DEPARTMENT OF ACCOUNTING

UNIVERSITY OF JAFFNA- SRI LANKA

Programme Title : Bachelor of Engineering Technology
Course Unit : CST307NT2: Fundamentals of Financial Accounting
Handout : 05 – Double Entry System
Prepared by : Mr. A. Ajanthan
Issued on : 06th of September, 2019

Learning Objectives:
After you have studied this chapter, you should be able to:
 understand the double entry bookkeeping
 identify the elements of accounting
 understand the process of recording of transactions
 prepare a trial balance

Double entry bookkeeping

This is a scientific method and is recognised as a universally accepted system. Simply,
the double entry book keeping is based on the principle that every financial transaction
involves the simultaneous receiving and giving of value, and is therefore recorded twice.
Double entry bookkeeping, in accounting, is a system of bookkeeping so named
because every entry to an account requires a corresponding and opposite entry to a
different account. The following are the advantages of double entry system:
a) Availability of complete record
b) Facilitates the control of operations
c) Provides arithmetical accuracy
d) Preparation of financial statements

Elements of accounting
According to the conceptual framework for the financial reporting, elements of financial
statements are as follows:
 Assets
 Liabilities
 Capital
 Income (revenue)
 Expenses

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These five elements can be put into two categories, according to whether they appear
on the statement of financial position or income statement. The elements directly related
to financial position (statement of financial position) are:
 Assets
 Liabilities
 Equity
The elements directly related to financial performance (income statement) are:
 Income
 Expenses

Classification of ledger accounts

General ledger is the complete record of financial transactions and events. This ledger
holds account information that is needed to prepare financial statements, and includes
accounts for assets, liabilities, capital, income and expenses. This is considered as the
principal book of accounts and it contains all the accounts of a business.

What is a ledger account?

An account is a record of the transactions involving a particular item. You may have a
bank account which provides you with a record of the transactions you make through
your bank. Likewise, a ledger account may be thought of as a record kept as a page in a
book. The book contains many pages - many accounts and is referred to as ledger.
Each account comprises two sides: the left-hand side is referred to as the debit side and
the right-hand side is referred to as the credit side. The title of each account is written
across the top of the account at the centre. The format is shown below.
Account title
Date Narrative Ref Rs. Date Narrative Ref Rs.
Balance c/f XXX

Balance b/f XXX

Recording of transactions
Double entries for elements in financial position statement:

Assets - Increase in assets - Debit (Dr)

- Decrease in assets - Credit(Cr)

Liabilities - Decrease in liabilities - Debit (Dr)

- Increase in liabilities - Credit (Cr)
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 Capital - Decrease in capital - Debit (Dr)
- Increase in capital - Credit (Cr)

Asset Account

Increases Decreases

+ -

Liability Account

Decreases Increases

- +

Capital Account

Decreases Increases

- +

Example: 01
Vishwa Fernando Enterprise has the following opening balances (assets, liabilities and
capital) as at 01/01/2019.
“Rs”
Assets
Land 400,000
Motor vehicle 800,000
Building 1,000,000
Inventories 500,000
Cash in hand 100,000
Trade receivables 50,000
Total assets 2,850,000
Liabilities
Bank loan 850,000
Capital ?

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When the opening balances are given, first of all we have to enter the opening balances
into the ledger accounts. Assets have debit balances and liabilities and capital have
credit balances.
Note: 01
Balance is also known as balance brought forward (balance b/fwd) or balance brought
down (balance b/d).
Land A/c

1 Jan Balance b/d 400,000

Motor Vehicle A/c

1 Jan Balance b/d 800,000

Building A/c

1 Jan Balance b/d 1,000,000

Inventories A/c

1 Jan Balance b/d 500,000

Cash in hand A/c

1 Jan Balance b/d 100,000

Trade receivable A/c

1 Jan Balance b/d 50,000

Bank loan A/c

1 Jan Balance b/d 850,000

Capital A/c

1 Jan Balance b/d 2,000,000

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Note: 02
As explained earlier equity or capital is the residual interest in the assets of the
enterprise after deducting all the liabilities.
Equity = Total assets – Total liabilities
Rs. 2,000,000 = Rs. 2,850,000 – Rs. 850,000

Note that the following transactions have been occurred in the month of January 2019:

05/01/2019 bought office equipment worth Rs. 10,000 on cash basis.

Now, we enter this transaction into the ledger accounts. Office equipment is an
asset, and is increasing. Therefore, we have to debit the new asset account called
“office equipment account”. For purchasing this asset, the business has paid Rs.
10,000 by cash. Accordingly, cash, an asset is decreasing, so we want to credit the
cash account. And also, you have to interchange the names of the two accounts
when entering the transaction.

Office equipment A/c

5 Jan Cash 10,000

Cash in hand A/c

1 Jan Balance b/f 100,000 5 Jan Office equipment 10,000

10/01/2019 received Rs. 20,000 from the business’s receivables.

Receivable is an asset, and is decreasing now because of the settlement of their due
amounts. Therefore, we have to credit the “receivables account”. Since the business
is getting cash, again, asset is increasing. That is the cash account. So we want to
debit the cash account.

Cash in hand A/c

1 Jan Balance b/f 100,000 5 Jan Office equipment 10,000

10 Jan Receivables 20,000

Receivable A/c

1 Jan Balance b/f 50,000 10 Jan Cash 20,000

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12/01/2019 the business has obtained a bank loan of Rs. 100,000.
Bank loan is a liability, and is increasing. Therefore, we have to credit the “bank loan
account”. At the same time, business’s cash balance will go up and we have to debit
the cash account.

Cash in hand A/c

1 Jan Balance b/f 100,000 5 Jan Office equipment 10,000

10 Jan Receivables 20,000
12 Jan Bank loan 100,000

Bank loan A/c

1 Jan Balance b/f 850,000

12 Jan Cash 100,000

20/01/2019 the owner has invested Rs. 500,000 in cash as additional capital
Cash is an asset and is increasing now with the additional capital introduction.
Therefore, we have to debit the “cash account”. At the same time, owner’s equity will
go up and we have to credit it to the capital account.

Cash in hand A/c

1 Jan Balance b/f 100,000 5 Jan Office equipment 10,000

10 Jan Receivables 20,000
12 Jan Bank loan 100,000
20 Jan Capital 500,000

Capital A/c

1 Jan Balance b/f 2,000,000

20 Jan Cash 500,000

Double entries for elements in income statement:

Income - Decrease in income - Debit (Dr)

- Increase in income - Credit (Cr)

Expenses - Increase in expenses - Debit (Dr)

- Decrease in expenses - Credit (Cr)

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 Income Account

Decreases Increases
- +

Expense Account

Increases Decreases
+ -

Continue with the example discussed above… (Vishwa Fernando Enterprise)

25/01/2019 the entity received rent income from the rented out buildings Rs.
20,000.
Rent income is come under the income category and is increasing now with the
receipt of rent income. Therefore, we have to credit the income account called “rent
income”. Because of this income, cash balance goes up and we have to debit the
cash account.

Cash in hand A/c

1 Jan Balance b/f 100,000 5 Jan Office equipment 10,000

10 Jan Receivables 20,000
12 Jan Bank loan 100,000
20 Jan Capital 500,000
25 Jan Rent income 20,000

Rent Income A/c

25 Jan Cash 20,000

30/01/2019 electricity expense of the entity has been paid by cash Rs. 15,000
Electricity expense is coming under the expense category and is increasing now.
Therefore, we have to debit the expense account called “electricity”. Because of this
expense, cash balance reduces and we have to credit the cash account.

Cash in hand A/c

1 Jan Balance b/f 100,000 5 Jan Office equipment 10,000

10 Jan Receivables 20,000 30 Jan Electricity 15,000
12 Jan Bank loan 100,000
20 Jan Capital 500,000
25 Jan Rent income 20,000

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 Electricity expense A/c

30 Jan Cash 15,000

Example: 02 [Joe Simple: a sole trader]

The following information relates to Joe Simple, who started a new business on 1
January 2018:
1. 1.1.18 Joe started the business with Rs. 500,000 in cash.
2. 3.1.18 He paid Rs. 50,000 of the cash into a business bank account.
3. 5.1.18 Joe bought a van for Rs. 200,000 paying by cheque.
4. 7.1.18 He bought some goods, paying Rs. 25,000 in cash.
5. 9.1.18 Joe sold some of the goods, receiving Rs. 20,000 in cash.
Required:
Enter the above transactions in Joe’s ledger accounts.

Balancing ledger accounts

At the end of an accounting period, a balance is drawn on each account in turn. This
means that all the debits on the account are totalled and so are all the credits. If the total
debits exceeded the total credits there is said to be a debit balance on the account; if the
credits exceed the debits then the account has a credit balance. Balancing the ledger
accounts in the above example is as follows:
Land A/c

1 Jan Balance b/d 400,000 31 Jan Balance c/d 400,000

400,000 400,000
31 Jan Balance b/d 400,000

Motor Vehicle A/c

1 Jan Balance b/d 800,000 31 Jan Balance c/d 800,000

800,000 800,000
31 Jan Balance b/d 800,000

Building A/c

1 Jan Balance b/d 1,000,000 31 Jan Balance c/d 1,000,000

1,000,000 1,000,000
31 Jan Balance b/d 1,000,000

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 Inventories A/c

1 Jan Balance b/d 500,000 31 Jan Balance c/d 500,000

500,000 500,000
31 Jan Balance b/d 500,000

Trade Receivable A/c

1 Jan Balance b/d 50,000 10 Jan Cash 20,000

31 Jan Balance c/d 30,000
50,000 50,000
31 Jan Balance b/d 30,000
Bank loan A/c

1 Jan Balance b/d 850,000

31 Jan Balance c/d 950,000 12 Jan Cash 100,000
950,000 950,000
31 Jan Balance b/d 950,000

Capital A/c

1 Jan Balance (b/f) 2,000,000

31 Jan Balance c/d 2,500,000 20 Jan Cash 500,000
2,500,000 2,500,000
31 Jan Balance b/d 2,500,000

Office equipment A/c

5 Jan Cash 10,000 31 Jan Balance c/d 10,000

10,000 10,000
31 Jan Balance b/d 10,000

Rent Income A/c

25 Jan Cash 20,000

31 Jan Balance c/d 20,000
20,000 20,000
31 Jan Balance b/d 20,000

Electricity expense A/c

30 Jan Cash 15,000 31 Jan Balance c/d 10,000

10,000 10,000
31 Jan Balance b/d 10,000
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 Cash in hand A/c

1 Jan Balance 100,000 5 Jan Office equipment 10,000

10 Jan Receivables 20,000 30 Jan Electricity 15,000
12 Jan Bank loan 100,000 31 Jan Balance c/d 715,000
20 Jan Capital 500,000
25 Jan Rent income 20,000
740,000 740,000
31 Jan Balance b/d 715,000

Trial balance (TB)

Double-entry accounting requires the sum of debit account balances to equal the sum of
credit account balances. It does not form part of the double-entry procedure. It has three
main purposes:
a) To check that all of the transactions for a particular period have been entered
correctly in the ledger system;
b) To confirm that the balance on each account is correct; and
c) To assist in the preparation of the profit and loss account and the balance sheet.
The trial balance lists each debit and each credit balance in columns side by side. The
total of each column is then added up. If the two totals agree we can be reasonably
confident that the double-entry procedures have been carried out correctly.

Example: 03
Prepare a trial balance for the above example 01.

Solution:

“Vishwa Fernando Enterprise”

Trial balance as at 31 / 01 / 2019
Debit Credit
Description
“Rs” “Rs”
Land 400,000
Motor vehicle 800,000
Building 1,000,000
Inventories 500,000
Office equipment 10,000
Cash in hand 715,000
Trade receivables 30,000
Bank loan 950,000

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 Electricity expense 15,000
Rent income 20,000
Capital 2,500,000
3,470,000 3,470,000

Demonstration problem: 01
After several months of planning, Dhananjaya De Silva (DDS) started a haircutting
business. The following events occurred during its first month.
a. On August 1, Dhananjaya invested Rs. 300,000 cash and Rs. 150,000 of
equipment in business.
b. On August 2, business paid Rs. 60,000 cash for furniture for the shop.
c. On August 3, business paid Rs. 50,000 cash to rent space in a strip mall for
August.
d. On August 4, it purchased Rs. 120,000 of equipment on credit for the shop (using
a long-term loan).
e. On August 5, cash received from services provided in the first week and a half of
business (ended August 15) is Rs. 82,500.
f. On August 15, business provided Rs. 10,000 value of haircutting services on
account (credit basis).
g. On August 17, business received a Rs. 10,000 amount of cheque for services
previously rendered on account.
h. On August 17, business paid Rs. 12,500 to an assistant for working during the
grand opening.
i. Cash received from services provided during the second half of August is Rs.
93,000.
j. On August 31, business paid a Rs. 40,000 installment toward principal on the
loan entered into on August 4.
k. On August 31, Dhananjaya withdrew Rs. 9,000 cash for personal use.
Required:
1. Prepare general journal entries for the transactions.
2. Open the ledger accounts and post the journal entries to the ledger accounts.
3. Prepare a trial balance as of August 31.

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Solution:
1. General journal entries

Date Account titles and Explanation Debit Credit

‘Rs’ ‘Rs’
Aug 1 Cash a/c 300,000
Equipment a/c 150,000
Capital a/c 450,000
[Owner’s investment]
Aug 2

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2. Open the ledger accounts and post the journal entries to the ledger accounts.

3. Prepare a trial balance from the ledger

Dhananjaya De Silva (DDS)
Trial Balance
August 31
Debit (Rs) Credit (Rs)

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Demonstration problem: 02
Edward started a new business on 1 January 2019. The following transactions took
place during his first month in business.
1.1. 2019 Edward commenced business with Rs.750,000 in cash.
3.1 2019 He paid Rs. 400,000 of the cash into a business bank account.
6.1 2019 He bought a van on credit from Perkin’s garage for Rs. 300,000.
9.1 2019 Edward rented shop premises for Rs. 10,000 per quarter; he paid for the first
quarter immediately by cheque.
12.1 2019 He bought goods on credit from Roy Limited for Rs. 40,000.
15.1 2019 He paid shop expenses amounting to Rs. 15,000 by cheque.
18.1 2019 Edward sold goods on credit to Scott and Company for Rs. 40,000.
21.1 2019 He settled Perkin’s account by cheque.
24.1 2019 Edward received a cheque from Scott and Company for Rs. 30,000; this
cheque was paid immediately into the bank.
27.1 2019 Edward sent a cheque to Roy Limited for Rs. 5,000.
31.1 2019 Goods costing Rs. 30,000 were purchased from Roy Limited on credit.
31.1 2019 Cash sales for the month amounted to Rs. 20,000.
Required:
a) Enter the above transactions in appropriate ledger accounts, balance off each
account as at 31 January 2019, and bring down the balances as at that date.
b) Extract a trial balance as at 31 January 2019.

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