ACCOUNTING IG:

Section 2: Sources and Recording of data

2.1 The double entry system of book-keeping
 INTRODUCTION:

 A business would find it impossible to prepare a balance sheet after every single transaction. The day-
to-day transactions are recorded in the books of a business using the double entry system of
bookkeeping. The term double entry is used because the two effects of a transaction (a giving and a
receiving) are both recorded in the ledger.
 A business maintains a separate ledger account for each type of asset, expense, liability and income and
for each individual debtor to that item or person.
 A ledger is traditionally a bound book where each account appears on a separate page. Over the years,
the ledger has developed into a loose-leaf folder with separate sheets, each containing a ledger account.
Recent developments have seen the introduction of a computer file divided into separate ledger
accounts.
 LEDGER ACCOUNTS:

• Ledger accounts are divided into two sections by a central vertical line.
• The left-hand side is known as: the debit side (abbreviated to dr)
• The right-hand side is known as: the credit side. (abbreviated to cr)
• On either side of the account, there are columns to record the date, details and amounts of each
transaction.
• A portfolio number column is used for reference purposes.
• In order to record the two aspects of every transaction, every transaction is entered twice – on the debit
side of one account and on the credit side of another account. The account which is receiving or gaining
the value is debited and the account which is giving the value is credited.
 EXAMP LE OF L EDGER ACCOUNTS :

• The first transaction (a) is debited in the bank

account, as this is the account which is receiving the
money, and credited in the capital account, as this is
where the money is coming from.
• The second transaction (b) is debited in the fixtures
and equipment, to show the value being received,
and credited in the bank account, as this is where the
money is coming from.
• In each transaction, the details column shows the
name of the account in which the other half of the
double entry is made.
• The folio number is used for reference purposes and
shows the page of the ledger on which the account
name in the detail's column appears.
It is important that a double entry is made for every
transaction. In practice, the information entered in the
accounting records is obtained from business
documents. It is not practical for a set of business
documents to be provided in examination, so questions
usually list the transactions.
 D O U B L E E N T RY R E C O R D S F O R A S S E T S A N D
LIABILITIES:

A ledger account is opened for

each type of asset and liability.
Applying the double entry
principles, every transaction is
entered twice. The account which
is receiving the money is debited
and the account which is giving
the money is credited.
 D O U B L E E N T RY R E C O R D S F O R E X P E N S E S A N D
INCOMES:

• A ledger account is opened for each type of expense

and income. The same double entry principles
applied to assets and liabilities are applied to
expenses and incomes. The account which is
receiving the money is debited and the account
which is giving the money is credited.
 D O U B L E E N T RY R E C O R D S F O R E X P E N S E S
AND INCOMES: CONTINUED…

 The motor vehicle expenses such as fuel and repairs are

shown in an expense account as they do not increase the
value of the motor vehicle.
 The rent received from a tenant is shown in an income
account and is kept separate from the expense of rent
payable.
 No lines are left blank in the middle of the ledger accounts
as each entry is made on the next available line.
 In practice, for ease of reference, accounts of the same type
(e.g., assets, expenses and so on) are kept in the same area
of the ledger.
 DOUBLE ENTRY RECORDS FOR DRAWINGS:

Whenever the owner of a business takes value from the business for his/her own use this is known as
drawings. The value may be in the form of money, non-current assets, or goods from the inventory held by the
business. It is usual to open a drawings account to record these values so that the capital account does not
have many entries.
- Any drawings are debited in the drawings account to show the value going into that account. The credit
entry will be in the account giving the value.
- When money is withdrawn either the cash or bank account will be credited. When a non-current asset is
withdrawn, the appropriate non-current asset will be credited.
- When goods are withdrawn, the purchases account will be credited. This is because these goods were
originally purchased for resale and the amount of goods available for resale is reduced when goods are
taken by the owner.
- At the end of the financial year, the total of the drawings account is transferred to the capital account. This
reduces the amount owned by the business to the owner of the business.
ACTIVITIES: