Lea rning objectives

In this chapter you will learn to:

and accounting 1.1
■ understand and explain the difference between book-keeping
1.1
■ state the purposes of measuring business profit and loss
monitoring progress and
■ explain the role of accounting in providing information for
decision-making 1.1
1.2
■ explain the meaning of assets, liabilities and owner 's equity
■ explain and apply the accounting equation 1.2
and liabilities on a
■ understand that statements of financial position record assets
specified date. 5.5
 ( 11.qll, r I l11tr1 d11, 111111 lfJ 11, cr1111l11,

B/6/;:r,~-;i
,oh I ,o?. ~ A,,4'A,l'll;..0 I
e,,
1.1 Introduction g,,.,\,
.,,,,r· .,,.1)
Accounting is r<'g,,rdt'd M, th<' !,'lnp,ll,,gr of bll~ltw,._, A, rn11ntlnH <;111 hP <hwl11<11nrn \
I

two s~tions:
'

I\Jc, ,co.l i>j ,, trtlrcf.

1 ) Book-keeping
Book-bepin1 is a proccs~ of...d....ctall~~,~~ocdln& otall th~,fln~
business. It is nec1:ssary for even the s111allcst buslt,c!>!l to
at!~'.al_!!~~! ;l_Ctlo'!s oJ c\
mtlkc n rN ord of evNy triln -,,i<,fir>n
......,,..•
'
'wnich '
' aftects the business. If the record:, are not m,1int ,11twd, , likely th,11 -;orn~rh inP,
It I'. fair -
, ' C '• 0

will be forgotten or overlooked. lhc basis of ma int,1 ining th c~r dct~1ilcd rc>cord'.. I!, dout>lc
:n!~ ~ook~~~P-i(lg. The actu al records mai~,t Jin-cd by one bu'.,lne'..~ rn ,1y V<l f Y fro~ho-,e
maintain'ed by another business bec.'.l usc eJch bu siness ls dllfcrcnt . However, all bu'..ine·,-,e-, WI •·
apply the same pri nciples while maintai1iing double entry records .

.:. ) Accounting Alt.ltelMtlt

' Accounting uses t ~ ~ ~ ~ i e J , i ~ ~ " ) ~ ~ s ~ , t . . r e g 4 l a r.
jJ~,.-W s.. The owner of a business needs to know wh eth er the ':.Ys~~~~ making a profit or
a loss. Periodically (ofte~_a_t_yeady intervals), ~ ~ is drawn up. This shows
Ol'I a certain date
ffieca lcu lation of the profit or loss earned by the business. If the business has earned a profit-
then the own er is receiving a return on his investment and funds are avail~ble for expanding
or improving the bosiness. However, if the business has made a loss then it mar eventually "t?, k -, ~Pw'1-7J~ f.~,.,cl
~sr-CJ'¼c+,1 C,y"A ·
cf
-
close down as the owner is not rece iving any return on his investment and funds are not
available for runn ing or maintaining the business. Y It -i Pr"(CJ•J ~-k b,-,.a,,J -f..crcd
-It Sc F P..; jf::(.fs 4 ~J,:t, '- ~
You can now answer Question lat the end of th is-chapter, ~
..:~
The owner of the business also needs to kn ow the fina nci al position at'regular intervals so
s o ;:; I'!. , • You will learn more
a statement of financi l osition is prepared . This shows what th e business owns and r: - about financial
what is owing to it, its assets; and what the b~s_iness pwes, its liabilities. The term fina_ncial . statements !n Chapters
~!atements is often use~ as a collective name fo r an in co 'T1e sta tement 2nd a statement of sand 9.

fi na ncial position. ,' : '.> .... _;. , ~ :;-- (

The progress of the business can be measured by corn paring the f111ancial statements of one
year with th ose of previous years, or ~th th6{e of other similar businesses. The calculation of
various acco unting ratios is used to measure the ~el ationship berween figures wi th in a set of
fi nancial statements. These are also usefu l for _s:~mparison purposes.
The information provided by the financial statem ents shows the owner of the business what
has happened during a certain period of time and helps m monitoring the progress of the
business. The plans fo r the futu re development of the bu siness are also ba sed on these
fin anci al statements.

TEST YOURSELF 1. 1

1 Define the term book-keeping. ,rrc,r(,'i~

.., ..I • .fl..
i:>,r
.I.· c·J ~ ..~,:.J"-'f' (,n~
'f'" e:> 1 '
· 1 . / 1 I -,, lf't or,l.vi L iu. 'r ~ ,t j ,
2 Define the term accounting. ().LJ1P,·.,,, ~ 1 ,l\c.-r1r ,c. ~1<.,. t¥HV'
3 State two reasons why it is necessary to prepare financial sta~ements at regular inte~vals.C... 1, 11 r~,. ;"~ }r.v\ ,' i J.- -'~-;
., 4 State what is included in the term financial statements. 1h, l") t1f'ti .?-ti"' tttcv>C•~, I f'O ~"'vv\ '-

A ... 1- ~' J- C,
L .. 'ru~P.,
t ·tc, tVt
1 -v c.lw r-#)
F YJ. .,_ , \ i,,....· r ,.>..-'\
 ~
You wlll INN\
about luttS Ind
,nor.
1.2 Assets, liabilities and ,apitadl' O, . bu,ines, relw, only Ir, lh.
• .
r
. t the owner o
P, r<•cor j
O
rd
It I!, Import lnt to rem<'mb,•r th,1t th<• ,1Ccoun in J - t that b1J~ine'.'..'.'.. i~ reg,;, '~d a~ br'.ir,o
·

.,
r i.

bu ...lrw:.s. r rom ,,n /lccounlinij v1rwpoin • ·

llabllltlfl In ChaptN 9.
compk•tt'ly ~>,HJlr from the bur,in('',S, 'de the nece-;r ary fun,j, !
- h ·11 have to prov1 , ;;;..;..:.J. .

I l<tvTCRMI
When a f)er:.on d(•cidc!t to r, t,Hl a bur,lnr',,,
O
(
(rt'!>Ourccs). This I'> often In thr form monc
c wi f
1ary un , ds but may consist
ner of the business
of
are
build1na,.
knovm
":r',
a~
,.,..,.,
c,~
., ,,,.
.

Ca,ltalisthetot~I
TeSOUl'Ct'S provided
bytheOWIX'I and
repR'S(.'nh. ~ I I~
business O\~ t~
owner
Allltl repr('SE'nt
an)'th1ng owed by or
owing to the business.
Liabilities represent
anything owed by the
business.
C-> iiocvJV~ &j ow,w.. t....,
O1AJ {Ql fo- o wl"llJL
A-. , ~ ~ w.s;~
J_--, ,1 ,, ,, tv ~
~ \ Many businesses are set up and_operated by one person. These are known as ~!Rdccs.
~ The early chapters in this book cover accounts maintained by sole traders.
. You will learn about
the accounting records
of partnerships and
limited companies In
Chapters 19 and 21.
goods and !,O on. An~ ((\',Qllrc<'', [?.!QYlQ~~eo~of that busines~
Thi!\ represents tlwamounl owed by th~ business lO .
- , . d ced the business will own the mont:-;or .
Once the business Is formed and ca~~t_ al ~~~~....~d b~ the.bJJSiO.eS5 (Qr owed to the bu::in~-
other items provided by the owner. ~-.. Of · ~
are re ar the res f the business or the assets • ,
ide assets to the business. The amc, 1 ,.
In addition to the owner other people may aIso prov ~
. ' · k as liabilities.
~wed by the business to these people 1s nown ::.----
TIP
. ·d d f b · b the owner represents capital. This is not necessarfly in the
Any thmg prov, e or a usmess y
_!.orm of money.
TEST YOURSELF 1.2
' 1 Define each of the following terms.
a assets b liabilities c capital

1.3 The accounting equation

Like any other mathematical equation, the two sides of the equation will alwa s bee ual
The formula f01 rhis equation is: y q
' J<<: ,.-
---------.)
Assets = Capital + Liabilities. ~
.
Capita l is sometimes referred to as owner's equity 50 th . .
written as: ------ · e previous equation can also be

Assets = Owner's equity+ Liabilities.

TIP Like any mathematical equation the accountin . 1

three elements if the other two ~re present. g equation can be used to find any one of the
If you know two
elements of the .
This equation illustrates that the assets of a bus1ness (the reso
accounting equation
are aIways equal to the liabilities and capital of b . urces used by a business) ,
you can easily calculate .
bus1ness by ot hers). The assets represent ho tha usiness (the resources provided for the
the third element.
the liabilities and capital represent where th w e resources are used by the business and
- - - - -- - ese resources come from
P)~~t l~J ft ~ f ()( .J. CY
:, r1Z.; r+,,,,,.,o
f. .v, !)l}},1 J., ~
~- 'Of oJw~
J - ~ J ~\)(A•~ 1
C • ( Lr ,t '(J;
/. . 1 ( I' ✓ ()I
I
Walkthrough 1.1- ----- ----- ----- --.
~-tt1,J& --
20-7 L- f'c... iPr
January 1 Leena set up a business to trade under the name of The Dress Shop. She opened
C- 1c~ \:.II 0r
a business bank ac~Ol,lt\t and paid In $20 000 as cnpltal. '
,,- lh$d . J I 0,- , , [ - Pr W .,..,~✓
2 The business purchased preml;5es, $15000, and paid by ch eque; « a.,.,.k . ,-.., "-, ·.L .v-
I ~ v of v JOiJj
3 The busi,~ess purc~aj~ g?ods, $3000, on credit~ / ;a1,n,·~ .. ·
4 The business solcf goo~s. at the cost price of $1000, on credit. " ) -- ---------
Show the accounting equation after each of the above transactions,

Date Assets = Capital + Liabilities You will learn more

about buying and
1 January Bank $20000 $20000 Nil
'
selling on credit in
2 January · Premises -15'000 Chapter 2. 1

Bank 5 ooo -> rerhruft)·, '1j I- - - ·•- --·---. --··-·-- ___ j

$26 000 $20000 Nil &,.. i.....v,1, 0 ~ ""10"'1 •,~·--,>

3 January Premises ..... 15 000 ew,.~~ tt._-.to ...,._!iw·~.A .1 ➔ klr~.s-
<;>~ J'lnventorv
~
+; _._ 30 00
1¥
f->7'5'c~ Ba nk .- t? 5000 /IJ\91'\,'c) wul h>
( c.reoj to ,s
l°' $23000 $20000 Tra de payable $3 000\
J'-,
4 January Premises _ 15000
Inventory k 1
_ 2 00 0
~~.,"' ,.,Trad e receivable --r 1 000

~ ~ ~ Ban k v·\...- 5000

$23 000 $20000 Tra de payable $3 000

• 1 January The assets of th e busi ness are equal to 'the capital of the business.· ·
• 2 January The money in the ban k has decreased because a new asset has been
bought. The total assets are equa l to the capital.
Inventory is the
• -3 January Purc·hasing on credit means that th e business does not pay_irrirn ~diatelt
goods a business has
A new asset inventory has been acqui red, but the busi ness has also
available for resale.
acquired a lia5ili!t, as it owes mon ey to the supplier (who is known as a
Trade payables
~ l- In a statement of financial positi on thi s-rs described as a;_r_~e represent the amount
~ l e. The total assets are equal to th e capital plus the liabilities. the business owes to
the credit suppliers
• 4 January Sell ing on cred it means that the business does not immediately receive th e

-
mon ~y. The inventory has decrea-sed but a-new asset -h-as been acquired in
the form of mon ey owing to th e busi ness by a customer (who is known as
a gebtod.'l ~atement of financial position this is des.crlbed as a trade
of goods (the trade
creditors).
Trade receivables
represent the amount
receiv;i,le. The total assets are equal to th e capital plus th e liabilities~ owed to the business
(For the sake of simplicity, the goods were sold to the customer at cost by its credit customers
price. In practice, ~hey need to be sold at a price above cost price to en~ble (the trade debtors).
the business to· mai<e_a profit.) ·
 TEST YOURSELF l 3
A: Ctt.
1 Fill In the missing figures In the following table. l,, 1-1-~c,
Assets Capita! Liabilities
C,, -:: ·Y-\ .;t..
$ $ $
a 35000 7 12 500 - <'Jf00
b ? 44400 19300 • {, J, .,o0
C 67300 55000 7 ,. - 1'J,JOO i
---------~- ---------·----- - -----.._)
You can now answer Question 2 at the end of this chapter.

1.4 The statement of financial position .sv r P

The accounting equation may be shown in the form of a state_me~t of financial position.
~his sho"."~ the three elements of the accounting equ~tion - the assets, t~e ~~it9.I qnd the ,
liabilities. The statement of financial position w.i ~_affected every time the business makes
ch~ng~s to_the ~ssets, liabilitiesJ)r capital.

Walkthrough 1 . 2 - - - - - - - - - - - - - - - - - -
Prepare the statement of financial position of The Dress Shop after each of the transactions
shown in~alkthrough l. ~ · ·

■ " The Dress S~op ·. . .: .. -,:,,

'_ :, .Stat~IT!e,nt.~f rynanda_lposition .~t _Ja.nuary'~0---7
;,., + ·· ' ,,S j • • • , · (•·M\I' • •
!
-~•-••> ; ;:-,- -,.--..---...'\"' •.. - 1!"'-:;--:••-'•$ . , _ :•,r~to,,
,;
--~~:❖~=.....,""=:-:~-~---

Assets $ Liabilities $
-Bank 20000
20000
Capital
--·
20000
?0000
- -_J

20000
I • -~-------~ -
\
The Dress Shop
Statement of financial position at 3 January _~ •
20
Assets ..
S liabilities
II Premises J,5 000 Capital s
20000 _,.. i
i l
~ x<O"' ~~ 3000 Trade payable· ~ed.~ • •
1
I i

~ 3000 ,· I

~ di!>
' Bank
~--) ,.,,, .Jv
'
. - 5000
23000 I
'
~ 11,
~
 . ~]G;~@.tr:-;.2, ~1.tBJJ . .
• ;--~✓q;~~~~:£i..,¥~~,\ :f~~~~?&.... . -
.,: Assets
Premises 15000
$ Liabilities
Capital
$
20000 !

,
I

Inventory 2000 Trade payable 3000 ~

, Trade receivable - ~ "'~ -C, 1000 01.1.,, ~~ - v-
1 Bank 5000
23000 23000

TEST YOURSELF 1.4

1 Give two examples of each of the following (excluding those shown in Walkthrough 1.1
and 1.2): "'-"' 0 ,~dt £
1 asset b liability. ~
2 Explain the meaning of each of the following terms:
1 trade payable b trade receivable You will learn more
•. _Jki-~ ' rr-Y- about statements of
financial position in
The statements of financial position shown in Walkthrough 1.2 were presented in a Chapter 9.

■
horizonta_L!Q~~at. There are different ways to present a statement of financial position and
these are explained in Chapter 9. A statement of financial position is also more useful if the
assets and liabilities are divided into different types (see Chapter 9 ).
TIP
Walkthrough 1.1 showed that every single transaction involves a change lo the assets The totals of a
and/or the liabilities and/or the capital. This mear·s thot ir. is necess3ry to prepare a statement of financial
statement of financial position after every single transacti8n, as shown in Wal kthrough position must always
agree: if they do not
1.2. However, this is not possible in practice as mary tr~msactions can take place every
you know that there is
hour of each working day. In practice, rhe da,1-to-day busi1 ,ess transactions are recorded an error.
using double entry book-keeping and a statement of financial position is prepared only
perioaically. Th isisusually done at the ciosing of a business on the last day of the fin ancial
year as part of the finan cial statements. As the business can be started on any day of the
year, ,ts financia l year may not necessarily match the calendar year (i.e. from 1 January to You will learn more
31 December). The financial statements are prepared for 1~ m_ontb_p.erLo.dslrom the-date about double entry
book-keeping in
the business started. Chapters 2 and 4.
L ______ _ _ _ _J

You can now answer Questions 3- 6 at the end of th is chapter.

~~
■ Book-keeping is the detailed recording of all the financial transactions of a business. Accounting uses
these book-keeping records to prepare financial statements.
■ It is necessary to prepare financial statements to show the profit or loss of the business and the financial
position of the business and to help in decision-making.
■ The accounting equation shows that the assets are always equal to the capital plus the liabilities of the
business.
■ A statement of financial position shows the assets and liabilities of a business on a certain date.
 Exam -st yle qu est ion s
l Whl< h t,,._k i<, p1•rlormrrl hy ,, hook -k"'' 1
Pf r?
A ,,n,,ly•,H'lt I"" tr ,1d1Pft ,,,•,11l1 ·,
¥ ""'( 'll"R 1,,,nr,,l( tioll ', In lhl' 1,,c1w•r
C p,rp,,11111\ y1•,1r C'nd fip,,n<i,11 -.1,11Nn<•
ntr,
D prov1d1"fl lnfo rm,, llon for cfoc.i•,1on
-mak 1ng

2 A \, ,1dl't prov ided the fallo wing ,nfo

rma tion :
s
A-""{ <- Premises 180 000
f.. ~+ <- Inventory 234 20
;.. .__,\~'-'~; <- Trade payables 261 80
_/l~s~t ~ Trade receivables 217 10
L.:J....l,·~ <:- Office fixtures and fittin gs 326 00
..t:..L.·i:1 <- Loan from bank 800 00
P~~~J (:-- Cash at ban k 255 0
fls.>d <- Mot or vehicles 159 00
a Calculate the value of the assets . .J.'1
Z, \~-e,
b Ca lculate the value of the liabilities.
c Use the acco unti ng equ atio n to calc
1; "J"'.h'-
ulate the trad er's capi(;:il. !..r:.. :i > ~o
✓ 3 What is a- stat emen t of financial pos
ition?
A a calc ulat ion of the amo unt owe
d to the own er o! the bi_•:.:i ncs s
. /a list of assets and liab ilitie s of
a business on a certr1!r, ,Jc,:e
C a list of everyth ing own ed by and
owe d to a bus 1ness
D a sum mar y of mon ey paid to and
received by a business

./ 4 A busi ness had $9 420 in its ban k acco

unt. The foilo wing trzinsactions took
place:

1
I
$
250

.I
t Bou ght goo d s on cred it
,J1 )', .: Sold goo ds on credit 110 0 +
,Repaid a loan by cheque 500 0 -

II
I
- --
---"::
I I./(_

' '.,I;,. -; ,__

~-, (~
How muc h was there in the ban k afte

A $35 70 B $44 20
r these tran sactions?
C $46 70 /s5 21 0
 s Complete the following table to show the effect or each of the followlng transactions.
The first one has been completed as an example.

a Bought a motor vehicle and paid by cheque

b Bought goods on credit from a credit supplier
c Received a cheque from a credit customer ·T1oth ,-tc:c.vo.l,R
d Sold goods on credit
e Paid off a loan in cash

$ Effect on liabilities $
a Motor vehicles - Or Increase No effect
Bank ·G- Decrease

(1,

~l.
,. trtc>--1JJ
e
Ow

-:. @ The statement of financial position of Bharwani Traders on 31 October 20-4 is shown below.
Bharwani Traders·
.,
Statement of financial positio~ at :11 October 20-4

Assets $ Liabilities $
Machinery ./19 000 Ca pit.a! 35000
Motor vehicles ,/6000 Trade payables 8000
. ; 0 :!'·0
Inventory f 4900
Trade receivables · / 3000--.:- . i ,
\ .'
. '
r ;~~~0 '- "")
·1 ' ' - /

Bank ./10100 _,. I' ", '

- - ·"- + , ,, ·t,/
43000
- -_........~--·
43000. ..

On 1 November 20- 4 the following transactions took place:

A cheque for $3 000 was paid to a·credifsupplier.'
• I {.\ . •
Acredit custom e;yaid $500 in cash. . J
1
A loan for $8000, which was paid into the bank, w_as received from Lenders Limited.
A cheque for $7 000 was paid for an additional machine.; ,A .
•
I

Prepare the statemett' of financial position of Bharwani Tra ders on 1 November 20-4 after
the above transactions have taken place.
Learning objectives
In this chapter you will learn to:
• outline the double entry system of book-keeping 21
• process accoun ting data using the double entry system
21
• prepare ledger accoun ts 2.1
• post transactions to the ledger accoun ts 2.1
• balance ledger accounts as required 2 l
■ interpret ledger accounts and their balances. 2.1
2.1 Introduction
ent_oUinancial..position after every
A business would find it impos sible to prepare a statem----
recor-eed in the books of a business using
single transactigo. The day-to -day transa ctions.are Double entry
doub le entry is used because the two
the doub le entry system of book-keeping. The term book-kNpln1 is the
effects of a transaction (a giving a-nd a receiving) are

A business maint ains a separate ledgeLaccount for

-
6ofhi- ecord edin the ledger~-- -

each type of asset, expense, liabili ty and

process of makin g
a debit entry and a
credit entry for each
c~dit or. Every-transa ction is recorded in the
income and also for eacfiTridividual debto r and -- - -n.- ---- t,ransaction.
le9ger accou nt relatin g! o t!'JatparticuTar item or p~rso
nt appears on a separate page.
A ledger is tradit ionall y a bOL!O.d book wber.e_eact,_jlccou
leaf f9lde-r with separate sheets, each
Over the years, the ledger has -developed_i.[lto a loose
have seen the introd uction of a comp uter
'conta ining a ledge r account. Recent devel opme nts TIP
file divide d into separate ledger accou nts. The debit side of a
ledger account is the
The layou t of a ledge r accou nt is as follows: side which is receiving
or gaining value and
the credit side of a
ledger account is the
Credi t . :
I Debit
"'o;; /
1
Details
I ~ •
I Folio
I
ti' ,,
$" : Date I Details
/ F~llo 1~ !
side which Is giving
value.

be shown by a central vertical line,

Ledger accou nts are divide d into two sectio~s. this can
. The left-ha nd-side is know n as the
in this text book the central vertical line is not shown
t side. The term debit is usual ly
debit side and the right-hand- side is know n as the credi
viated to 'er'. On either side of the
l5breviated to 'dr' and the term credit is usually abbre
s and amou nt of each transaction.
accou nt there are colum n s to record the date, detail
The use of folio numb ers is not
A folio numb er colum n is used for reference purposes.
numb ers have been includ ed in examples
required wh en answering quest ions. However, fol!O
their use and purpose.
prese nt up to Chapter 7 so that you can aporecia'.E
, every transaction is entered twice
In order to record the two aspects of every tr2nsacc1on
side of anoth er accou nt. The accou nt
- on the debit side of one accou nt and on tr,e u-=d1t
the accou nt which is giving the value
which is receiving or gainin g the valuE ts deD1led ::wd
is credi ted.

Walkthrough 2.1 - - - -- - -- - -- - - - - - - - - - -
20-1
nt and invested $80 000
January 1 Ajay began business. He open ed a business bank accou
as capita l a
~t and paid [or by_ch~que b
2 Fixtures and equip ment costi_ng $30000 were boug
Enter t hese transactions in Ajay's ledger.
I
I

I
I
f
: oate
20- 7
::
Details Follo $
Ajay
Bank account
Date
20- 7
Details s ·j
80000 Jan 2 b Fixtures and
3 30ooo·j
IJan 1 a Capital 2
equipment ... ~ ...._,;
t

I
t
1 Date Details Folio
capital account

$ Date Details Folio

r 20-7
Jan 1 a Bank 1 80000 ·
'"""'-'
..... _

L
f Date
20- 7
Details
Fixtures and equipment account
Folio $ Date Details Folio • s
iJan 2 b. Bank 1 30 000
--
• The first transaction a is debited in the bank account, as th is is the account which is

~
receiving the money, and credited in the capital account, as this is where the money is
coming from.
TIP
The second transaction bis debited in the fixtures and equipment, to show the value being
. It is important to •
received, and credited in the bank account, as this is where the money is com fng from.
ensure that every
transaction is entered
twice, once on the
• In each transaction, the details column shows the name of the account in which the other
debit side and once on
half of the double entry is made.

The folio number is used for reference purposes and shows the page of the ledger an
the credit side.
•
which the account named in the details column appears.
It is important that a double entry is made for every transaction.

t You will learn more

{ abo.ut business '
} documents in Chapter 6. l
. *•~I..~ ----·..~· - ~-j,oo. . .- -....J
In practice, the information entered in the accounting records is obtained from .
business docume nts.
In practice, each ledger account has Its own page or sheet.

·.·.. •\ .
.;
.. -. .· •'
.·,:,.:

. ......
. .
,
 ll '1 VOlll~~l 11 ) I

lJ.<.f 1· , ()c.~ J,~,.,.1,(-r~~,J .

1 Explain why It Is necessary to niakc a double entry In the lcdg1n for oach tran1act1on. ... - " 1u o
0
Explain the use of the folio column In a ledger ,>ccount. ,,,,., ,,!.,, l C.
)

2.2 Double entry records for assets and liabilities

A ledger account is opened for eJch type of asset and liability. Applying the double entry
principles, eve1y transaction is entered tw ice. The account which is receiving the money is
debited and the account which is giving the money is credfte_d.

Walkthrough 2.2 - - - - - - - - - - - - - - - - - - -
20-7
January 1 Ajay began business. He opened a business bank account and invested $80 000
as capital --

2 Fixtures and equipment costi ng $30 000 were bought and paid for by cheque
3 A short-term loan of $10 000 was received from AB Loans
.,,,-- -
5 A motor vehicle costing $9 000 was bought and paid for by cheque
6 A long-term loan of .$5 000 was received from Ajay's sister Mallika
Enter these transactions in Ajay's ledger.

[ ■
Date Deta iLs Folio $ Date Details Folio
20-7 20-7
Jan 1 Capital 2 80 000,r' .Jan 2 ;=1xtures a11d equiprnent 3 30 00~
•7

3 AB Loa ns 4 10000 ., 5 M,,torve 111des

5 9 000 /
~/ '\,

6 Mallika loan 6 5 OQQ_,.

....,,.,.

-·· -·:--~~-- ~ ;~i;:~~~c~ --~-··---- ··-

I
Date Details Folio $ Date Details Folio s
20-7
Jan 1 Bank 1 ~000$;

Date Details Folio $ Date Details Folio $

20- 7
. Jan 2 Bank 1 3000v
'
 Jan l B,ink 1

Date Detalls Follo $

20-7
Jan 5 Bank 1 900!(

E!::::
Date Details
~::: =:- .~~~,oa~~nt__________s
Folio S Date Details Folio
20-7
Jan 6 Bank l scr.v

'2.3 Double entry records for expenses and inco·me

A ledger account is opened for each type of expense and income. The same double
entry principles applied to assets and liabilities are applied to expenses and income.
The account which is receiving the money is debited and the a.:cou nt which is giving the
money is credited. ·

Walkthrough 2·.3 - - - -- - - - - - -- - - - - - -
20-7
January 1 1\jay began business with a cap;:al c,f $80 DOO in tht• business bank account
1 He paid rent of premises, $400, by ,~hequ0

2 Fixtures and equipment costing $30000 we;e bought and paid for by cheque
3 He paid insurance, $250, by cheque

3 A short-term loan of $10000 was received from AB Loans

5 A motor vehicle costing $9 000 was bought and paid for by cheque
5 He paid motor expenses, $50, by cheque

6 A long-term loan of $5 000 was received from Ajay's sister Mc1llika

7 Part of the premises were rented out to another business and a cheque for $95
was received
Enter these transactions in Ajay's ledger.
 Date Details Folio $ Dato Dotall1 Follo $
I

20-7 20-7
Jan 1 Capital 2 8000~ Jt1n 1 Rent pay,1blc 7 4~.
3 AB Loans ◄ 1000~ 2 Fixture!, ;md equipment 3 30002,,'
6 Mallika loan 6 5000 3 lnsurc,nce 8 25~
✓
7 Rent receivable 10 9~ 5 Motor vehicles 5 9~
Motor expenses 9
~

Date Details Folio $ Date Details

20-7
Jan l Bank l 8000✓

Fixt~r~s and e; uipment acc~u~ ~~

Date Details Folio $ Date Details Folio $
20-7
Jan 2 Bank l

Date Details Folio $ Date Details

20-7
.Jan 3 Bank l

:. ---W-....,,._,,,"':"~* ~•'_;,~;:-;~'~cw
1~:t"?--,:-~\~t~'·""'~•~.......-~~"lf---·- --]
'~°";-.: 7"1;'••••..-.•

[ ---'--"-- r,A(,,.,, r M:,- 1

:= -~~~~L::.~:!~:~~~~;:·.~,~~I- ' ·----'--'~-----~~----
Page 5

Date Details Folio $ D;~ te ::letails Folio $

20-7
Jan 5 Bank 1 9000 :
I

[ '
Mallika loan account

Date Details Folio $ Date Details Folio $

20- 7
I
Jan 6 Bank l 5000✓
 Datt Dtt1lls
20-7
l
: Jan l Bank

Date Details Follo

20-7
1 25
' Jan 3 Bank ___ ~

~~nr:: -~ -:::. : :_)I

-Date
20-7
Details
- .
Foho $ D
ate Details Folio S

·,..Jan 5 Bank 1

Folio S Date Details Folio S

Date Details
20-7
Jan 7 Bank l 95)
• The motor expenses such as fuel and repairs are shown in an expense account as they do
not increase the value of the motor vehicle.

TIP • The rent received from a tenant is shown in an fncorne account and is kept separate from
When an item such as the expense of rent payable.
rent is both paid and
received by a business,
• No lines are left blank in the middle of ledger accounts as each entry is made on the next
separate accounts are available line.
maintained, one for
• In practice, for ease of reference, accounts of the same type (e.g. assets, expenses and so
rent payable and one
for rent receivable.
on) are kept in the same area of the ledger. _ _

TEST YOURSELF 1.,2 ·,

1 For each of the following transactions

. · state the name of th"''° account wh.1ch w1·11 be deb'1ted
and the name of the accountIwhich will be credited .
1 Paid rates by cheque r )'
b Bought machinery and paid by cheque -J 'l.\,
."
c Received
. commission by cheque for work done for another business
. \..1
tr
d Repaid, by cheque, money borrowed from XYZ Loan Co (/
2.4 Double entry records for drawings
Whenever l~!1_t'_!_~,~ bu!il_1~~--~~ l,11<~~-'::.'lul' frQJ:' lh!' l_)t1'.,lm~'•2.!orhis/h"' <1wn_w,~ thl:; l'i
k~!_np. Thi!. v~uc m~r In tl,c form of monry, non -current a'.,',"''• or good,;
~m the inventory held by the business. It is usuJI lo open ii drawing~ account lo rf•<.0rd
these values so that the capital account docs not have a large number of entrie•,.
Any drawings are debited in the drawings account to show the value golnP, Into lhat account. bu 1n
The credit entry will be in the account giving the vnlue. When money Is withdrawn, either t. lll1law on,
the cash or bank account will be credited. When a non-current il'.>'>et Is wilhdr awn, the lfdg,r acc:ounc
d,tf r n e e ~
appropriate non<urrent asset account will be credl\ed. When goods arc withdrawn, th(!
th,. d,.blt ,dit .and m
purchases account will be credited . This is becau se these goods were originc1lly purchar,cd <:red,t ~d
for resale and the amount of goods avallable for resale Is rg_cLL1cpJ:J wh en goods are taker?"
by the owner. ' 1

At the end of the financial year, the total of the drawings account is transferred to the capital
account. This reduces the amount owed by the business to the owner of the business.

TEST YOURSELF 2.3

1 For each of the following transactions, state the name of the account which will be debited
and the name of the account which will be credited.· l ' ' ( /",
r., •

11 The owner of a business invested more money in the business. pt ~ · l(,.•I ,;~r-\ V ),~, - , ..
b The owner of a business took an unused motor vehicle for personal use. '},c,. ,,,,ir~ 1 /'·\ •
I~ • I I
c The owner of a business took goods for personal use. :_7 1·,.,r--.~•-s I
Y"' ,,, ,, _,,
)

2.5 Balancing ledger accounts

At the end of each month, it is usual to -~~Ja rict> any account of assets and liabilities which TIP

cont.ain more than one entry. The balance is t he difference between the two sides of the When balancing an
__ i.,. .... ,,,, · - ~
---
account, add up each
account and represents the amount wfiich rs lert in that account.
- _...,_____, side of the account
The steps necessary to balance a ledger accoum are surn111arised as fo llows: and find the difference
between them before
• On a calculator or a separate sheet of paper, add up each side of the account and find the drawing total lines
,,,,,...._,,,..
difference between the two sides. and before writing the
word 'balance'.
• Enter this difference on the next ava ilable line on the side which is the smaller in money.
- Enter the ciate (usually the last day of the month) in the date column and the word 'balance'
in the details column. It is usual to insert 'c/d' in the folio column. This is the abbreviation for
'carried down' and indicates where the double entry for this item will be made.
- - . . ...
~~ ... ---,..-,._;.; .

• To!al each side of the account This is done by drawing total lines and inserting the figure
between these lines. It is usual to show a ~ingle line above the total and either a single or a
double line below the total. The totals of an account must be on the same level and~
.._be the same figure.
• Make the double entry for the balance carried down. On the line below the total s, writ_e
the amount of the balance on the opposite side to where the words :£.alan.c,;_e5Ld' were
written . Enter the date (usually the first day of the next month) in the date column and
the word 'baJance'._in the details column . It is usual to Insert Yd' in the fol io column.
This is the abbreviation for 'prou_gh! go~ and indicates ~ere She d<2ub~e e_ntr:y for_this
~ p e.
 Wnlkthrou5th 2,4 - rt ,, , •nlri"', m,,rJ,, h'j Aj ,I / rJ•1r1rir1 ,•.
1 hr- b,,11!. , , , """' prrp,w •,1 ff, WAlklhtOIIR fl ') · l , ,'how ,,, t' , ( JI, ', fJrl I J,1r111 ,1ry )(J I . ,., '·"
11,q "°"''"nf 1,,,11,,,,: 11,,l.rn1 ,, tl\l' h,111" ,1
L 1 ' 1111 " ' in A1 ,1v , ' '

Oat. Date OeMllt Folio s

0.-1111 Folto $
;'O 7 }(),
J,,n 1 C,,p,t,11 ) /111000 l,Hl I RN1t p,11,1blt! 7 111,
3 AH lll,\ll\ .. l0000 2 F11t11rr••• ,ind ,_,q•Jipm,:nt 3 ¥i·11,
t, M.,11,",, lo.,n '> ()()0 3 1n-,11r,1nr1> P, ,,
j" ~
h
7 Rc•nt rt'C l'IV,lblt• 10 9~ s Motor vf:h1r..l 1.-; s j,.ll .
Motor e,pen-,,,,, 9 ,,.
h

20-7
95095
7 Balance C/d
-
5~ :'°f.,

Jan 8 Balance b/d 55395

-
--
You can now answer Question 1 at the end of this chapte r.

2.6 Double entry records for sal,es, purchases and

returns ·
It is r·1,y0ss,1 ry to opC'n an account 10 record eoods whrch arc pur. ~Jsed for resale and also
an 0ccount to rC'cord goods which arc sold by the busrne·,.,,_ Wf' : ~L ~·1• se are actually the
s,in1i> c,oods comrnc into thr bCJ~rnc"s Jnci go 1ng out of Lh c bu,1 ,, •.,', ,t ,s necessary to record
tht~rn in St'p,1 ratl, Jccounts as tlw purchJses will be at cost prrcc ,.-.:; t 1-ie sales at selling
p1 ,:..c A pw:cha&e..aa.OJJot .:ind a sa l~:i.ac.c_Qunt are used r,1ti1c•r thJ,1 J goods account. An
inven~~)ry dccou~trs only used to !,('._C~d_t_tie g~Q~~ [eft at thE• cn(l ot tie finacg~ and
I '.
Ji01 lor d.Jy-10 d<ly trilnsactions.
: I
' i Thf' S.Jnw double e11 t1y pr inciples applied to assets and l1Jbil1ties are applied to purchases,
t
sales and rt>turn s.

Purchases -')f. (..tr•'~ -Vl!; v~t\~ J r

a Goods purchased for cash or cheque cJ..,
t Wlwnever goods airpurd1 ased, the p~~~:}c~~~'9~ed as the goods are
I corning into the bus,n c>ss and the pu,chdses account is recE>iving that value. The double entry

'i will bP a cr(ldi t l_n ei thPt th e> cash account or the bank account dE>pending on whether the
amount was paid 111 cash or by cheque.

I b Goods purchHed on credit

It is co mm on fo r businesses to buy on c1edi t and pay for th e goo
. _.
at lhe t11ne ol pu ,chast>. I he purchases account wi ll be deel tecl I th
t d th r than
cIs a a Ic1 ter ate ra e
· n e usu<1 I way.
er
 The credit entry will be made In the account of the supplier of the goods to show the valu(!
coming from that person. The supplier of goods Is known as a trade crecHtor.
W_hen payment is made to the supplier, the bank or cash account wlllbc crcjJfed (to show
value going out of that account) and the account of the supplier will be dcoitcd (lo show
value going into that account).

Walkthrough 2.5 - - - - - - - - - - - - - - - - - - -
20-7
January 9 Ajay bought goods, $650, on credit from Kolkata & Co PW1 t>i~~ 1 Mc,.
10 Ajay bought goods, $150, and paid by cheque {U-010,o.1,e;, , &an k

13 Ajay paid the amount owing to Kolkata & Co by cheque f<"-G, fJ.c.Y>~

Enter these transactions in Ajay's ledger.

::
I W 10 .

: Pa~J
s
Date Details Folio S Date Details Folio
20- 7
Jan 10 Purchases 11 1~_g.,,
13 Koikata & Co 12 65~ .

r:: ~~~:1E~~;!~~ei!?£\~1~~i~~-"'~--..... · .. ,~ Page 11]

s
■
Date
20-7
Details Fo lio ,$
,,
.
0£:.l:~J:le
''
Details Folio

Jan 9 Kolkata & Co 12 6.50 1 '

- -1
I •• ,.,
10 Bank 1 ... :J\~it?

[ -~=-";~~~~~;~-~~~~~-~~~--~·-·
Folio $ Date Details
. -=. '
Folio
Page ~~
S
Date Details
20-7 20- 7
· Jan 13 Bank 1 650 Jan 9 Purchases 11 650
650 650

• The account of Kolkata & Co is 'in balance' as both sides equal $650. The account has
been ~otalled to indicate that tfie~ cou; t is pow c[Q.S,edJ - - TIP
• ft is not necessary to write the month against each transac~ion, only when it is th~ first Only goods bought
for resale are entered
entry for the.month . .
in the purchases
• If there is more than one entry on the same side of an account on the same date, it is not account.
n~~~ssary to write th e day of the month each time,
 Sales
• Goods sold for cash or cheque
th
Ct.
Wh~never goods cJre sold, the s:iles arc:oun.t. wllib~cr~~d as e goods a~e going out of the
'
business and the sales accoun~t~iue.-:rhe double entry wdl be a debit in
~ither the cash account or the bank account depending on whether the amount was reO!iv~
in cash or by cheque.

b Goods sold on credit

Just as a business may purchase goods and pay for them at a later date, it may also SE':11
goods on credit. The sales account will be credited in the usual way. The debit entry will be
made in the account of the customer to whom the goods were sold to show the value going
to,.that person. The customer who bought the goods on credit is known as a ~ -
·when payment is received from the debtor, the bank or cash account will be debited (to show
val_ue coming into that account) and the account of the 9ebtor will be credited (to show value
going out of that account).

Walkthrough 2.6 - - - - - - - - - - - - - - - - -
20-7
January 16 Ajay sold goods, $175, for cash
17 Ajay sold goods, $770, on credit to Prerna
20 Prerna gave Aj ay a cheque for $500 on account

■
Enter these transactions in Ajay's ledger.

[ 7··:;~-~ ••:2;:,'.':'.:~~ =~:!:~ou:.t --: '. ,.,

~.<J.j,._:-:, . • u

Date Details
, ,. ~_.:,rp! ,. '

; ~ ~ate,
.

Det~
, "
•' .
- ,
p ::•1
age~
~ - ~- Fo"'"l-io- - $....,.•
20-7

c· ·----~ ·:~,,.~~7•~-·= :~: ~ P;g~~~

Jan 20 Prerna 15 .500.
,y
::'

Date Details Folio $ Date Details Folio $

20-7
Jan 16 Sales 14

[ : :~
' Date
:: :: :: :: :::: -~:~~1;;-accou~t:
Details Folio $ Date
: :: :·:::: :
Details
'
Folio
Page.~
$
I 20-7
Jan 16 Cash 13 17y ;
I
~
17 Prerna 15 71J ;
 Jan 17 Sales 14 77~ Jan 20 Bilnk 1
20 Balc1nc<? c/d
-~ r •
770 770
20-7

· •
Jan 21 Balance
- b/d 270

The term 'on account' indicates that only part of the amount outstanding is being paid.
TIP
The remainder will be paid at a later date.
' - - -- - - When goods
• Prema's account has been balanced following the stages mentioned previously in this (orlglnally purchased
chapter (though this is usually done at the end of the month). for resale) are sold

•
-On 21 January, Prema is Ajay's debtor as an amount of,,S27Q. is owing to Ajay.
~
they are recorded in
the sales account.

Returns
Sometimes goods which have been purchased have to be returned to the supplier. They may
be faulty, damaged or not what was ordered. These goods are known as purchases returns
or-returns outward. A special account known as a gurchases returns account (or returns__ .
outward ac~unt) is opened and any returns are cr~d;ed to this account to show the value
goin out The debit entry will be mad~ in the account of the supplier to whom the goods are
eingTeturned (to showl:hevalue going to that person).
Similarly, a customer may return goods to the business. These goods are known as :_al~

--
returns or returns inwards. An account known as the sales returns account (or returns
inwards account) is opened and any return: are deo1ted to this account to show the value
co~ ing in. The credit entry will be made in the account of the customer who returned the
goods (to show the value coming from that person).

Walkthrough 2.7 - - -- - - - - - - - - - - - - ----.

20-7
January 21 Ajay sold goods, $245, on credit to Xavier Traders

22 Xavier Traders returned damaged goods, $55, to Ajay

23 Ajay purchased goods, $820, on credit from Va run
25 Xavier Traders paid their account by cheque . l q o
27 Ajay returned faulty goods, $44, to Varun
30 Ajay gave Va run a cheque for $700 on account
Enter these tran?actions in Ajay's ledger.
'
'

• I
 Date Details Folio $
'. Date Detalls Follo $
'. 20-7 20-7
19P/ Jan 30 Varun 18 700 :
!I Jan 25 Xavier Traders 16 ~~

I! ,::___~~k__. . . . '""...,...
Pu_....
rch_as~~c-ou....... ~~:
nt.........._,_..~~~ ......._..:....__..~~-3'1...lllllllll
Date Details Folio $ Date Details Folio $ ;
I 20-7
I Jan 23 Varun 18 82$,'

[: .~ : ~a,les ac~ount ' ,

$ Date Details Folio
Page~
$ J
Date Details Folio
20-7
Jan 21 Xavier Traders 16 245 ,
- -- ✓_J

20-7 20-7
Jan 21 Sales 14 24~/i Jan 22 Sa !e::; 'rE.'tums 17 5.:/
· 25 8an r~ , 1 190 '
~ :::::v
245 245 i
- -~ - --__J

[ ~~~-,--~-~ ,~ ~;·:~T~~ ---;•~ ~;;~ ~~c~~unt . -~ ~·- ~ ~ ~ ~ Pagel~

Date Details Folio $ Date Details Folio $ I.

20-7
1 Jan 22 Xavier Traders 16 5~
. .
; Date
I
Date Details Folio $ 1
·I 20-1 20-7
1
Jan27 Purchases returns 19 ✓ Jan23 Purchases 11 82~'.
30 Bank 1 70~
31 Balance c/d 76
- I
820 820 I
20-7
Jan 21 Balance
- - ..
b/d 1
d
Pag~~~
Date Details Folio $ Date Details Folio $ l
20-7
~an 27 Varun 18 44
✓·

You can now answer Questions 2- 4 at the end of this chapter.

2. 7 Double entry records for carriage inwards and

■
carriage outwards l ~ : r
I
The term carriage refers to the c.9~ of C<!UYJng or transporting ~c,ods. Carri~ge inwards
Carriage is the cost of
is part of the cost of urchasi .gQ..o<;t~ as it occurs when a business has to pay for goods it transporting goods.
has purchase to be g_elivered tQ..Lt.~-P.roise;;. Ca!'riage outwards is a Slc'lling ~~P.~IJ..~e as Carriage Inwards is
it occurs when a business pays for goods ~o be d?livere.d to the customer's prem ises. It is the cost of bringing
important that these two·exe~.fil.~.$ are treated separately in the accounts. the goods to the
- - , : -~--·- - ---- - 1' business and carriage
Applying the double entry pri nciple to carriage inwards, the carriage inwards account is outwards is the cost
debited as this_is the acg2unt receiving the_money and the cash account (or the bank a2fuunt of delivering the goods
if the money is paid by cheq\,Je) is credited as the money is coming from this account. to the customer.
&f
Similarly, if the payment relates to carriage outwards, the cash account bank account is
credited and the ca rriage out~ s account is debited.
If the carriage is not actually paid for at the time, the account of the supplier of the carriage
--
service will be' credited instead of the cash account or bank ~ccount.
~ - ·- -- . - ----- --

lJ
TEST YOURSELF 2.4

1 Explain how to balance a ledger account. dr.J.. -, lr/d.

2 Explain the meaning of the term cree:lit purchases. ~ lcJ VL
I l You will learn more
3 State two reasons why it may be necessary to return g~ods to a supplier. f~
pJA ->1to~
l about dou~le ~ntry
4 State an alternative name for sales returns.~ '"~CU.. book-keeping in
5 Explain the difference between carriage inwards and carriage outwards.-lt, ~ ' -L<i~~
Chapter 4.
. c.,vJ ~ $ 6 -J-, c----- -- -----'
You can now answer Question 5 at the end of this chapter.
2.8 Three column running balance accounts
, hf' lr-dt!"'' .,,_, 1)111111. p,,,~,,,,,,.,t •,n ,.,, h,\11(' hN'r1 lr1 !ht' rr,1d1rron,1I f,)rrn n11 ·, fr1rrn I, ,11-,,,
'-ncw,·n ~'- lhf' '1 · t\t, "'"'' fnrm ,11
,I . <h ,. rnrnrnrinh,, 11·,,,rJ r,n
11"'1\, '" ,,111,1tw1 n,1·1h,, ,1 ol p11".1' nllflf; I,·, t f'. 1 '1 ,1u o 11n f •• ,.,h1
•• · ' ·
( '-1mp1 tk1 t:1'1w1 .,11,,1 ,,11P11111 •, v-.l\11 h ,,, ~1111.·m ., ,, thr rtir!''' r fJl11rnn runrun~brJl~k.crr,.,,
1 h," k 11m c,I p11'\1' nl ,1l1pn 11 ,.,,., only n tH' , nlumn ,,.,, h fnr fh" rl ,,tf', rJ,,r, 11 l•, ,,nrl r,,,,,, -1nr1 h,1•,
lht1'<"' n, 1,i,q, CL'IUtnn.., ', 1(11' hy w lr <HH' tor~, ft ,I, nnI• frir rrr•d 1t ,twl rm " frJ! b,il,~,,,.~.-Jft,,,
\'\ ,~h ''-""''-•"" 11\,n l lw l,,yo ut ol ,, IPdt','•r .1rr (HHlf u·.,n ~ th ,·, form,,t ,,, ,1•, fr1llr)w ·, .

1 he: advJntJge: of th is method is that ,t shows the ba lance of th<' -1ccount aft er e•J1:r J
t 1i'lnsaction . When the accounts are prepared manu al ly, 1t involves E'i<tra u 1k1~l_:--H19n'.; ·11hr.h
may leJd to errors.
-
Wa lkthrough 2.8 - - - - - - - - - -- - - -- - - - - -
20- 7
January~ l Ajay bega n bu si ness. He opened a bu si ness bJnl-- ,icco un t Jnd invested $2GCCC
• ' 1'
...,...,•: as ca p ital , ~..,, \ , ,,
,
t . '• ·'

- l Pai d rent o f premises, $400, by cheque .

- 2 Fixt ures ;-ind cquipn1en t cost ing S30 000 werl' bvuf.',hi J" •.! " J1d for by cheque r::- •.;o
- 3 Paid in surJnCt\ $250, by chL'que •. .

..... 3 A ~d1 o rt-tt>rm loJn of Sl OCOO w,~s received fro m AG L,1.i 1...

' 5 A moto1 vehicl t? costing $9 000 was bought and pJ 1d f0r by ch0que .
5 Paid motor e~pen st"'S, S50, by cheque>
1

6 A lo ng 1e,rnloa n ot $SOOO w as rece1ved froni Ai ay·ss1sterM Jlli kJ t' .,, ~ ,_:~ --:-

7 Part of the prem ises w er,e ';nted out to another bu sin ess and a cheque for $95
was , ecP1ved ; . , 1· 1,, •
E.nt er tlwse tr ,rn!>.1C t io 11 s in th e b.inl-. account in AJ 1'-' !> lt•d ,,.,r LJ " t· r1:i th th
' , o~ _, g e ree co Iumn runni·ng
ba la nce lo , rna 1.
'Date Details Folio Debit Credit Balance
$ $ $
20-7
. Jan l Capital t- 80000✓ aoooodr
·Rent payable - 40Q./ 79600 dr
2 Fixtures and equipment -3000_} 49600 dr ·
3 Insurance -250 49 350 dr
✓
AB Loans + 10000 59350 dr :
5 Motor vehicles V
-900~ 50350 dr
Motor expenses - 50 50300 dr
✓
6 Mallika loan t- 5000 55300 dr
✓
7 Rent receivable ~ 9~ 55395 dr
- -- ---
• ,,,.._,,.,..
column to indicate th1nature of the balan_gJ
-
It is common for the abbreviation 'dr' or 'er' to appear after the figure in the balance
·
,

2.9 Interpreting ledger accounts and their balances

It is necessary to be able to understand the entries made in a ledger account and to be able
to exp lain those entries.

· Walkthrough 2.9 - - -- - - -- - · - -- - - -- - - -
The following ·account appeared in the ledger of Aj ay.
_.....,...l___.....--~-,-..-.,~r•~.-,-;;~----~,.,..,,,.,.,.....,A
: ~:-.•;·~(":•~~-:-,-•'". -~""":'":~-, ~-·'. ,: .•~,_r. -~7
C Date Details
'
·., . , .

Folio S
. . Jay , .
X~vief,Trnders a~count ~

Date · Details
.. •, .., : .'.
, , _· . . · · ,
~... .

Folio S
20-7 20- 7
Mar 1 Balance b/d 122 Mar 9 Cash 122
8 Sales 650 12 Returns 98
20 ·sales 820 29 Bank 550
31 Balance c/d 822
1592 1592
Explain each entry in the account of XavierTraders and state where the double entry for each
item will be found .
March 1 Xavier Traders owe Ajay $122 for goods supplied on credit in previous months
Double entry: Xavier Traders account for February 20-.7 credit side
8 Ajay sold goo·ds on credit to Xavier Traders, $650
Double entry: Sales account credit side
 9 Ajay received cash, $122, from Xavier Traders
Double entry: Cash account debit side
12 Xavier Traders returned goods, $98, to Ajay 'd
Double entry: Sales returns account debit si e
820
20 Ajay sold goods on credit to Xavier T~aderS, $
Double entry: Sales account credit side
(or by bank transfer)
29 Xavier Traders paid Ajay $550 by cheque
Double entry: Bank account debit side

31 Xavier Traders owe Ajay $82 2 ii 20 _7 on the debit side

Double entry: Xavier Traders account for Apr

You can now answer Question 6 at the end of this chapter.

unts easier to understa nd, the
As students often find the traditional form of ledger acco .h f f
, , . h t th· book However e1t er orm o
T format 1s used in all ledger accounts throug ou is · ' -
presentation is acceptable.

■ Every transaction must be entered twice - on the debit side of one account and on the credit side of
another account.
• The debit entry is made in the account which is receiving the value and the credit entry is made in the
account which is giving the value.
■ Each type of asset, liability, expense and income has its own ledger account.
• Any_ value taken from the business by the owner of the business is known as drawings.
• At the end of the period, the accounts of assets and liabllitie~ which contain more than one entry should
be balanced. ~ \ I i l '
- ~
• ••~• • ' ' . : "-Mo~ -:

• The entries for purchases and sates, ai,d µurcha5es return~ai1d sales returns, areirecorrJecf.in '~ ' 1
I r jfl • " , • , , _ ,- "'•\ •
, 1

separate accounts. ,, , .' .. , , ,; , · ' • . . .· ',, ·

__ ___
■ Carriage is the CC$t of trar.sportlng eoods. ·, . :
....._ ' ._:...•,
....._......... -~~...... _;_ ·_,
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