Entries in ledger accounts
On June 1st, we received cheque for £400 from J. Bloggs
 Debit cash account
 Credit J. Blogg’s account
Class activities
 Work through Activity A and enter
the transactions into the books using
double entry procedures
 Activity B is a longer version of activity A;
you should attempt this as independent study
using the core text solution as a guide.
Balancing Off the Accounts

 Done at end of accounting period to extract the following

data:
the cash balance

total value of sales made during the period

The amount of ‘trade payables’ owed.

how much ‘trade receivables’ is owed to the business

 total of expenses incurred during the period

Remember:
✓ Trade receivables are disclosed by debit balances on customers’ accounts.

✓ Trade payables are disclosed by credit balances on suppliers’ accounts.

 Balancing off accounts

Bank Account
Capital 40,000 Car 8,000
Sales 5,000
 Balancing off accounts

Bank Account
Capital 40,000 Car 8,000
Sales 5,000 Rent 1,000
Purchases 25,000
Sundry 500
Balance c/d 10,500
45,000 45,000
Balance b/d 10,500

Stage 2: now enter Stage 1: Add up both

Stage 3: finally enter
totals level with sides & enter balance
balance to start off
each other. (difference) on side
entries for following
with smaller total so
period.
both sides are equal.
Balancing off accounts
Main points to remember
1 Trade receivables are disclosed by debit balances on
customers’ accounts.

2 Trade payables are disclosed by credit balances on

suppliers’ accounts.

3 Both T accounts and three-column accounts will disclose

the same balance, given identical information about
transactions.
The trial balance
One way of checking the arithmetical accuracy of
the accounts.
If totals agree it shows that:
Book-keeper has entered an equal debit for every credit

the accounts have been added correctly.

But errors can be made in the accounts which will

not be shown up by the trial balance.
e.g. when a transaction is completely missed.
The trial balance

Trial Balance for Miss Coffee

Dr Cr
£ £
Bank 10,500
Capital 40,000
Purchases
Sales
Rent
Sundry
Car
The trial balance

Trial Balance for Miss Coffee

Dr Cr
£ £
Bank 10,500
Capital 40,000
Purchases 25,000
Sales 5,000
Rent 1,000
Sundry 500
Car 8,000

45,000 45,000
 Ms Coffee's Statement of Comprehensive Income for
Period Ended First Month
£ £
Sales
Less: Cost of goods sold (i.e. COGS)
Gross Profit
Rent
Sundry Expenses
Net Profit
 Ms Coffee's Statement of Comprehensive
Income for Period Ended First Month

£ £
Sales 5000
Less: Cost of goods sold (i.e. COGS) (2000)
Gross Profit 3000
Less: Expenses
Rent 1000
Sundry Expenses 500 (1500)
Net Profit 1500
 £ £
Statement of financial position for Ms ITEM TOTAL COLUMN
Coffee as at 30th Sept 2013 COLUMN

Non-current assets.

Current assets.

Total Assets

Capital
 £ £
Statement of financial position for Ms ITEM TOTAL COLUMN
Coffee as at 30th Sept 2013 COLUMN

Non-current assets.

Car 8,000

Current assets.

Inventory 23,000
Bank 10,500 33,500
Total Assets 41,500

Capital 40,000
+ Net Profit 1,500 41,500
 The Trading Account

 preliminary section of the Statement of Comprehensive

Statement (SCI)

 shows the calculation of Gross Profit.

 Gross Profit = Sales - cost of goods sold (COGS)

 COGS

= Opening Inventory + Purchases - Closing Inventory

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Class activities
 Complete Activity C
 Recommended Reading
 Britton & Waterston (2010) Financial Accounting. Chapter 5. (An
Electronic copy can be accessed via either the Library E catalogue or module
reading list in the folder on moodle)
 Chapter 3 in Collis, J. Holt, A. & Hussey, R (2017) Business Accounting
(3rd Edition)

 Harvey, McLaney & Atrill.(2001) Accounting for Business. Chapter 9.

 Wood and Sangster (2012) Business Accounting Part I. Chapter 7

 Complete / check through today’s class activities,

including activity B in today’s sheets - you can check the
answer at the back of the core text, Britton & Waterston.