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CHAPTER THREE

Double Entry Accounting


System

The double entry system


Double entry system is a system where each
transaction is entered twice, one on the debit side
and one on the credit side.
The double entry system divides each page into
two halves. The left hand side of each page is
called the debit side, while the right hand side is
called the credit side.
The title of the account is written across the top
of the account at the centre
When recording a transaction each item record
should also include a date when the transaction
took place.

T Accounts
SHAPED
LIKE a T Debit

Credit

T Accounts
Debit means
Left

Credit means
Right
Debi
t

Credit

T Accounts
Abbreviation
for Debit

Dr.

Cr.

Abbreviation
for Credit

T Accounts
ACCOUNT NAME

CASH
Dr. Cr.

Rules of Double Entry Recording

1. Every transaction affects at least two


accounts.
2. There must be at least one debit and one
credit entry
3. The total debits must be equal to the total
credits
4. The particulars in the account refer to the
name of the other account where the double
entry is recorded.

Every T Account has:


An Increase Side,
and
A Decrease Side
But, Some
Accounts Increase
on the Debit Side
And, Some
Accounts Increase
on the Credit Side

ASSET ACCOUNTS

Increase on
Debit Side

Dr.

Cr.

Decrease on
Credit Side

LIABILITY ACCOUNTS
Decrease on
Dr.
Debit Side

Cr.

Increase on
Credit Side

CAPITAL ACCOUNT
Decrease on
Debit Side

Dr.

Cr.

Increase on
Credit Side

JUST LIKE
LIABILITY ACCOUNTS

EXAMPLE:

PURCHASE FURNITURE FOR


RM800 CASH

STEP #1
Name the accounts affected:

FURNITU
RE

CASH

STEP #2
Determine Classification of
Accounts
AS
AS S

SE
T

ET

CASH

FURNITURE

Did furniture
increase or decrease
in this transaction?

INCREASED

FURNITURE
DR.

RM80
0

CR.

What about cash?


increase or decrease
in this transaction?

DECREASED

CASH
DR.
+

CR.

RM80
0

DEBITS = CREDITS
FURNITURE
DR.
CR.

Cash
$800

CASH
DR.

CR.
Furniture
$800

EXAMPLE:
Ahmad, the owner, invested
$25,000 cash in the
business.

INCREASED OR
DECREASED?
INCREASED

INCREASED

CAPITAL
DR.

CR.

Cash
$25,000

CASH
DR.
+

Capital
$25,000

CR.

DOUBLE-ENTRY ACCOUNTING FOR RECORDING


ASSETS, LIABILITIES AND OWNERS EQUITY
DEBIT

CREDIT

Asset
Fixed Asset
Current Asset

Liability
Long term Liability
Current Liability

Capital

DOUBLE-ENTRY ACCOUNTING FOR RECORDING ASSETS

For asset accounts, we will debit the asset account if the value is
increase; and we will credit the asset account if the value is
decreased.
Example
Ahmad bought a furniture for RM500 in cash.
Account name

To record

Entry in the account

Furniture Account

+ (an increase)

debit RM500

Cash Account

- (a decrease)

credit RM500

DOUBLE-ENTRY ACCOUNTING
FOR RECORDING LIABILITIES
AND OWNERS EQUITY (CAPITAL)
For liability and owners equity accounts, we will credit the account
if the value is increase; and we will debit the account if the value is
decreased.
Example 1
Ahmad borrowed BankXX for RM2,000 to pay its debt to Syarikat
Kamdar (creditor).
Account name
BankXX Loan Account
Syarikat Kamdar

To record

Entry in the account

+ an increase

Credit RM2,000

- a decrease

Debit RM2,000

Example 2
Ahmad started the business with initial cash capital of RM10,000.
Account name

To record

Entry in the account

Capital Account

Credit RM1,000

Cash Account

Debit RM1,000

Fill in the blanks:


Transaction

Bought a machinery with cheque for


RM500

Sell a second hand van to Encik Abu


for RM6,000 in cash.

Bought a furniture from Syarikat


Gagah for RM600 on credit.

Zainal started a business with


RM80,000 cash.

Paid Syarikat Anis RM200 using a


cheque.

Account name

Machinery
Bank account

To
record

Entry in the
account

Transaction

Account name

To
record

Entry in the
account

Bought a machinery with cheque


for RM500

Machinery account
Bank account

+
-

Debit
Credit

Sell a second hand van to Encik


Abu for RM6,000 in cash.

Van account
Cash account

Credit
Debit

Bought a furniture from Syarikat


Gagah for RM600 on credit.

Furniture account
Syarikat gagah
(creditor)

+
-

Debit
Credit

Zainal started a business with


RM80,000 cash.

Capital account
Cash account

+
+

Credit
Debit

Paid Syarikat Anis (creditor) for


RM200 using a cheque.

Syarikat Anis(creditor)
Bank account

Debit
Credit

DOUBLE ENTRY FOR


EXPENSES AND REVENUE
What is expenses?
sacrifice made ; for running the business on
a day-to-day basis.
Example: to pay petrol to use in a vehicle.

What is revenue?
An income to the business.
Example: interest received, rent received.

DOUBLE ENTRY FOR


EXPENSES AND REVENUE
DEBIT
REVENUE
EXPENSES

CREDIT
+

We will credit all the revenue account when the revenue is


increased.
No entry will be made at the debit side of the revenue account.
Example 1:
RM1,000 cash is received for renting a building by the firm.
Account name

To record

Entry in the account

Rent received account

Credit RM1,000

Cash account

Debit RM1,000

We will debit all the expenses account when the expenses is


increased.
No entry will be made at the credit side of the expenses account.
Example 1:
Paid salary RM500 in cash.
Account name

To record

Entry in the account

Salary account

Debit RM500

Cash account

Kredit RM500

Example 2:
Petrol expenses are paid by cheque RM300.
Account name

To record

Entry in the account

Petrol expenses account

Debit RM300

Bank account

Kredit RM300

DOUBLE ENTRY FOR GOODS


Goods referring to purchase and sale activity.
Purchase of goods refer to the goods that youre buying in
intention to sell it back and make profit out of it.
Sale of goods mean that youre selling the product and make
profit out of it.
Transaction

Accounts involved

Entry in the account

Cash purchase

Purchase account
Cash account

Debit
Credit

Credit purchase

Purchase account
Creditor account

Debit
Credit

Cash sales

Cash account
Sales account

Debit
Credit

Credit sales

Debtor account
Sales account

Debit
Credit

DOUBLE-ENTRY FOR
RETURN INWARDS AND RETURN OUTWARDS
Return inwards happen when goods which had been sold to
someone (debtor) are now returned by him/her back to the
firm (us).
This could be for various reasons such as:
a.
b.
c.

We have sent him/her goods of the wrong size,wrong colour


or the wrong model;
The goods may have damaged in transit;
The goods are of poor quality;
Transaction

Return inwards

Accounts involved

Entry in the account

Return inwards account Debit


Debtor account Credit

Return outward happen when goods that we (the firm) are


previously brought are returned to the seller (creditor).

a.
b.
c.

The reason might be:


We received goods of the wrong size, the wrong colour or the
wrong model;
The goods may have been damaged in transit;
The goods are of poor quality;

Transaction

Return outwards

Accounts involved

Entry in the account

Creditor account Debit


Return outwards account Credit

DOUBLE-ENTRY FOR DRAWINGS


Traders will often take items out of their business goods or cash for
their own use, without paying for them.
There is nothing wrong about this, but an entry should be made to
record the event.

Transaction

Cash drawings
Goods drawings

Accounts involved

Entry in the account

Drawings account Debit


Cash account Credit
Drawings account Debit
Purchases account Credit

Example 1

2012
Jan 1

Puan Keembung started her business with cash of RM50,000.

Jan 3

The business bought a machine RM4,000 with cash.

Jan 15

The business bought a furniture for RM500 on credit from Pak Abu.

Jan 28

The business make a bank loan of RM10,000 to buy a delivery van.

Jan 31

Pay Pak Abu in cash RM450.

Required:
Record the above transaction in the ledger and prepare the
Trial Balance as at 31 Jan 2012.

Example2
February
1

Puan Kenanga started her business with cash of RM5,000.

Bought goods from Pak Hitam on credit for RM300.

15

Goods sold to Pak Utih on credit for RM500.

20

Bought goods with cash of RM100.

24

Goods returned by Pak Utih RM50.

26

Cash sales for RM800

27

Puan Kenanga withdrew RM400 cash from the business for


her own use.

28

Goods returned to Pak Hitam RM100.

Required:
Record the above transaction in the ledger and prepare the
Trial Balance as at 28 February 2011.