DOUBLE ENTRY BOOKKEEPING

It refers to the dual aspects of recording financial transactions. This implies that every transaction is recorded twice, in two different ledger accounts, recognizing the giving and receiving aspects separately. The name double entry derives from the fact that each individual transaction is entered twice, recognizing two aspects of accounting record keeping.

 Repetitive transactions may initially be captured in day books (also known as books of original or prime entry), e.g. all the sales invoices may be listed in the sales day book.  The total of the day book, or the single transaction, is recorded in the double-entry system by being posted into the proper accounts.

 Each account (or T account) has two sides; the left hand side, which is called the debit side (DR) and the right hand side which is called the credit side (CR).

The date the transacti on is recorded Date Description of the transaction Narration Date The date the transaction is recorded Description of the transaction TITLE OF THE ACCOUNT This is the Debit side (DR) This is the Credit side (CR)

 There is no limit to the number of accounts or ledgers that can be opened or any restriction on their names.  Accounts are normally opened for each asset and liability (or class thereof), and one for each type of expense and income.

To record entries in a double-entry system there are Three important rules to follow;  Rule 1: The Duality Rule (Golden Rule) Every transaction has two effects; one of which will be recorded as a debit in one account and the other which will be recorded as a credit in another account. If this rule is broken, the trial balance will not agree (not balance).  Rule 2: The When To DR And CR Rule The rules as to when to debit a T account and when to credit a T account can be summarized in the following table.

The DR/CR Table Increase Decrease  Asset  Expense  Purchases  Drawings  Liability  Income  Sales  Capital  Provisions Debit (Dr.) Credit (Cr.) Debit (Dr.) Credit (Cr.) CONT: DOUBLE ENTRY RULES

 Start from the premise that when the effect of a transaction is to increase an asset, the entry to be posted to the asset account is a DR. Expenses behave in the same way as asset accounts.  When the transaction is to cause a decrease in an asset, the entry is a CR.  As a liability is the opposite of an asset so it is appropriate that it behaves in the opposite to asset, i.e. to record an increase in a liability, the entry to be posted to the liability account is a credit. Income/Sale account behave in the same way as liability accounts. CONT: DOUBLE ENTRY RULES

 Rule 3: Where To Debit (Dr) Or Credit Rule (CR) Debit is on the Left side of the T- Account whiles Credit is on the right side. There is a saying in the UK where cars drive on the left hand side of the road, which goes like this “always DRive on the left side of the road or CRash on the right side”.

Example 1  Land is bought for cash, $80,000.  The two effects are;  An increase in asset called land which is a DR entry;  At the same time there will be a decrease in another asset (cash) which require a CR entry on the right hand side of the Cash account.

LAND ACCOUNT Bank A/c 80,000 Balance C/d 80,000 Balance B/d80,000

BANK ACCOUNT Bank C/d 80,000 Land 80,000 Balance B/d 80,000

Example 2 Plant and machinery is bought on credit for $155,000. The two effects are; Increase the asset of Plant which is a DR entry on the left hand side of the Plant account; increase the liability (payables) which is a CR entry on the right hand side of the payables account i.e.  (DR Plant account $155,000)  (CR Payables account $155,000)

Plant and Machinery Account (Asset) DrCr Account Payable 155,000 Balance C/d 155,000 Balance B/d 155,000 Account Payable (Liability) DrCr Balance C/d 155,000 Plant & Mach. 155,000 Balance B/d 155,000

 Example 3  A sale of goods on credit is made for $33,000 and cash sale of $57,000  The four effects are to:  Increase receivables (assets) which is a Dr entry on the left hand side of the receivables account;  Increase in cash (asset) which is a Dr entry on the left hand side of cash book  Increase in the income account of $33,000 which is Cr entry on the left side  Increase in the income account of $57,000 which is Cr entry on the left side  I.e.  Dr Receivables account $33,000  Dr Cash Book $57,000  Cr Sales account $33,000  Cr Sales account $57,000

Sales A/C DrCr Balance C/d 90,000 Receivables A/c 33,000 Bank 57,000 90,000 90,000 Balance B/d 90,000

Receivables A/c (Asset) Sales 33,000 Balance C/d 33,000 33,000 33,000 Balance B/d 33,000

Bank Account (Asset) Dr Cr Sales A/c 57,000 Balance C/d 57,000 Balance B/d 57,000 DOUBLE ENTRY RULES –ILLUSTRATION