O Level Accounting Chapter 1 Theory Double Entry System

Double Entry System - Basic Accounting

Accounting:
Accounting is the art of recording, classifying, summarizing and communicating of the business
data to the concern persons.

Book-keeping:
Routine process of recording business transactions

Business Transactions:
 Involves the exchange of goods or services for a financial consideration
 This can be either for cash or credit

Separate Entity Concept

The business and the owner of the business are treated as two separate entities.

Accounting Equation
The accounting equation shows the relationship between the assets, owner’s equity and the
liabilities of a business.

Resources in the business = Who supplied the resources?

Assets = Capital + Liabilities
It is fact that accounting equation is always equal one another and no matter how many
transactions there may be.

 Double Entry System

This is the system in which the transactions are recorded twice, one on the debit and another
on the credit.

RULES OF DEBIT & CREDIT

NATURE OF ACCOUNTS DEBIT CREDIT

Assets + __

Liabilities __ +
Capital __ +

Expense + __
Revenue/income __ +

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O Level Accounting Chapter 1 Theory Double Entry System

 Heads of Accounts
1. Assets Assets are the resources owned by the business.

Current assets are those assets which can be consumed within a year (or a 12
months period) like inventory (stock), trade receivables (debtors), cash in hand
and bank balance.

Non-Current (Fixed) assets are those assets which held in the business for more
than a year (a 12 months period) like land, building, furniture, vehicles and
equipment.

2. Liabilities Liabilities are the amounts owed by the business.

Current liabilities are those liabilities which the businesses have to pay within a
year (a 12month period) like trade payables (creditors) and bank overdraw

Long term liabilities are those liabilities which the businesses have to pay for
more than a year like Bank Loan

3. Capital Capital is the investment made by the owner in the business.

4. Expenses These are regular expenditures of the business.

Examples, Rent, Electricity, Salaries etc.

5. Revenues These are the earnings of the business.

Sales of goods, rent Income, Commission Income etc.

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O Level Accounting Chapter 1 Theory Double Entry System

 Basic Terms use in Accounting

Goods
Goods are those things in which the business deals; the business always buys these things for
reselling.

Inventory
These are the goods held in godown, i.e. unsold goods in stock

Purchases Account
Whenever business buy goods it records it in purchases account.

Sales Account
Whenever business sale goods.

Trade Payables (Creditors or Account Payable)

The business owes creditor. When business buy goods on credit, creditor’s accounts are
created.

Trade Receivable (Debtors or Account Receivable)

The Person who owe the business. When business sold goods on credit, debtor’s accounts are
affected.

Carriage Inwards
These are the transportation expenses on those goods which the business bought.

Carriage Outwards
These are the transportation expenses on those goods which the business sold.

Journal
General Journal is the first book where transactions are recorded.

Sales Return (Return Inwards)

Goods sold by a firm, received back from the customers, being defected.

Purchase Return (Return Outwards)

Goods bought by firm, found defective and returned back to suppliers.

Drawing
Whenever the owner withdraw the cash or the goods from the business for his personal use.

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