THE DOUBLE ENTRY SYSTEM FOR ASSETS, LIABILITIES AND CAPITAL

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THE DOUBLE ENTRY SYSTEM FOR ASSETS LIABILITIES
AND CAPITAL
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TRANSACTIONS

• We have seen how various events change two items
  in the balance sheet. Events which result in
  such changes are known as transactions.
• If the owner of a business (proprietor) asks for
  the price of some goods but does not buy them
  then there is no transaction. If he had of
  bought them then there would have been a
  transaction and two balance sheet items would
  have to be changed.

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THE DOUBLE ENTRY SYSTEM

• Instead of constantly drawing up balance sheets
  after each transaction we have a system of
  DOUBLE ENTRY.
• The basis of this system is that the transactions
  which occur are entered in a set of accounts
  within the accounting books.
• If we want to show the double effect of every
  transaction when we are doing our book-keeping
  we have to show the effect of each transaction on
  each of the two items affects.

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ACCOUNTS FOR DOUBLE ENTRY

• Each transaction is recorded in two accounts.
• A T account is laid out as follows.

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T ACCOUNTS
Title of account written at top LHS
of the account RHS of the account is the DEBIT
side is the CREDIT side
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T ACCOUNTS

• The term debit comes from the latin word meaning
  to receive.
• The term credit comes from the latin word meaning
  to give.
• Every debit entry has a corresponding credit
  entry.
• Every credit entry has a corresponding debit
  entry.

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WORKED EXAMPLE.

• A proprietor (owner) starts the business with
  10000 in cash 1 August 2008.
• CASH ACCOUNT
• 2008
• Aug 1 CAPITAL 10000
• CAPITAL ACCOUNT
• 2008
• Aug 1 CASH 10000

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WORKED EXAMPLE.

• A van is bought for 4500 in cash on 2 August
  2008.
• CASH ACCOUNT
• 2008 2008
• Aug 1 CAPITAL 10000 Aug 2 VAN 4500
• VAN ACCOUNT
• 2008
• Aug 2 CASH 4500

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WORKED EXAMPLE.

• Fixtures (shelves) are bought on credit from
  Shop Fitters for 1250 on 3 August 2008.
• FIXTURES ACCOUNT
• 2008
• Aug 3 SHOP FITTERS 1250
• SHOP FITTERS ACCOUNT
• 2008
• Aug 3 FIXTURES 1250

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WORKED EXAMPLE.

• Paid the amount owing to Shop Fitters in cash on
  17 August 2008.
• CASH ACCOUNT
• 2008 2008
• Aug 1 CAPITAL 10000 Aug 2 VAN 4500
• Aug 17 SHOP FITTERS 1250
• SHOP FITTERS ACCOUNT
• 2008 2008
• Aug 17 CASH 1250 Aug 3 FIXTURES 1250

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DOUBLE ENTRY ASSETS AND LIABILITIES

• To increase an asset we make a DEBIT entry.
• To decrease and 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.

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DOUBLE ENTRY RULES FOR BOOKKEEPING
ACCOUNTS TO RECORD ENTRY ASSETS An
increase Debit A decrease Credit LIABILITIES
An increase Credit A decrease Debit CAPITA
L An increase Credit A decrease Debit