Unit 2 FM

The Double Entry System
1
During the Accounting Period
Source Transaction Record in Post to

Documents Analysis Journal Ledger
At the End of the Accounting Period
Financial Adjusted Record & Post Unadjusted

Statements Trial Balance Adjusting Trial Balance
Entries
The
At the End Accounting
of the Year Processing
Close Temporary Post-Closing
Cycle
Accounts Trial Balance
Double-Entry Accounting
“ Double-entry accounting is based on a simple
concept: each party in a business transaction will
receive something and give something in return. In
bookkeeping terms, what is received is a debit and
what is given is a credit. The T account is a
representation of a scale or balance.”
Scale or Balance T account
Left Side Right Side

Receive Give
DEBIT CREDIT
Luca Pacioli
Developer of
Receive Give
Double-Entry
DEBIT CREDIT
Accounting
3
 Each transaction must still be analyzed to
determine which accounts are involved,
whether the accounts increase or decrease,
and how much the balance will change.
4
 Some businesses enter into thousands of
transactions daily or even hourly.
◦ Accountants must carefully keep track of and
record these transactions in a systematic manner.
 Accountants use a double-entry accounting
system in which at least two accounts are
always affected by each transaction.
5
 Real Account = Debit –What comes in
Credit- what goes out
 Personal Account = Debit –Receiver
Credit - Giver
 Nominal Account =Debit –Expenses/Losses
Credit- Incomes/Gains
6
 Real – all the assets (Land, buildings)
 Nominal – all the expenses, incomes, losses,
gains.
 Personal – all the accounts of persons,
company or firms.
 What a business “owns”
 Probable future economic benefits
 Examples
Cash
Investments
Buildings
Plant and Machinery
Patents and Copyrights
 What a business “owes”
 Probable future sacrifices of economic
benefits
 Examples
Loans payable
Pensions payable
Income tax payable
 They are amounts received or to be
received from customers for sales of
products or services.
– sales
– performance of services
– rent
– interest
 They are amounts that have been paid or
will be paid later for costs that have been
incurred to earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
 It is what‟s left of the assets after liabilities
have been deducted (Residual interest of
owners)
– the same as net assets
– the owner‟s claim on the entity‟s assets
 Examples
 Share capital
 Share premium
 Revenues
 Retained profit
Assets = Liabilities + Owner’s Equity
Economic Claims to
Resources Economic
Resources
C3
Assets
Assets
Asset Liability
Liability
Liability Equity
Equity
Equity
Accounts
Accounts
Accounts = Accounts
Accounts
Accounts + Accounts
Accounts
Accounts
2-14
A = L + OE
+ Revenues - Expenses
+ Owner Investments - Owner Withdrawals
+ Gains - Losses
Note that the accounting equation equality is
maintained after recording
each transaction.
17
What is a journal?
 It is a list in chronological order of all the
transactions for a business.
1 Identify transaction from source documents.
2 Specify accounts affected.
3 Apply debit/credit rules.
4 Record transaction with description.
18
 What does a journal entry include?
– date of the transaction
– title of the account debited
– title of the account credited
– amount of the debit and credit
– description of the transaction (narration)
19
P1
Transaction Titles of Affected

Date Accounts
GENERAL JOURNAL Page 1

Date Account Titles and Explanations PR Debit Credit
2009
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
Dollar amount of debits
Dec. 2 Transaction
Supplies 2,500
and credits
explanation
Cash 2,500 2-20
Ledger
21
 What is a ledger?
 It is a digest of all accounts utilized by an
entity during an accounting period.
Loose leaf Computer

pages printout
Bound
Cards
books
22
 Ledger - a group of related accounts kept
current in a systematic manner
◦ Think of a ledger as a book with

one page for each account. Ledger
23
 A simplified version of a ledger account is called
the T-account.
◦ They allow us to capture the essence of the accounting
process without having to worry about too many details.
◦ The account is divided into two sides for recording
increases and decreases in the accounts.
Account Title
Left Side Right Side
24
 Debit (dr.) - an entry or balance on the left
side of an account
 Credit (cr.) - an entry or balance on the right
side of an account
 Remember:
◦ Debit is always the left side!
◦ Credit is always the right side!
25
Post from the journa
to the ledger.
26
 What is posting?
 It is the transfer of information from the
journal to the appropriate accounts in the
ledger.
27
Proforma for Account
Debit Credit
Date Particulars L.f Amt. Date Particulars L.f Amt.
Year To (Name of Year By (Name of

Month Credit Month Debit Account
Account in in Journal)
Date Date
Journal)
28
Account Title
Debit Credit
LEFT SIDE
29
Account Title
Debit Credit
RIGHT SIDE
30
Journal Page 1
Date Particulars Debit Credit
April 2 Cash 30,000
Garge Capital 30,000
(Being Received initial
investment from owner)
31
Posting
Debit Cash Account Credit
Insert the number of the journal

page.
32
The listing of all accounts and their account
numbers is called the chart of accounts.
A typical account numbering scheme might
appear as follows:
Assets 100-199 Revenues 400-499

Liabilities 200-299 Expenses 500-599
Equities 300-399
P1
Assets = Liabilities + Equity

T- Account
(Left side) (Right side)
Debit Credit
Step 1: Analyze transactions Step 2: Apply double-

and source documents. entry accounting

ACCOUNT NAME: ACCOUNT No.
Post.
Date Description Ref. Debit Credit
Date Description PR Debit Credit Balance
Step 4: Post entry to ledger

Step 3: Record journal entry
2-34
P1
Transaction Titles of Affected

Date Accounts

Date Account Titles and Explanations PR Debit Credit
2009
Dec. 1 Cash 30,000
Common stock 30,000
Dollar amount of debits
Dec. 2 Transaction
Supplies 2,500
and credits
explanation
Cash 2,500 2-35
P1
T-accounts are useful illustrations, but

balance column accounts are used in practice.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance

2009
Dec. 1 Initial investment 30,000 30,000
Dec. 2 Purchased supplies 2,500 27,500
Dec. 3 Purchased equipment 26,000 1,500
Dec. 10 Collection from customer 4,200 5,700
2-36
P1

Date Account Titles and Explanation PR Debit Credit
2009
Dec. 1 Cash 30,000
Common stock 30,000
Dec. 2 Supplies 2,500

1 Identify theCash 2,500
debit account
Purchased store supplies
in ledger.
for cash
CASH ACCOUNT No. 101

2009
Dec. 3 Purchased equipment G1 20,000.00 ######## 2-37

P1

2009
Dec. 1 Cash 30,000
Common stock 30,000

2 Enter the date.
Cash 2,500
CASH for cash ACCOUNT No. 101

2009
Dec. 1
Dec. 3 Purchased equipment G1 20,000.00 ######## 2-38

P1

Date Account Titles & Elxplanations PR Debit Credit
2009
Dec. 1 Cash 30,000
Common stock 30,000

3 Enter the amount and description.
Cash 2,500

2009
Dec. 1 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000) 2-39

P1

2009
Dec. 1 Cash 30,000
Common stock 30,000
4 Enter
Dec. the journal reference.
2 Supplies 2,500
Cash 2,500

2009
Dec. 1 G1 30,000
2-40
P1

Date Account Titles & Elxplanations PR Debit Credit
2009
Dec. 1 Cash 30,000
Common stock 30,000

5 Compute the balance.
Cash 2,500

2009
Dec. 1 G1 30,000 30,000

P1

2009
Dec. 1 Cash 101 30,000
Common stock 30,000
Dec.2 Supplies 2,500

Enter Cash
6 the ledger reference. 2,500

2009
Dec. 1 G1 30,000 30,000

A1
Shareholders invested $30,000 in FastForward on

Transaction:1 Dec. 1.
Analysis:
Cash Common
Stock
30,000 30,000
Double entry:
(1) Cash 101 30,000
Common stock 301 30,000
Posting:
Cash 101 Common Stock 301
(1) 30,000 (1) 30,000
2-43
A1
FastForward purchases supplies by paying $2,500

Transaction:2 cash.
Analysis:
Cash Supplies Common
Stock
(2,500) 2,500
Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500
2-44
A1
FastForward purchases equipment by paying $26,000

Transaction:3 cash.
Analysis:
Cash Equipment Common
Stock
(26,000) 26,000
Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000
2-45
A1
Transaction:4 FastForward purchases $7,100 of supplies on credit.
Analysis:
Supplies Accounts Payable Common
Stock
7,100 7,100
Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100
Posting:
Supplies 126 Accounts Payable 201
2,500 (4) 7,100
(4) 7,100
2-46
A1
FastForward provides consulting services and

Transaction:5 immediately collects $4,200 cash.
Analysis:
Cash Revenue
4,200 4,200
Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200
Posting:
Consulting Revenue 403 Cash 101
(5) 4,200 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
2-47
A1
Transaction: 6 FastForward pays $1,000 cash for December rent.
Analysis:
Cash (Expense)
(1,000) (1,000)
Double entry:
(6) Rent Expense 640 1,000
Cash 101 1,000
Posting:
Rent Expense 640 Cash 101
(6) 1,000 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
(6) 1,000
2-48
A1 After processing its remaining transactions for December,
FastForward’s Trial Balance is prepared.
FastForward
Unadjusted Trial Balance
December 31, 2009
Debits Credits The trial balance lists
Cash $ 4,350
Accounts receivable -
all account balances
Supplies 9,720 in the general ledger.
Prepaid Insurance 2,400 If the books are in
Equipment 26,000
Accounts payable $ 6,200 balance, the total
Unearned consulting revenue 3,000 debits will equal the
Common stock 30,000
Dividends 200
total credits.
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
2-49
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 10,000
Notes Payable 10,000
to record loan from bank
Start with the journal entry from the General

Journal.
GENERAL
Next, find the appropriate pageJOURNAL
in the General Ledger for
Cash. Page: 1
1-Jan Cash 10,000
ACCOUNT NAME: CASH ACCOUNT No. 100

Beginning Balance 0 0
GENERAL JOURNAL
Post the account reference number.
Page: 1
1-Jan Cash 100 10,000

GENERAL JOURNAL
Page: 1
1-Jan Cash 100 10,000

1-Jan Loan G1 10,000
Post the transaction info to the GL.

GENERAL JOURNAL
Page: 1
1-Jan Cash 100 10,000

1-Jan Loan G1 10,000 10,000
Update the General Ledger balance.

Next, find the NotesGENERAL JOURNAL
Payable page in the General Ledger.
Page: 1
1-Jan Cash 100 10,000
ACCOUNT NAME: Notes Payable ACCOUNT No. 201

GENERAL JOURNAL
Post the account reference number.
Page: 1
1-Jan Cash 100 10,000
Notes Payable 201 10,000

GENERAL JOURNAL
Page: 1
1-Jan Cash 100 10,000

1-Jan Loan G1 10,000
Post the transaction info to the GL.

GENERAL JOURNAL
Page: 1
1-Jan Cash 100 10,000

1-Jan Loan G1 10,000 10,000

GENERAL JOURNAL
Examine the next journal entry. Page: 1
15-Jan Trucks 9,500
Cash 9,500
to record purchase of truck

1-Jan Loan from bank G1 10,000 10,000
GENERAL JOURNAL
Record the account reference. Page: 1
15-Jan Trucks 9,500
Cash 100 9,500

GENERAL JOURNAL
Page: 3
15-Jan Trucks 9,500
Cash 100 9,500

15-Jan Purchase of truck G3 9,500
Post the entry to the GL.

GENERAL JOURNAL
Page: 3
15-Jan Trucks 9,500
Cash 100 9,500

15-Jan Purchase of truck G3 9,500 500
 Used to periodically test whether the General
Ledger is in balance.
 Consists of a listing of each account with its

balance as of a specific date.
◦ All Debit balances are in one column.
◦ All Credit balances are in another column.
First Company
Trial Balance
12/31/X8
Debits Credits
Cash $ 500
Accounts Receivable 1,200
Equipment 3,800
Accounts Payable $ 700
Notes Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 -
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
$ 16,150 $ 16,150
First Company
Trial Balance
12/31/X8
Notice that Total Debits are Debits Credits

Cash
equal to Total Credits. $ 500
Accounts Receivable 1,200
Equipment 3,800
Accounts Payable $ 700
Notes Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 -
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
$ 16,150 $ 16,150
66
What is a Trial balance?
 It is an internal document.
 It is a listing of all the accounts with their
related balances.
 It provide a check on accuracy by showing
whether total debits equal total credits.
67
 A listing of all accounts with balances at the
end of the accounting period after all
transactions have journalized and posted
 Purpose
◦ to determine that debits = credits
◦ to identify accounts to be adjusted
68
 The purposes of the trial balance:
◦ To help check on accuracy of posting
by proving whether the total debits
equal the total credits
◦ To establish a convenient summary
of balances in all accounts for the
preparation of formal
financial statements
69
 The trial balance is usually prepared with
the balance sheet accounts first, followed
by the income statement accounts.
 An example of a trial balance:
Account
(Rs)
Number Account Title Debit
Credit
100 Cash 3,50,000 3,50,000
130 Merchandise inventory 150,000 150,000
202 Note payable 100,000 100,000
300 Paid-in capital 400,000 400,000
500,000 500,000
==================
===================
70
The financial statements are a picture
of the company in financial terms.
Each financial statement relates to a specific

date or covers a particular period.
71
Financial
Question Answer Statement
1. How well did the
Revenues
company perform Trading
– Direct Expenses
(or operate) during Account
Gross income (Gross loss)
the period?
1. How well did the

Gross Profit Profit and
company perform
– Indirect Expenses Loss
(or operate) during
Net income (Net loss) Account
the period?
72
Financial
Question Answer Statement
3. What is the company’s Assets

Balance
financial position at the = Liabilities
sheet
end of the period? + Owners’ equity
4. How much cash did Operating cash flows Statement

the company generate ± Investing cash flows of
and spend during ± Financing cash flows cash
the period? Increase or decrease in cash flows
73
 The final accounts of business concern generally
includes two parts.
 The first part is Trading and Profit and Loss
Account. This is prepared to find out the net result
of the business.
 The second part is Balance Sheet which is prepared
to know the financial position of the business.
 However manufacturing concerns, will prepare a
Manufacturing Account prior to the preparation of
trading account, to find out cost of production.
75
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening stock By Sales xxx
To Purchases xxxx Less: Returns xxx
Less:- Returns xxxx By Closing stock xxx
_____ XXX
Direct Expenses:-
To Carriage inwards
To Wages
To Fuel & Power
To Manf. Expenses
To Octroi Duty/Dock dues
To Coal, water & gas
To Freight Inwards By Gross Loss c/d
To Gross profit c/d (transferred TO P&L
(transferred To P&L A/C) ------------- A/C) ---------
76 xxxxx xxxxx
77
Profit and Loss Account for the period ending on
Debit Credit
To Gross loss b/d By Gross Profit b/d
Selling & Dist Exp :- By Interest Received
To Advertisement By Discount Received
To Traveller’s Salary, By Comm. Received
exp. & commission By Rent from tenants
To Bad Debts By income from investment
To Carriage Outwards By Interest on debenture
Administration Expenses By Miscellaneous Revenue
To Rent, Rates & Taxes Receipts
To Office salaries
To Postage and Telegram
To Telephone Charges
To Printing & Stationary
To Depreciation
78
Profit and Loss Account for the period ending on --
---Debit Credit
To Repairs &
Maintenance
To Discount allowed
To Interest on Capital
To Interest on Loans
To Discount on bills
To Loss by fire(not
covered by insurance)
To Net Profit c/d By Net Loss c/d

---------- ----------
xxxx xxxx
79 ---------- ----------
The balance sheet is the financial
tool that focuses on the present
condition of a business.
80
 Balance sheet is defined as „a statement
which sets out the assets and liabilities of a
business firm and which serves to ascertain
the financial position of the same on any
particular date‟.
 The Balance sheet shows the financial
position of a company at a particular point in
time.
◦ The balance sheet is also referred to as the
statement of financial position or the statement of
financial condition.
 The Right side lists assets – the Left side lists

liabilities and owners‟ equity
82
Probable future economic benefits
obtained or controlled by a
particular entity as a result
of past transactions events.
83
Probable future sacrifices of economic
benefits arising from present obligations
of a particular entity to transfer assets
or provide services to other entities
in the future as a result of past
transactions or events.
84
The residual interest in the assets
of an entity that remains after
deducting its liabilities.
Investment Earned
by owners equity
85
 Balance sheet formats:
◦ Report format - a classified balance sheet with
assets at the top and liabilities and equity below
◦ Account format - a classified balance sheet with
assets at the right and liabilities and equity at the
left
 Regardless of format, balance sheets always

contain the same basic information.
86
 The balance sheet is affected by every
transaction that an entity encounters.
 Each transaction has counterbalancing

entries that keep total assets equal to
total liabilities and owners‟ equity.
87
PROFORMA BALANCE SHEET of XYZ AS ON __________
LIABILITIES ASSETS
SHARE CAPITAL FIXED ASSETS
Equity a) Land , b) Buildings, c) Goodwill, d)
Preference Plant and Machinery e) Furniture and fittings
Add:- Net Profit f) Patents, trade marks and designs.
Less:-Drawings
Less:- Net Loss INVESTMENTS:
RESERVES AND SURPLUS a) Investments in Government or Trust
SECURED LOANS Securities, in shares, debentures or bonds,
UNSECURED LOANS b) Immovable Properties.
CURRENT LIABILITIES AND PROVISIONS: CURRENT ASSETS:

A. CURRENT LIABILITIES: (A) a) Interest accrued on Investments.
a) Acceptances. b) Stores and Spare Parts c) Loose Tools
b) Sundry Creditors d) Stock in trade, e) Works in progress.
c) Advance Payments f) Sundry Debtors, g) Cash balance on hand
d) Outstanding expenses h) Bank balances
e) Interest accrued but not due on loans.
f) Bills Payable
g) Bank Overdraft
88
 Elements of the balance sheet:
◦ Assets - resources of the firm that are
expected to increase or cause future cash
flows (everything the firm owns)
◦ Liabilities - obligations of the firm to
outsiders or claims against its assets by
outsiders (debts of the firm)
◦ Owners‟ Equity - the residual interest in, or
remaining claims against, the firm‟s assets
after deducting liabilities (rights of the
owners)
89
Current assets
Long-term assets
Current liabilities
Long-term liabilities
90
Original evidence Accounting Financial
records records Statements
Source
Journals
documents
Profit and Loss
Statement
Ledger
Balance Sheet
Trial
Balance
Statement of
Closing
cash flows
Entries
91

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Unit 2 FM

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The Double Entry System

Source Transaction Record in Post to

At the End of the Accounting Period

Financial Adjusted Record & Post Unadjusted

Scale or Balance T account

Left Side Right Side

Transaction Titles of Affected

GENERAL JOURNAL Page 1

Loose leaf Computer

◦ Think of a ledger as a book with

Left Side Right Side

Date Particulars L.f Amt. Date Particulars L.f Amt.

Year To (Name of Year By (Name of

Debit Cash Account Credit

Insert the number of the journal

Assets 100-199 Revenues 400-499

Assets = Liabilities + Equity

Step 1: Analyze transactions Step 2: Apply double-

GENERAL JOURNAL Page 123

Step 4: Post entry to ledger

Transaction Titles of Affected

GENERAL JOURNAL Page 1

T-accounts are useful illustrations, but

CASH ACCOUNT No. 101

Date Explanation PR Debit Credit Balance

GENERAL JOURNAL Page 1

Dec. 2 Supplies 2,500

Date Explanation PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000.00 ######## 2-37

GENERAL JOURNAL Page 1

Dec. 2 Supplies 2,500

Date Explanation PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000.00 ######## 2-38

GENERAL JOURNAL Page 1

Dec. 2 Supplies 2,500

Date Explanation PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000) 2-39

GENERAL JOURNAL Page 1

Date Explanation PR Debit Credit Balance

GENERAL JOURNAL Page 1

Dec. 2 Supplies 2,500

Date Explanation PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000) 2-41

GENERAL JOURNAL Page 1

Dec.2 Supplies 2,500

Date Explanation PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000) 2-42

Shareholders invested $30,000 in FastForward on

FastForward purchases supplies by paying $2,500

FastForward purchases equipment by paying $26,000

Transaction:4 FastForward purchases $7,100 of supplies on credit.

FastForward provides consulting services and

Transaction: 6 FastForward pays $1,000 cash for December rent.

Start with the journal entry from the General

ACCOUNT NAME: CASH ACCOUNT No. 100

ACCOUNT NAME: CASH ACCOUNT No. 100

ACCOUNT NAME: CASH ACCOUNT No. 100

Post the transaction info to the GL.

ACCOUNT NAME: CASH ACCOUNT No. 100

Update the General Ledger balance.

ACCOUNT NAME: Notes Payable ACCOUNT No. 201

ACCOUNT NAME: Notes Payable ACCOUNT No. 201

ACCOUNT NAME: Notes Payable ACCOUNT No. 201