WEEK 3

LEC 5,6
 Nature of transaction
 The double entry system
 The accounts for double entry
Examples, problems and Exercise
 NATURE OF A
TRANSACTION
In previous lectures, we saw how
various events had changed two
items in the balance sheet. Events
which result in such changes are
known as ‘transactions’.
This means that if the proprietor asks the price of
some goods, but does not buy them, then there is
no transaction. If the proprietor later asks the price
of some other goods, and then buys them, then
there would be a transaction, and two balance
sheet items would then have to be altered.
 THE DOUBLE ENTRY
SYSTEM
We have seen that every transaction affects two
items.
This is the bookkeeping stage of accounting and
the process we use is called double entry. You
will often hear it referred to as double entry
bookkeeping. Either term is correct.
WHY DO YOU THINK IT IS
CALLED ‘DOUBLE ENTRY’?

if wewant to show the double effect of every

transaction when we are doing our bookkeeping,
we have to show the effect of each transaction on
each of the two items it affects.
For each transaction this means that a bookkeeping entry
will have to be made to show an increase or decrease of
one item, and another entry to show the increase or
decrease of the other item. From this description, you will
probably see that the term ‘double entry bookkeeping’ is a
good one, as each entry is made twice (double entry)
 THE ACCOUNTS FOR
DOUBLE ENTRY
Each account should be shown on a separate
page in the accounting books. 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 each account is written
across the top of the account at the centre.
 EXAMPLE
for example, if you paid £10 by cheque for a kettle, you could say
‘debit the kettle account with £10 and credit the bank account with
£10’. To actually make this entry, you enter £10 on the left-hand
(i.e. debit) side of the kettle account and on the right-hand (i.e.
credit) side of the bank account.
 ASSET, CAPITAL AND
LIABILITIES
 to increase an asset we make a DEBIT entry
 to decrease an asset we make a CREDIT entry
to increase a liability/capital account we make a CREDIT
entry
to decrease a liability/capital account we make a DEBIT
entry.
PLACING THESE IN A
TABLE
Accounts To record Entry in the account

Assets An increase Debit

A decrease Credit

Liabilities An increase Credit

A decrease Debit

Capital An increase Credit

A decrease Debit
SUMMARY
Each transaction is entered twice. In an
accounting transaction, something always
‘gives’ and something ‘receives’ and both
aspects of the transaction must be recorded.
In other words, there is a double entry in the
accounting books – each transaction is
entered twice.
A balance sheet is a financial statement that
summarizes the financial position of an
organization at a point in time. It does not present
enough information about the organization to make
it appropriate to enter each transaction directly on
to the balance sheet. It does not, for instance, tell
who the debtors are and how much each one of
them owes the organization, nor who the creditors
are and the details of the amounts owing to each of
them.
We need to maintain a record of each
individual transaction so that (a) we know
what occurred and (b) we can check to see
that it was correctly record