Lecture 5

Double-entry
book-keeping II
Today’s lecture
 T accounts and double entry for JB Strings example
Another reminder of T accounts
and debits and credits
DR (DEBIT) (CREDIT) CR

INCREASES IN ASSETS INCREASES IN LIABILITIES

INCREASES IN EXPENSES INCREASES IN REVENUE

DECREASES IN LIABILITIES DECREASES IN ASSETS

DECREASES IN REVENUE DECREASES IN EXPENSES

DECREASES IN EQUITY INCREASES IN EQUITY

LEFT (DR.) AND RIGHT (CR.) HAND SIDE ENTRIES

DR. CR.

+ Assets Liabilities +

Equity / Profit or loss +

Entries that INCREASE A BALANCE go on the SAME (‘NORMAL’) SIDE in the separate T account as it
would have done in the ACCOUNTING EQUATION. Items that DECREASE THE BALANCE go on the
OPPOSITE SIDE.

Accountants don’t like negative entries so they put them on the opposite side instead.
• If we record transactions on the balance
sheet (like we did last week), we will end up
with a large number of balance sheets - not
just 10 balance sheets.
• Instead, accountants make the entries to T
accounts and then transfer the numbers to
one balance sheet.
 Making an entry
Called posting – updating the accounting records with
transactions
3 steps
1. Determine the 2 accounts affected.
2. Consider the impact on the accounts. Think about
whether they are asset, liability, income, expense
or equity accounts and whether the transaction is
increasing or decreasing their value.
3. Identify the money value that is transferring.
 T accounts – more detail
DEBIT SIDE (DR) CREDIT SIDE (CR)
Date Description Amount Date Description Amount

The description can either give information about

what the transaction is or give the name of the other
account where the other side of the double entry
appears
 Double-entry and T accounts for JB Strings
transactions
1. Jake Bigg starts a business making and selling guitars (JB Strings) on the
1 January 2014 with £20,000 cash to purchase shares in the company.

Double entry:
Dr Cash 20,000
Cr Share Capital 20,000

T Accounts
CASH SHARE CAPITAL
DR CR DR CR
01-Jan Sh. Cap 20,000 01-Jan Cash 20,000
Increase in Increase in
asset equity
 Double-entry and T accounts for JB Strings
transactions
2. Jake raises a bank loan for a further £50,000 on 5
January 2013.
Double entry:
Dr Cash 50,000
Cr Bank loan (liabilities) 50,000
T Accounts
CASH BANK LOAN (LIABILITY)
DR CR DR CR
05-Jan Bk. Loan 50,000 05-Jan Cash 50,000

Increase in Increase in
asset liability
 Double-entry and T accounts for JB Strings
transactions
3. Jake buys a second hand machine for cash.
This costs £6,000. The machine is expected to last
for 5 years.
Double entry:
Dr Machine (non-current asset) 6,000
Cr Cash 6,000
CASH T Accounts MACHINE (NON-CURRENT ASSET)
DR CR DR CR
08-Jan Machine 6,000 08-Jan Cash 6,000

Reduction in Increase in
asset asset
 Double-entry and T accounts for JB
Strings transactions
4. Jake buys some wood for £2,000 payable in 1
month’s time on 10 January 2014.
Double entry:
Dr Inventory 2,000
Cr Trade Payables 2,000
T Accounts
INVENTORY TRADE PAYABLE (LIABILITY)
DR CR DR CR
10-Jan Purchases - Jim 2,000 10-Jan Jim - wood 2,000
 Double-entry and T accounts for JB Strings
transactions
5. On 31 January 2014, Jake sells the first guitar
for £1,800 on credit with the cash receivable in 1
months’ time. Double entry:
Dr Receivables 1,800
Cr Revenue (SOPL) 1,800
T Accounts
RECEIVABLES (ASSET) PROFIT AND LOSS
DR CR DR CR
31-Jan Sales 1,800 31-Jan Credit sales 1,800
 Double-entry and T accounts for JB
Strings transactions
5. For his first sale, Jake uses £500 of his wood
for the guitar
Double entry:
Dr Cost of sales (SOPL) 500
Cr Inventory 500
T Accounts

PROFIT AND LOSS INVENTORY

DR CR DR CR
31-Jan Cost of sales/inv 500 31-Jan SOPL 500
 Entries for capital introduced and
loans received
Capital introduced:
Debit Cash (increase cash)
Credit Share Capital (increase equity)

Borrowings:
Debit Cash (increase cash)
Credit Loan(increase liability)
Entries for credit transactions

Receipts from customers:

Debit Cash (increase cash)
Credit Customers account (reduce liability)

Payments to suppliers:
Debit Trades payable (reduce liability)
Credit Cash (reduce cash)
Entries for credit transactions

Sales:
Debit Trades receivables (increase asset)
Credit Revenue (increase equity)

Purchases:
Debit Expenses (decrease equity)
Credit Trades payables (increase liability)
Summary of the Measurement Process

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