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    The Accounting Cycle: Double Entry Book Keeping

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    Junaid Islam
    The document discusses the accounting cycle and double entry bookkeeping. It explains that double entry bookkeeping means every transaction involves at least two accounts with equal debit and credit amounts. It then describes the accounting equation, books of original entry like journals and cash books, source documents, ledger books, and different types of accounts.

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    The Accounting Cycle: Double Entry Book Keeping

    Uploaded by

    Junaid Islam
    240 views7 pages
    The document discusses the accounting cycle and double entry bookkeeping. It explains that double entry bookkeeping means every transaction involves at least two accounts with equal debit and credit amounts. It then describes the accounting equation, books of original entry like journals and cash books, source documents, ledger books, and different types of accounts.

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    Accounting

    Original Title

    Double-entry-book-keeping

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    The document discusses the accounting cycle and double entry bookkeeping. It explains that double entry bookkeeping means every transaction involves at least two accounts with equal debit and credit amounts. It then describes the accounting equation, books of original entry like journals and cash books, source documents, ledger books, and different types of accounts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    240 views7 pages

    The Accounting Cycle: Double Entry Book Keeping

    Uploaded by

    Junaid Islam
    The document discusses the accounting cycle and double entry bookkeeping. It explains that double entry bookkeeping means every transaction involves at least two accounts with equal debit and credit amounts. It then describes the accounting equation, books of original entry like journals and cash books, source documents, ledger books, and different types of accounts.

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    © All Rights Reserved
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    At a glance
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    The key takeaways from the document are that double entry bookkeeping involves recording every transaction in at least two accounts with equal amounts in debits and credits, and that there are different books like journals, ledgers and cash books used for recording accounting transactions in a systematic manner.

    The different types of ledgers used in accounting are sales ledger, purchases ledger and general ledger. The sales ledger contains customer accounts, purchases ledger contains supplier accounts and general ledger contains other accounts like expenses, assets etc.

    The different types of accounts are personal accounts for debtors and creditors, and impersonal accounts which are further divided into real accounts for assets and nominal accounts for income, expenses and capital.

    Double Entry book keeping

    The accounting cycle

    Double entry book keeping


    The double entry system of accounting or bookkeeping means that every business transaction will involve
    two accounts (or more) and equal amounts will be recorded as both debit and credit. For example, when a
    company borrows money from its bank, the company's Cash account will increase and its liability account
    Loans Payable will increase.

    Accounting equation
     Assets= Equity + liabilities
     Assets= Equity+ Revenue – Expenses- Drawings+ Liabilities
     All ledger accounts will be classified as any of the above items of the accounting equation
     Assets, expenses and drawings -if increased- debit
     Capital or Equity, Reserves, Provision, Revenue and liabilities -if increased -credit

    Books of prime or original entry / day books/ journal


    Books of original entry are the books in which we first record transactions. These are not accounts; they are
    simply books that records the details of a transactions, almost like a diary. Books of original entry are also
    known as either 'journals' or 'daybooks'. The term 'day book' is, perhaps, more commonly used, as it more
    clearly indicates the nature of these books of original entry - entries are made to them every day.

    Advantages of keeping books of original entry


    1. Accounts can be found more easily by the use of the cross referencing nature of the books of original
    entry being kept.
    2. If records are lost then the ledgers and the books of original entry acts as a backup for each other.
    3. Helps to post totals to various accounts, thereby saving labour.

    The commonly used books of original entry are:


    1. Sales daybook (or Sales journal) - for credit sales
    2. Purchases daybook (or Purchases journal) - for credit purchases
    3. Sales/ Returns inwards daybook (or Returns inwards journal) - for goods returned by customers
    4. Purchase/ Returns outwards daybook (or Returns outwards journal) - for goods returned to suppliers
    5. Cashbook - for receipts and payments of cash and cheques – petty cash book is a part of cash book

    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 1


    6. General journal (or just 'The journal' if the term 'Daybook' is used for other books of original entry) - for
    other items

    Cash book- The cashbook is a combined account of the cash account and the bank account. It is the only one
    of the six daybooks that is both an account and a daybook at the same time. Apart from the cashbook, all the
    other double-entry accounts are kept in one of the three ledgers.

    Petty cash book- Some firms keep a separate cashbook and a petty cash book. The petty cash book is for
    dealing with small items of money spent for various purposes like conveyance, stationary, telephone and
    postage, fuel cost, entertainment etc.

    Imprest System (petty cash): It is a system where a reimbursement is made of the total amount paid in a
    period. It can also be called as a system where petty cashier begin each new accounting period with the same
    amount of petty cash.

    Advantages of Petty Cash Book:


    1. The number of entries in the main cashbook is reduced.
    2. The main cashier’s burden is reduced.
    3. The chances of mistakes in recording are minimised.
    4. Posting becomes easier with the Total’s Analysis Columns.

    Advantages of using analysis columns in petty cash books:


    It let us know the money spent on each different nature of small expense. The double entry for each analysis
    column is made by transferring the totals of the analysis columns to their respective accounts which are
    available in the General ledger.

    Source documents for recording transactions


    All the daybooks are constructed on the basis of transfers from original source documents. These are items of
    business use that contain financial data related to business transactions. The main source documents a firm is
    likely to use are as follows:
    1. Purchase invoice: Received by the firm from suppliers when buying goods on credit
    2. Sales invoice: Sent by the firm when selling goods on credit
    3. Debit notes: Received by the firm from suppliers when goods purchased are returned to the original
    supplier.
    4. Credit notes: Sent by the firm to customers who have returned the goods
    5. Cheque counterfoils: From the chequebook to show cheques paid out
    6. Paying in or deposit slip: Evidence of money paid into bank accounts
    7. Till rolls: Evidence of cash being received
    8. Petty cash vouchers: Slips to indicate small amounts of cash being paid
    9. Bank statements: A summary of the bank account from the banks point of view.

    The following daybooks are constructed by the use of each of the following source documents:

    Daybook Source document(s)


    Sales daybook Sales invoice
    Purchases daybook Purchases invoice
    Sales Returns or inwards daybook Credit notes
    Purchase Returns or outwards daybook Debit notes
    Cashbook Cheque counterfoils, paying in slips, till rolls, etc.
    The journal Everything else not covered by above

    Ledger books
    Ledger books are the books of final entry which contains the various accounts to which the entries made in the
    Books of Original entry are transferred.

    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 2


    The ledger provides a complete record of financial transactions over the life of the company. The ledger holds
    account information that is needed to prepare financial statements and includes accounts for assets, liabilities,
    owners' equity, revenues and expenses. Ledger books can be maintained physically or virtually through
    accounting software.

    Types of ledgers
    The different types of ledgers most businesses use are:
    1. Sales ledger- This is for customers' (debtors) personal accounts
    2. Purchases ledger- This is for suppliers' (creditors) personal accounts
    3. General ledger- This contains the remaining double entry accounts, such as those relating to expenses,
    sales, purchases, fixed assets, and capital

    Types of accounts
    Some people describe all accounts as personal accounts or as impersonal accounts.
    1. Personal accounts - these are for debtors and creditors (i.e. customers and suppliers)
    2. Impersonal accounts - divided between 'real' accounts and 'nominal' accounts:
    3. Real accounts - accounts in which possessions are recorded. Examples are buildings, machinery,
    fixtures and stock
    4. Nominal accounts - accounts in which expenses, income and capital are recorded

    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 3


    Exercise 1

    General journal or cash book bank/cash Dr 2000 Motor vehicle NBV 1400
    Disposal account Cr. 600 +600

    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 4


    Exercise 2
    Goldy’s sales ledger
    Rahman account (trade receivable)
    Date Details $ Date Details $
    2010 Balance b/d 300 2010
    April 1
    6 Sales (500×80%) 400 April 12 Sales return (150×80%) 120
    18 Sales (200×85%)) 170 Bank (300×97%)) 291
    Discount allowed (300×3%) 9
    Balance c/d 450
    870 870
    May 1 Balance b/d 450

    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 5


    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 6
    Exercise 3

    Complete the table below. The first item has been completed as an example.

    Solution
    ii) Purchases day book +1500 + 1500 no effect
    iii) Sales day book +1800 and -1000 no effect 800
    iv) General journal/ cash book - 4000 no effect no effect
    v) Cash book -1440 -1500 +60

    Coach- Mohammad Yousuf Akter. Hotline- 01671089144, 01916743556 Page 7

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