Financial Accounting

Lesson Two

Principles And Practice of Double-Entry

Introduction

The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

1. The Double Entry Book Keeping: This principle states that for every debit entry, there must be a corresponding credit entry and vice versa. It is the foundation of book keeping. Experience has shown that many students failed accounts due to lack of in depth knowledge of this principle. The principle operates on the basis that every financial transaction must have two aspects.

Summary of the principle

Dr Receiver (receiving account)

Cr Giver (giving account)

The Procedures For Principl of Double Entry

a. The keeping of books of accounts

b. The division of each book into separate accounts

c. Each account is divided into two halves, left hand side, debit (Dr) and right hand side, credit (Cr)

d. All transactions must be recorded in two accounts, one is debited and another account credited

e. The giver (giving account) is credited with and the value of whatever it receives and the receiver (receiving account) is debited with the same amount.

2. Cash And Credit Transactions

Financial transactions may be classified into cash and credit transactions.

Cash Transactions: Here, the buyers pay immediately for goods bought. No account will be opened in respect of a supplier or customer.

Steps in Recording Cash Transactions

  • Prepare two accounts
  • Identity the “Giving account” and the “Receiving account”.
  • Now apply the principle Cr Giver, Dr Receiver.

All cash transactions must pass through the cash book.

Credit Transactions: The majority of commercial transactions are termed credit transactions, which means that the transfer of ownership takes place before payment is made to the supplier. That is, settlement is deferred to a future date e.g Mr. Frank bought goods but he did not pay until two months later.

Steps in Recording Credit Transactions

  • Prepare day book: Sales, Purchase, Returns and Journal proper
  • Prepare two accounts
  • Identity the ” Giving account ” and the “Receiving account”.
  • Apply the principle of double-entry.

Debit – Receiver

Credit – Giver

Credit Entry Versus Debit Entry

I) In debit entry, there is an increase in the value of assets whereas there is a decrease in the value of assets in credit entry

II)There is a decrease in the amount of liability in debit entry while in credit entry, there is an increase in the value of a liability.

III)A debit entry is an item of expenditure or expenses but credit entry is an item of income or gain.

Illustration of The Principle of Double- Entry

Here is an Example of how double entry is carried out.

Jan 1. Gloria started business with 40,000 naira cash

Effect…………………………Increase in capital: capital account

…………………………………Increase in asset: cash account

Action Required……….Cr Capital account account Giver

…………………………………Dr Cash account Receiver

Jan 2. Paid 450 naira cash for rent
Effect…………………………increase in expenditure: Rent account

………………………………….Decrease in asset: Cash account

Action required………..Dr Rent account Receiver

………………………………….Cr Cash account Giver

Jan 3. Received refund of insurance 300 naira cash
Effect……………………...Increase in asset: Cash account

……………………………….Decrease in expenditure: Insurance account

Action Required…….Dr Cash account Receiver

……………………………….Cr Insurance account Giver

Jan 4. The proprietor put a further 500 naira into the bank
Effect……………………… Increase in capital: Capital account

………………………………..increase in assets: Bank account

Action Required………Dr Bank account Receiver

…………………………………Cr Capital account Giver

Jan 5. Bought motor vehicle 60 naira paying by cheque
Effect……………………….Increase in assets: Motor vehicle account

.……………………………….Decrease in assets: Bank account

Action Required……..Dr Motor vehicle account Receiver

.……………………………….Cr Bank account Giver

Jan 6. Cash sales 1000 naira
Effect…………………………... Increase in sales: Sales account

……………………………………..Increase in assets: Cash account

Action Required…………..Dr Cash accounts Receiver

.…………………………………….Cr Sales account Giver

Jan 7. Cash purchases 30 naira

Effect………………………….Increase in purchases: Purchases account

…………………………………..Decrease in assets: Cash account

Action Required………..Dr Purchases account Receiver

.………………………………….Cr Cash account Giver

Jan 8. Withdraw cheque for private use 1,500 naira
Effect…………………………Increase in Drawings: Drawings account

………………………………….Reduction in assets: Bank account

Action Required……….Dr Drawing account Receiver

………………………………….Cr Bank account Giver

Jan 9 Withdraws 150 naira cash from the bank for office use

Effect………………………… Reduction in assets: Bank account

…………………………………..Increased in assets: Cash account

Action Required ………..Dr Cash account Receiver

……………………………………Cr Loan account Giver

Jan 10 Received Loan of 1000 naira from Earnest

Effect……………………… ..Increase in assets: Cash account

………………………………… Increase in liabilities: Loan account

Action Required……….Dr Cash account Receiver

..………………………………..Dr Loan account Giver

Jan 13 put cash 6000 naira into the bank

Effect…………………….. .Increase in assets: Bank account

..………………………………Reduction in assets: Cash account

Action Required……. Dr Cash account Receiver

.……………………………….Cr Loan account Giver

Jan 15 purchase goods worth 100 naira on credit from Paul

Effect………………………Increase in liability: Paul account

………………………………Increase in purchases: Purchase account

Action Required…………. Dr Purchase account Receiver

…………………………………….Cr Paul account Giver

Jan 16 Sold goods 503 naira on credit to Benjamin

Effect…………………………..Increase in asset: Benjamin account

..………………………………….Increase in sales: Sales account

Action Required…………Dr Benjamin account Receiver

……………………………………Cr Sales account Giver

Jan 19 returned goods worth 15000 naira to us

Effect………………………Increase in returns inward account

……………………………….Returns inward account

……………………………….Decrease in Fidelis account: Fidelis account

Action Required…… Dr Returns inward account Receiver

……….. …. ………………..Cr Fidelis account Giver

Jan 20 Goods worth 30 naira were returned to a supplier-Gloria

Effect…………………..Reduction in Gloria account: Gloria account

.…………………………..Decrease in Returns outward account:

……………………………Returns outward account

Action Required……….Dr Gloria count Receiver

………………………………….Cr Return outwards account Giver

Jan 25 Receiver commission 80 naira by cheque

Effect……………………..Increase in asset

………………………………Increase in commission account

Action Required……Dr Bank account Receiver

..…………………………….Cr Commission receivable account Giver

Jan 30 paid salesman commission cash 50 naira

Effect………………………….Reduction in asset: Cash account

…………………………………..Increase in commission payable account

Action Required………..Dr commission payable Receiver

…………………………………..Cr Cash account Giver

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