PRINCIPLES OF

ACCOUNTING

Double Entry System &

Bookkeeping Basics - I

Narmada Balasuriya
B.Sc. Accounting (Special) – USJ, CIMA (UK)
Department of Accounting and Finance
Faculty of Business
Accounting Process

The accounting process mainly includes the following steps.

1. Identifying transactions and recording them in journals
2. Post to the ledger accounts
3. Preparing the initial trial balance
4. Adjusting the ledger accounts
5. Balance and Close the accounts
6. Prepare Financial Statements

Let’s look at the first two steps in this session.

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1. Identifying transactions and recording them in journals

Source Documents
• Source documents will tell you almost
everything you need to know about a
transaction.
• Source documents provide evidence for
transactions happened along with the details.
Examples: Bill/Invoice, Receipt, Payment
Voucher, Debit Note, Credit Note

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1. Analyzing transactions and recording them in journals

Journals or Prime Entry Books

• By using the information in source documents, the transaction will be properly recorded in
account books.
• Transactions are first entered in journals or Prime Entry Books or Books of original entry
• This process is called ‘Journalizing’
• There are specialized journals such as sales journal, purchases journal, sales returns journal,
purchases returns journal, cash book etc. These are also called ‘Day Books’
• The ‘General Journal’ is not a special journal used to record a special type of daily
transactions – it can used to record transactions which are not normally recorded in other
day books. 7
Accounting Record and Double Entry System
• An accounting entry is made using the double entry system.

• DE system is based on the ‘Dual Aspect Concept’ – every transaction results in two impacts.

• Two impacts will be recorded in accounting books in the form of ‘Debit’ and ‘Credit’.

• First identify the account/s affected by the transaction and then apply the double entry

rules.

• Let’s now look at the double entry rules.

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Double Entry Rules - Assets

• What is the double entry used to record the following transaction?

‘Buying a land worth Rs.1,000,000 paying cash’

Impact Account Name Debit/Credit Amount (Rs.)
Lands will increase - Asset Land Account Debit (Dr) 1,000,000

Cash will decrease- Asset Cash Account Credit (Cr) 1,000,000

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Double Entry Rules - Liabilities

• What is the double entry used to record the following transaction?

‘Received a loan of Rs. 500,000 from a creditor’

Impact Account Name Debit/Credit Amount (Rs.)
Cash will increase - Asset Cash Account Debit 500,000

Creditors will increase -Liabilities Creditors Account Credit 500,000

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 Double Entry Rules - Equity

• What is the double entry used to record the following transaction?

‘Owner invested Rs.800,000 in the business’

Impact Account Name Debit/Credit Amount (Rs.)
Cash will increase - Asset Cash Account Debit 800,000

Ownership will increase - Equity Capital Account Credit 800,000

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Double Entry Rules – Equity - Drawings

• What is the double entry used to record the following transaction?

‘Owner took away Rs.10,000 in cash for personal use’

Impact Account Name Debit/Credit Amount (Rs.)
Cash will decrease - Assets Cash Account Credit 10,000

Ownership will decrease- Equity Drawings Account Debit 10,000

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Double Entry Rules – Income or Revenue

• What is the double entry used to record the following transaction?

‘Earned Rs.200,000 sales income in cash’

Impact Account Name Debit/Credit Amount (Rs.)
Sales Income will increase - Income Sales Account Credit 200,000

Cash will increase -Assets Cash Account Debit 200,000

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Double Entry Rules – Income or Revenue

• What is the double entry used to record the following transaction?

‘Sales returns by customers worth Rs.10,000. These goods were sold on credit basis’
Impact Account Name Debit/Credit Amount (Rs.)
Sales Income will decrease - Income Sales Returns Account (Contra Debit 10,000
income account)
Trade debtors will decrease - Assets Trade Debtors Account Credit 10,000 14
Double Entry Rules - Expenses

• What is the double entry used to record the following transaction?

‘Paid Rs.15,000 as rent expense for the period.’

Impact Account Name Debit/Credit Amount (Rs.)
Cash will decrease - Asset Cash Account Credit 15,000

Rent Expense will Increase - Expense Rent Expense Account Debit 15,000
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Double Entry Rules - Expenses

• What is the double entry used to record the following transaction?

• We bought Rs.10,000 worth goods on credit basis from Jaliya Traders

• Purchases Expense Account Debit

• Trade Payables/Creditors Account Credit

Impact Account Name Debit/Credit Amount (Rs.)
‘Returned
Purchase Rs.50,000
expense worth
will decrease goods
-Expense purchased
Purchases Returns from Jaliya Traders
Credit (Trade50,000
creditor)’
Account/Return Outwards

Think
Trade of allwill
Creditors goods purchases
decrease- Liability as Trade
EXPENSES
Creditorsof the business
Debit – Purchase Expense
50,000 16
Account/Jaliya Traders
Double Entry Rules - Summary

Assets + Expenses = Capital + Liabilities + Income

Type DE Rule
Assets Increase – Debit
Decrease – Credit

Expenses Increase – Debit

Decrease – Credit

Equity Increase – Credit

Decrease – Debit

Liabilities Increase – Credit

Decrease – Debit

Income Increase – Credit

Decrease – Debit
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• Which of these journal entries represent a transaction where cash is paid by the business to settle a liability?
Dr. Income Taxes Payable 500
1 Cr. Cash 500
Dr. Electricity Payable 1,500
2 Cr. Cash 1,500
Dr. Cash 300
3 Cr. Creditors 300
Dr. Retained Earnings 500
4 Cr. Cash 500
Dr. Cash 1000
5 Cr. Bank Loan 1000
Dr. Rent payable 100
6 Cr. Cash 100

A. 1, 2, 3 and 5 only
B. 1, 2, and 6 only
C. 1,2, 4 and 6 only
D. 1,2,3, and 4 only

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• Which double entry reflects the following transaction? “JMC bought a building worth Rs.300,000, paying
Rs.50,000 in cash and the balance financed by a loan obtained from a bank.”

Building Account Debit 300,000

Loan Account Credit 250,000
1
Cash Account Credit 50,000

Loan Account Debit 250,000

Cash Account Debit 50,000
2
Building Account Credit 300,000

Building Account Debit 300,000

Loan Account Credit 250,000
3
Cash Account Debit 50,000

Building Account Debit 300,000

4 Cash Account Credit 300,000

A. 1 only
B. 1 and 3
C. 2 only
D. 2 and 3 19
• Which journal entry reflects the following transaction? ‘ABC Business bought Rs.150,000 of inventory from suppliers on
credit basis.’ Inventory is accounted for using Purchases Expense account.
Accounts Receivable Account Debit 150,000
1 Purchases Account Credit 150,000

Accounts Payable Debit 150,000

2 Inventory Account Credit 150,000

Purchases Account Debit 150,000

3 Trade Receivable Account Credit 150,000

Purchases Account Debit 150,000

4 Cash Account Credit 150,000

Purchases Account Debit 150,000

5 Trade Payable Account Credit 150,000

A. 1 only
B. 5 only
C. 2, 4 and 5
D. 3,4, and 5 20
1. A business provides the following figures. Property Rs.840,000, Equipment Rs.82,000, Cash at Bank Rs.101,150, and Loan
520,900. Based on the above data calculate the capital of the business.

2. Total assets of the business are worth Rs.1,250,000. The value of current liabilities is Rs.22,000 and non-current liabilities
is Rs. 500,000. Based on the above data calculate the capital of the business.

(when writing the answer please write the value without any symbols, spaces, commas, cents etc. For example, if your answer is
50000 rupees, then write the answer as 50000 in the space given.)

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How to record in a General Journal
Let’s focus on recording transactions in a general journal.
When a journal entry is placed in the general journal, the entry should comprise of the
following components.
1. the date of the transaction,
2. the accounts and amounts to be debited and credited,
3. a brief explanation of transaction (narration)

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2. Posting to Ledger Accounts

• Once transactions are recorded in the journal, then these records are copied to ledger

accounts using the following ledger account structure.

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Ledger account format – ‘T’ Account

• Instead of the detailed ledger account, we usually use a ‘T-account’ to post the double

entries.

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Activity 1

Write the double entries/journal entries for the following transactions and post them in ledger

accounts.
• Tharani invested Rs.1,0000,000 in a business called T-Break Bakes.
• Business bought Rs.100,000 worth equipment.
• Opened a bank account in business’s name by depositing Rs.50,000 cash.
• Obtained a loan of Rs. 500,000 from a Dinu Ltd.
• Purchased stocks worth Rs.60,000.
• Sold goods with a sales value of Rs.15,000 for cash.
• Sold goods to JT Restaurant for Rs.50,000 on credit basis.
• Tharani took away Rs.1,000 worth products for personal use. 25
Activity 2

Write the double entries/journal entries for the following transactions and post them in ledger accounts.
• Owner invested Rs.2,800,000 and started a flower décor business.
• Owner asked one of his friends to lend some money to the business. The friend gave Rs.1,000,000 as a loan to
the business.
• The business purchased 60,000 rupees worth office furniture.
• The first delivery vehicle was bought by paying Rs.1,000,000 in cash and the balance 1,500,000 is payable.
• Owner further invested Rs. 800,000 in cash.
• The business purchased its first stock of inventory worth Rs. 70,000 on credit basis.
• The business opened a bank account for its business purpose by depositing Rs.20,000 (taken out from the
drawer)
• Business made its first sale by selling flower decors for Rs.120,000 to a client (for cash). The cost of inventory
here is Rs. 70,000.
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 PRINCIPLES OF
ACCOUNTING

Double Entry System &

Bookkeeping Basics - II

Narmada Balasuriya
B.Sc. Accounting (Special) – USJ, CIMA (UK)
Department of Accounting and Finance
Faculty of Business
Accounting Process

The accounting process mainly includes the following steps.

1. Identifying transactions and recording them in journals
2. Post to the ledger accounts
3. Preparing the initial trial balance
4. Adjusting the ledger accounts
5. Balance and Close the accounts
6. Prepare Financial Statements

Let’s look at the third step in this session.

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3. Trial Balance

What is a Trial Balance?

• It is like a list of all the accounts (names and respective values) that you have in the account books

• Asset and expense account balances appear on the debit column of the trial balance while capital, liability and

income account balances appear on the credit column.

• Remember, Trial Balance is NOT a Financial Statement.

Why do we need to prepare a Trial Balance?

• Ensure numerical accuracy
• Errors revealed by the TB
• Errors not revealed by the TB
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Trial Balance - Format

• Let’s see how we can balance the ledger accounts first……… 30

Balancing Ledger Accounts

• To prepare a trial balance the accounts are balanced first.

• Let’s see how we can balance the ledger accounts first………

The steps involved in balancing a ledger account:

1. Take the totals of both sides of the ledger a/c (Debit and Credit sides separately).
2. The higher figure out of the totals must be inserted as the total of both sides.
3. Closing balance is the balancing figure on the side with the lower balance.

• In case of ledger accounts of assets, liabilities and equity, 'balance c/d' is written next to the closing balance
whereas in case of income and expenses ledger accounts, 'Income Statement or P/L' is written next to the
balance.
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4. Adjusting Ledger Accounts

• Sometimes there are transactions that we have either missed or things we have recorded but need to be

adjusted ---> to make figures more relevant and accurate.

• These will result in ‘Adjusting Entries’

• The accounts will be adjusted before finally balancing/closing the ledger accounts for the accounting period.

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Activity 3
Date Transaction
1st April Dhanush invested Rs.500,000 cash and Rs.200,000 worth equipment and started a business.
2nd April Purchased furniture worth Rs.80,000.
3rd April A loan of Rs.300,000 was obtained from a creditor.
5th April Deposited Rs. 200,000 and opened a bank current account for business purposes.
6th April Purchased goods for Rs.250,000.
7th April Purchased goods for Rs.125,000 and settled the payment by a cheque.
9th April Sold goods for Rs.150,000 in cash.
12th April Purchased goods for Rs.75,000 on credit from Lasitha
14th April Sold goods for Rs.175,000 on credit basis to Jayampathi.
15th April Dhanush brings a computer worth Rs.140,000 (which he earlier used personally), for the use of the
business.
16th April Paid rent of the building amounting to Rs.25,000 by cheque.
17th April Sold goods for Rs.200,000 for cash and Rs.100 000 for credit to Jayani.
18th April Settled the full amount owed to Lasitha and received a cash discount of Rs.2,000.
20th April Settled Rs.40,000 of the loan. Paid interest expense of Rs.3,000. 33
Activity 3
Date Transaction
22nd April Received Rs.70,000 from Jayampathi.
24th April Commission income received Rs.15,000
26th April Dhanush took goods costing Rs.5,000 from the business for function at his personal residence.
30th April Paid telephone expenses for the month Rs.5,000

You are required to;

1. Write the journal entries to record the above transactions.

2. Post the transactions to the ledger.
3. Prepare the trial balance as of 30th April 2021.

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