Double Entry Bookkeeping

PRINCIPLES OF DOUBLE ENTRY BOOK-KEEPING AND BOOKS OF
ORIGINAL ENTRY
SOURCE DOCUMENTS
The role of source documents

Business transactions are recorded on source documents. Examples include sales and
purchase orders, invoices and credit notes.
Types of source documents

Documents used to record the business transactions in the 'books of account' of the
business include the following.
(a) Quotation. A document sent to a customer by a company stating the fixed price
that would be charged to produce or deliver goods or services. Quotations tend to be
used when businesses do not have a standard listing of prices for products.
(b) Purchase order. A document of the company that details goods or services which
the company wishes to purchase from another company.
(c) Sales order. A document of the company that details an order placed by a
customer for goods or services. The customer may have sent a purchase order to the
company from which the company will then generate a sales order.
(d) Goods received note. A document of the company that lists the goods that a
business has received from a supplier.
(e) Goods dispatched note. A document of the company that lists the goods that the
company has sent out to a customer. The company will keep a record of goods
dispatched notes in case of any queries by customers about the goods sent.
(h) Credit note. A document sent by a supplier to a customer in respect of goods

returned or overpayments made by the customer. It is a 'negative' invoice. This is
discussed further below.
(i) Debit note. A document sent by a customer to a supplier in respect of goods

returned or an overpayment made. It is a formal request for the supplier to issue a
credit note.
(j) Remittance advice. A document sent to a supplier with a payment, detailing

which invoices are being paid and which credit notes offset. A remittance advice
allows the supplier to update the customer's records to show which invoices have
been paid and which are still outstanding. It also confirms the amount being paid, so
that any discrepancies can be easily identified and investigated.
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PRINCIPLES OF DOUBLE ENTRY BOOK-KEEPING AND BOOKS OF ORIGINAL ENTRY
(k) Receipt. A document confirming confirmation that a payment has been received.
This is usually in respect of cash sales, e.g a till receipt from a cash register. This is
discussed further below.
(l)Invoices
An invoice relates to a sales order or a purchase order.
a) When a business sells goods or services on credit to a customer, it sends out an
invoice. The details on the invoice should match the details on the sales order.
The invoice is a request for the customer to pay what they owe.
b) When a business buys goods or services on credit it receives an invoice from the
supplier. The details on the invoice should match the details on the purchase
order.
The invoice is primarily a demand for payment, but it is used for other purposes as
well, as we shall see.
BOOKS OF PRIME ENTRY
The need for books of prime entry

In the course of business, source documents are created. It needs to keep records of
source documents – of transactions – so that it knows what is going on. Such records
are made in books of prime entry.
Books of prime entry are books in which we first record transactions.
The main books of prime entry are as follows.

(a) Sales day book
(b) Purchase day book
(c) Sales returns day book
(d) Purchase returns day book
(e) Journal (described in the next chapter)
(f) Cash book
(g) Petty cash book
Sales and purchase day books
Invoices and credit notes are recorded in day books.
The sales day book

The sales day book is the book of prime entry for credit sales.
The sales day book is used to keep a list of all invoices sent out to customers each
day. An extract from a sales day book might look like this.
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The purchase day book
A business also keeps a record in the purchase day book of all the invoices it receives.
The purchase day book is the book of prime entry for credit purchases.
The purchase day book records other people's invoices
The sales returns day book

When customers return goods for some reason, a credit note is raised. All credit notes
are recorded in the sales returns day book. An extract from the sales returns day book
follows.
The sales returns day book is the book of prime entry for credit notes raised.
The purchase returns day book

Not surprisingly, the purchase returns day book records credit notes received in
respect of goods which the business sends back to its suppliers.
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The purchase returns day book is the book of prime entry for credit notes received
from suppliers.
Cash book
The cash book may be a manual record or a computer file. It records all transactions
that go through the bank account.
The cash book

The cash book is also a day book, used to keep a record of money received and money
paid out by the business. The cash book deals with money paid into and out of the
business bank account. This could be money received on the business premises in
notes, coins and cheques, subsequently paid into the bank. There are also receipts
and payments made by bank transfer, standing order, direct debit and bank interest
and charges, directly by the bank.
Many businesses have two distinct cash books – a cash payments book and a cash
receipts book.
Some cash, in notes and coins, is usually kept on the business premises in order to
make occasional payments for odd items of expense. This cash is usually accounted
for separately in a petty cash book.
The cash book is the book of prime entry for cash receipts and payments.
Types of cash books
1. Single / one column Cash Book

It has only one money column on both debit and credit side – to record cash
transactions
Example: cash book

At the beginning of 1 September, Robin Plenty had $900 in the bank.
During 1 September 20X7, Robin Plenty had the following receipts and payments.
(a) Cash sale: receipt of $80
(b) Payment from credit customer Hay $400 less discount allowed $20
(c) Payment from credit customer Been $720
(d) Payment from credit customer Seed $150 less discount allowed $10
(e) Cheque received from Len Dinger $1,800 to provide a short-term loan
(f) Second cash sale: receipt of $150
(g) Cash received for sale of machine $200
(h) Payment to supplier Kew $120
(i) Payment to supplier Hare $310
(j) Payment of telephone bill $400
(k) Payment of gas bill $280
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(l) $100 in cash withdrawn from bank for petty cash
(m) Payment of $1,500 to Hess for new plant and machinery
Generate the cash book?
If you look through these transactions, you will see that seven of them are receipts
and six of them are payments.
2. Double / Two column cash book
The double column cash book (also known as two column cash book) has two money
columns on both debit and credit sides – one to record cash transactions and one to
record bank transactions. In other words, we can say that if we add a bank column to
both sides of a single column cash book, it would become a double column cash book.
The cash column is used to record all cash transactions and works as a cash account
whereas bank column is used to record all receipts and payments made by checks and
works as a bank account.
Both the columns are totaled and balanced like a traditional T-account at the end of
an appropriate period which is usually one month.
Since a double column cash book provides cash as well as bank balance at the end of a
period, some organizations prefer to maintain a double column cash book rather than
maintaining two separate ledger accounts for recording cash and bank transactions.
Format
Important points to remember while making entries in a double column cash book
Recording cash transactions:
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1. All cash receipts are recorded in cash column on the debit side and all cash
payments are recorded in cash column on credit side of the double column
cash book.
2. If cash is received from a debtor or customer and is deposited into the bank
account on the same date, the entry will be made in the bank column on the
debit side, not in the cash column.
Recording bank transactions:
1. When a check is received and the same is deposited into the bank account on
the same date, the amount of the check is entered in the bank column on the
debit side.
2. When a check is received and the same is not deposited into the bank on the
same date, the amount of the check is entered in the cash column, not in the
bank column.
3. When a check received from a receivable on a date subsequent to its receipt is
deposited into the bank account, the entry is made in the bank column on the
debit side and in the cash column on credit side. It is called a contra entry.
4. When a check is issued, the amount of the check is entered in the bank column
on the credit side.
Recording contra entries:
The “contra” is a Latin word which means against or opposite. The contra entry is an
entry which involves a cash account and a bank account and which is recorded on
both debit and credit sides of the double column cash book at the same time.
This entry is not posted to any ledger account because both debit and credit aspects
of transaction are handled within the cash book and the double entry work is
completed.
A contra entry is made in the following circumstances:
(1). When cash is deposited into the bank account:
The entry for depositing cash into the bank account is:
Bank [Dr]
Cash [Cr]
The deposited amount is written in the bank column on debit side and cash column on
credit side.
(2). When cash is withdrawn from bank account for business use:
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The entry for withdrawal of cash from bank account for business purpose is:
Cash [Dr]
Bank [Cr]
The withdrawn amount is written in the cash column on debit side and bank column
on credit side.
Important: The contra entry is made only when the cash is withdrawn for business
use. If cash is withdrawn for personal use, it will be recorded only in the bank column
on credit side of the cash book.
(3). When a check received from a receivable or customer on a date subsequent

to its receipt is deposited into the bank account:
When a check is received and is not deposited into the bank account on the same
date, it is recorded in the cash book just like a normal cash receipt. On a subsequent
date, when the check is deposited into the bank account, the following entry is made:
Bank [Dr]
Cash [Cr]
The amount of the check is recorded in the bank column on debit side and cash
column on credit side.
Balancing and posting a double column cash book
Both cash column and bank column of double column cash book are totaled and
balanced at the end of an appropriate period. The process of balancing and posting a
cash book has been explained in detail in single column cash book article. The same
process is also applicable to a double column cash book.
The following example summarizes the whole explanation given above.
Example
The Edward Company uses a double column cash book to record its cash and bank
related transactions. It engaged in the following transactions during the month of
March 2018:
• March 01: Cash balance $1,450 (Dr.), bank balance $1,500 (Dr.).
• March 02: Paid Mark & Co. by check $120.
• March 04: Received from John & Co. a check amounting to $400.
• March 05: Deposited into bank the check received from John & Co. on March
04.
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• March 08: Purchased stationary for cash, $25.
• March 12: Purchased merchandise for cash, $525.
• March 13: Sold merchandise for cash, $1,800.
• March 15: Cash deposited into bank, $850.
• March 17: Withdrew from bank for personal expenses, $40.
• March 19: Issued a check for merchandise purchased, $630.
• March 20: Drew from bank for office use, $150.
• March 22: Received a check from Peter & Co. and deposited the same into
bank immediately, $880.
• March 25: Paid a check to Daniel Inc. for $270.
• March 26: Bought furniture for cash for office use, $175.
• March 28: Paid office rent by check, $120.
• March 29: Cash sales, $650.
• March 30: Withdrew from bank for office use, $145.
• March 31: Paid salary to employees by check, $300.
Required: Record the above transactions in a double column cash book and post
entries therefrom into relevant ledger accounts.
Solution
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3. Triple / Three Column Cash Book
The Cash Book that has three columns for discount received and paid, cash transactions
and bank transactions is called Three Column Cash Book.
Explanation
The three column cash book (also known as triple column cash book) has three
money columns on both debit and credit side – one on each side for recording
discount, cash and bank amounts. If a business keeps a bank account and receipts and
payments are frequently made through bank account than it is useful to maintain a
three column cash book rather than a single column cash book or a double column
cash book.
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It is the custom of the business houses that discount is allowed and received for early
payments of dues. If cash is paid early, creditors may allow a discount. On the other
hand, if debtors pay early, a discount may be allowed to them.
It may be noted that cash and discount are related to each other that’s why discount
columns are also provided in Cash Book.
Thus in three column cash book, three columns for amount are provided on each side.
One column is used to record cash receipts and payments, the second column is
provided to record banking transactions and in third column discount received and
discount allowed are recorded.
Where, the single and double column cash books are alternatives to a cash account,
the three column cash book serves the purpose of cash as well as bank account.
Some key points regarding discount columns
Following are some key point regarding discount columns of triple column cash book:
1. Discount allowed column is provided on debit side and discount received column is
drawn on credit side.
2. Discount Allowed and Discount received columns represent two different accounts.
They have no relationship with each other.
3. Discount columns are memorandum columns in nature. Therefore, two sperate
account, Discount Allowed” and “Discount Received” are opened is ledger.
4. Since there is no relationship between discount allowed and discount received, that’s
why they are not balanced. Both columns are separately totaled and aggregate is
transferred to ledger accounts.
Format of Tripple /Three Column Cash Book
The common format of three column cash book is given below:
Hints for recording in three/triple column cash book
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Remember the following points while recording entries in a three column cash book:
(1). Opening balance: The opening balance of cash in hand and cash at bank are
recorded on the debit side in cash and bank column respectively. If the bank balance
is a credit balance (overdraft) then it is entered on the credit side in the bank
column.
(2). Receipt of check or cash: If a check is received and is deposited into bank
account on the same date, it will appear on the debit side on the cash book in bank
column. If the check is not deposited into bank on the same date, the check is
treated as cash and therefore the amount will appear in cash column. The receipt of
cash is recorded in the cash column in usual manner.
(3). Payment by check or cash: If payment is made by check, it will be recorded in

the credit side in the bank column because the cash at bank is decreased. If the
payment is made in cash, it will be recorded in cash column in usual manner.
(4). Bank charges: Bank charges are recorded on the credit side of cash book in bank
column because cash at bank is decreased as a result of such charges.
What are Contra entries?

If an entry is made on the debit side and the same entry is recorded on the credit side
of the cash book, it is called a “contra entry“.
In order to distinguish the contra entries from other entries, letter “C” is put in
posting reference column against these entries on both debit and credit sides of the
cash book. Letter “C” shows that the contra effect of this transaction is recorded on
the opposite side.
Contra entries may be of the following types:

1. When cash is deposited into bank by the office two entries are required, one on the
credit (payment) side in the cash column to record the reduction in cash in hand and
the other on the debit (receipt) side in the bank column to record the increase in cash
at bank.
2. When cash is withdrawn from bank for office use, two entries are needed, one on the
credit side in the bank column to record the reduction of cash at bank and the other
on the debit side in the cash column to record the increase in cash in hand.
3. It has already been explained that when a check is received and not deposited into
bank on the same date, the amount will be recorded on the debit side in the cash
column. When the same check is deposited into bank account on another date, two
entries are required, one on the debit side in the bank column to record the increase
in amount at bank and the other on the credit side in the cash column to record the
cash (check) paid into bank.
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Balancing the three column cash book
Whenever it is desired to ascertain the bank balance, the bank columns are totaled on
both sides. If debit column is bigger than the credit column, the difference represents
cash at bank. If, on the other hand, credit column is bigger than the debit column,
the difference represents “overdrawn balance”. Bank account may have an overdrawn
balance because by arranging an overdraft with the bank, it is possible that more
money may be withdrawn from the bank than what has been deposited.
The cash columns are balanced as usual. The discount columns are just totaled and
not balanced.
Posting three column cash book to ledger accounts
The method of posting a three column cash book into ledger is as follows:
1. The opening balances of cash book are not posted.
2. Contra entries are not posted because the double entry accounting for these
transactions is completed within the cash book.
3. All items on the debit side of the cash book are posted to the credit of respective
accounts in the ledger.
4. All items on the credit side of the cash book are posted to the debit of respective
accounts in the ledger.
5. The total of discount column on the debit side is posted to the debit of discount
allowed account and the total of discount column on credit side is posted to the
credit of discount received account in the ledger.
Example
The John trading company has undertaken the following transactions during the
month of May 2016.
Year: 2016
May 01: Cash balance $2,200, bank overdraft $365.
May 03: Paid J & Co. by check $1,200, discount received from him $15.
May 05: Received from A & Co. a check for $980, discount allowed to them $20.
May 07: Deposited into bank the check received from A & Co. on May 05.
May 10: Purchased stationary for cash, $150.
May 15: Purchased merchandise for cash, $1,300.
May 15: Cash sales for the first half of the month, 2,350.
May 16: Deposited into bank $1,600.
May 18: Cash withdrawn from bank for personal expenses $150.
May 19: Issued a check for merchandise purchased, $1,650.
May 21: Drew from bank for office use, $650.
May 24: Received a check from S & Sons and deposited the same into bank, $1,560.
May 25: Paid a check to Ali Inc. for $400 and received a discount of $15.
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May 27: Bought furniture for cash for office use, $390.
May 29: Paid office rent by check, $450.
May 30: Cash sales for the second half of the month $4,300.
May 31: Paid salaries by check $1,760.
May 31: Withdrew from bank for office use $1,470.
Required: Record the above transactions in a three/triple column cash book.
Solution
Petty cash
Most businesses keep petty cash on the premises, which is topped up from the main
bank account.
Under the imprest system, the petty cash is kept at an agreed sum, so that each
topping up is equal to the amount paid out in the period.
What is petty cash?
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Most businesses keep a small amount of cash on the premises to make occasional
small payments in cash, eg staff refreshments, postage stamps, to pay the office
cleaner, taxi fares, etc. This is often called the cash float or petty cash account. The
cash float can also be the resting place for occasional small receipts, eg cash paid by
a visitor to make a phone call.
The petty cash book
A petty cash book is a cash book for small payments.
Imprest system
Under what is called the imprest system, the amount of money in petty cash is kept
at an agreed sum or 'float' (say, $250). This is called the imprest amount. Expense
items are recorded on vouchers as they occur, so that at any time:
The total float is replenished regularly (to $250, or whatever the imprest amount is)
by means of a cash payment from the bank account into petty cash. The amount of
the 'top-up' into petty cash will be the total of the voucher payments since the
previous top-up.
Example: petty cash and the imprest system

DEF operates an imprest system for petty cash. During February 20X9, the following
petty cash transactions took place.
$
2.2.X9 Stamps 12.00
3.2.X9 Milk 25.00
8.2.X9 Taxi fare 15.00
17.2.X9 Stamps 5.00
18.2.X9 Received from staff for photocopying 8.00
28.2.X9 Stationery 7.50
The amount remaining in petty cash at the end of the month was $93.50. What is the
imprest amount?
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Double entry bookkeeping
Double entry bookkeeping is based on the idea that each transaction has an equal but
opposite effect.
Every accounting event must be entered in ledger accounts both as a debit and as an
equal but opposite credit.
Dual effect (duality concept)
Double entry bookkeeping is the method used to transfer the weekly/monthly totals
from the books of prime entry into the nominal ledger. It is the method by which a
business records financial transactions. An account is maintained for every asset,
liability, income and expense.
Every transaction is recorded twice so that every debit is balanced by a credit.
Central to this process is the idea that every transaction has two effects, the dual
effect.
The following rules apply to the accounts in the main ledger (nominal ledger or
general ledger).
• Every transaction is recorded twice, as a debit entry in one account and as a
credit entry in another account.
• Total debit entries and total credit entries must always be equal. This
maintains the accounting equation.
It therefore helps to show accounts in the shape of a T, with a left-hand and a right-
hand side.
By convention:
• Debit entries are made on the left-hand side and
• Credit entries are on the right-hand side.
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The rules of double entry bookkeeping
A debit entry will:

• Increase an asset
• Decrease a liability
• Increase an expense
A credit entry will:

• Decrease an asset
• Increase a liability
• Increase income
The basic rule, which must always be observed, is that every financial transaction
gives rise to two accounting entries, one a debit and the other a credit.
The total value of debit entries in the nominal ledger is therefore always equal at any
time to the total value of credit entries.
Recording of transactions within the double entry framework
Explanation of the accounting equation and effect of transactions on statement of

financial position
The accounting equation is ASSETS = CAPITAL + LIABILITIES.
The rule is that the assets of a business will at all times equal its liabilities. This is
also known as the statement of financial position equation.
1. Double entry system for assets, liabilities and capital

2. The double entry system for expenses and revenues
3. The effect of profit and loss on capital
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Summary of the rules of debits and credits
In the main ledger, there are accounts for assets, liabilities, equity, income and
expenses. The rules about debits and credits are as follows.
The elements of the financial statements
In order to appropriately report the financial performance and position of a business

the financial statements must summarize five key elements:
(1) Assets – An asset is a resource controlled by the entity as a result of past events
from which future economic benefits are expected to flow to the entity. For example,
a building that is owned and controlled by a business and that is being used to house
operations and generate
revenues would be classed as an asset.
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(2) Liabilities – A liability is an obligation to transfer economic benefit as a result of
past transactions or events. For example, an unpaid tax obligation is a liability.
(3) Equity – This is the 'residual interest' in a business and represents what is left
when the business is wound up, all the assets sold and all the outstanding liabilities
paid. It is effectively what is paid back to the owners (shareholders) when the
business ceases to trade.
(4) Income – This is the recognition of the inflow of economic benefit to the entity in
the reporting period. This can be achieved, for example, by earning sales revenue or
through the increase in value of an asset.
(5) Expenses – This is the recognition of the outflow of economic benefit from an
entity in the reporting period. This can be achieved, for example, by purchasing goods
or services off another entity or through the reduction in value of an asset.
Credit transactions
Some accounts in the nominal ledger represent the total of very many smaller
balances. For example, the trade accounts receivable account represents all the
balances owed by individual customers of the business while the trade accounts
payable account represents all money owed by the business to its suppliers.
Payables and receivables

Trade accounts payable are liabilities. Trade accounts receivable are assets.
Trade accounts payable and trade accounts receivable

A payable is a person or organisation to whom a business owes money. In some
businesses, you may see trade accounts payable referred to as trade creditors.
A trade account payable is a liability of a business.
A customer who buys goods without paying cash for them straightaway is a
receivable. Some businesses refer to trade accounts receivable as trade debtors.
A trade account receivable is an asset of a business.
CAPITAL AND REVENUE ITEMS
The difference between capital and revenue items
A business entity normally operates over many years, but prepares financial statements
annually (at the end of each financial year).
• It spends money for both the long term, by investing in machinery, equipment
and other assets. It also spends money on day-to-day expenses, such as paying
for supplies and services, and paying wages or salaries to employees.
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• It receives income from its business operations. It might also receive income
from other sources, such as a new bank loan, or new capital invested by its
owner.
A distinction is made between ‘capital’ and revenue’ items:
• Items of a long-term nature, such as property, plant and equipment used to carry
out the operating activities of the business, are ‘capital items’.
• Items of a short-term nature, particularly items that are used or occur in the
normal cycle of business operations, are ‘revenue items’.
As a rough guide (but which is not strictly accurate):
• capital items will be reported in the statement of financial position, because

they are of a long-term nature
• Revenue items are at some stage reported as income or expenses in the income
statement or statement of comprehensive income.
Capital and revenue expenditure
Capital expenditure is expenditure to acquire a long-term asset for the business (a
capital asset), such as property, plant and machinery, office equipment and motor
vehicles. A ‘capital asset’ is a ‘non-current asset’.
Revenue expenditure is expenditure on day-to-day operating expenses. Revenue
expenditure is reported as expenditure in the income statement. For example, suppose
that a business entity borrows $100,000 from a bank for five years and pays interest of
$8,000 on the loan for the first year. The loan is a non-current liability (and part of the
long-term ‘capital’ of the business) and the interest is an expense.
Revenue income and capital receipts
Revenue income is income arising from the business operations of an entity or from its
investments (such as interest received on cash savings). This is reported in the income
statement or within profit and loss in the statement of comprehensive income.
Capital receipts are receipts of ‘long term’ income, such as money from a bank loan,
or new money invested by the business owners (which is called ‘capital’). Capital
receipts affect the financial position of an entity, but not its financial performance.
Capital receipts are therefore excluded from the income statement or statement of
comprehensive income.
The Journal
The journal is the record of prime entry for transactions which are not recorded in
any of the other books of prime entry.
You should remember that one of the books of prime entry is the journal.
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The journal keeps a record of unusual movement between accounts. It is used to
record any double entries made which do not arise from the other books of prime
entry, ie non-routine transactions. For example, journal entries are made when errors
are discovered and need to be corrected.
The journal is a book of prime entry which records transactions which are not routine
(and not recorded in any other book of prime entry), for example:
• year-end adjustments
– Depreciation charge for the year
– irrecoverable debt write-off
– record the movement in the allowance for receivables
– accruals and prepayments
– closing inventory
• acquisitions and disposals of non-current assets
• opening balances for statement of financial position items
• correction of errors
The journal is a clear and comprehensible way of setting out a bookkeeping double
entry that is to be made.
Presentation of a journal
A journal should be laid out in the following way:
A brief narrative should be given to explain the entry.
Ledger accounts
Why do we need ledger accounts?

Ledger accounts summarize all the individual transactions listed in the books of prime
entry.
In most companies each class of transaction and their associated assets and liabilities
are given their own account. For example, there will be separate accounts for sales,
purchases, rent, insurance costs, cash assets, inventory assets, liabilities to pay
P a g e 20 | 26
suppliers (payables), amounts due from customers (receivables) etc. There is no rule
as to how many accounts a business should have but the system should facilitate
effective and efficient accounting and control. Each account in the system is referred
to as a 'ledger.'
We have already seen the first step in this process, which is to list all the transactions
in various books of prime entry. Now we will look at the method used to summarise
these records: ledger accounting and double entry.
The nominal ledger

The principal accounts are contained in a ledger called the general or nominal
ledger.
The nominal ledger is an accounting record which summarises the financial affairs of
a business.
The information contained in the books of prime entry (eg the sales and purchases
day books) is summarised and posted to accounts in the nominal ledger.
The nominal ledger contains details of all accounts including assets, liabilities,
capital, income and expenditure, and so profit and loss.
Examples of accounts in the nominal ledger include the following.

(a) Plant and machinery at cost (non-current asset)
(b) Motor vehicles at cost (non-current asset)
(c) Plant and machinery, provision for depreciation (liability)
(d) Motor vehicles, provision for depreciation (liability)
(e) Proprietor's capital (liability)
(f) Inventories – raw materials (current asset)
(g) Inventories – finished goods (current asset)
(h) Total trade accounts receivable (current asset)
(i) Total trade accounts payable (current liability)
(j) Wages and salaries (expense item)
(k) Rent and local taxes (expense item)
(l) Advertising expenses (expense item)
(m) Bank charges (expense item)
(n) Motor expenses (expense item)
(o) Telephone expenses (expense item)
(p) Sales (revenue item)
(q) Total cash or bank overdraft (current asset or liability)
P a g e 21 | 26
When it comes to drawing up the financial statements, the revenue and expense
accounts will help to form the statement of profit or loss, while the asset and liability
accounts go into the statement of financial position.
Ledger accounts, with their debit and credit sides, are kept in a way which allows
the two-sided nature of every transaction to be recorded. This is known as the
'double entry' system of bookkeeping, because every transaction is recorded twice
in the accounts.
The format of a ledger account

If a ledger account were to be kept as a manual system in an actual book, rather than
as a file in a computerized system, it might look like this:
There are two sides to a ledger account, and an account heading on top, and so they
are often referred to as T-accounts.
(a) On top of the account is its name.
(b) There is a left-hand side, or debit side.
(c) There is a right-hand side, or credit side.
Exercise 2
Donald sets up a trading business, buying and selling goods. The following transactions
occurred during his first month of trading.
Transaction Details
1 Donald introduced $50,000 into the business by paying money into a business bank
account.
2 The business bought a motor van for $6,000. Payment was by cheque.
3 The business bought some inventory for $3,000, paying by cheque.
4 All the inventory purchased (transaction 3) was sold for $5,000 in cash.
5 More inventory was purchased for $10,000. The purchase was on credit.
6 50% of the inventory purchased in transaction 5 was sold for $8,000. All these sales
were on credit.
P a g e 22 | 26
7 A payment of $3,000 was made to a supplier for some of the purchases.
8 A payment of $4,000 was received from a customer for some of the sales on credit.
9 Donald drew $1,000 from the bank account for his personal use.
10 Donald paid $200 for diesel for the motor van.
11 The business paid $1,500 by cheque for the premium on an insurance policy.
12 The business received a bank loan of $10,000, repayable in two years.
Required
Record these transactions in the main ledger accounts of the business, using the
following format.
The Trial Balance
At suitable intervals, the entries in each ledger account are totalled and a balance is
struck. Balances are usually collected in a trial balance which is then used as a basis
for preparing a statement of profit or loss and a statement of financial position.
Total debit balances and total credit balances should always be equal. A list of the
debit and credit balances in the main ledger accounts is called a trial balance.
At any time, it should be possible to ‘extract’ a trial balance from the main ledger,
and prepare a list of debit balances and credit balances. If the accounts have been
prepared correctly, total debit balances and total credit balances must be equal.
How do you check that you have posted all the debit and credit entries properly?
There is no foolproof method, but a technique which shows up the more obvious
mistakes is to prepare a trial balance.
A trial balance is a list of ledger balances shown in debit and credit columns.
The first step

Before you draw up a list of account balances, you must have a collection of ledger
accounts.
The next step is to ‘close off’ and 'balance off' each account.
P a g e 23 | 26
Closing off the ledger accounts
At the year end, the ledger accounts must be closed off in preparation for the
recording of transactions in the next accounting period.
Balancing off a ledger account
Once the transactions for a period have been recorded, it will be necessary to find
the balance on the ledger account:
(1) Total both sides of the T-account and find the larger total.
(2) Put the larger total in the total box on the debit and credit side.
(3) Insert a balancing figure to the side of the T-account which does not currently add
up to the amount in the total box. Call this balancing figure ‘balance c/f’ (carried
forward) or ‘balance c/d’ (carried down).
(4) Carry the balance down diagonally and call it ‘balance b/f’ (brought forward) or
‘balance b/d’ (brought down).
Example
In this example, there is a debit balance on the bank account at the end of the
period.
The closing balance to carry forward is entered on the credit side, so that total debits
and total credits add up to $7,000. The debit balance of $2,000 is brought forward as
the opening balance on the account at the beginning of the next period.
Note
c/f stands for carried forward. You might also see:
• c/fwd (for carried forward), or
• c/d for ‘carried down’.
Similarly, b/f stands for brought forward. You might also see:
P a g e 24 | 26
• b/fwd (for brought forward), or
• b/d for ‘brought down’.
If the total debits exceed 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.
Account balances: opening and closing balances
Account balances and a trial balance

At any time, the balance on an account can be established. The balance on an
account is the difference between the total value of debit entries and the total value
of credit entries.
• If total debits exceed total credits, there is a debit balance
• If total credits exceed total debits there is a credit balance.
Closing balance and opening balance

At the end of an accounting period, an account is closed off. On many accounts
(particularly asset, liability and capital accounts), there will be a balance.
• Balances on expense accounts and income accounts are transferred to the
income statement. (Note: There might be some accruals and prepayments on
expense accounts. These are explained in a later chapter.)
• Balances on the asset, liability and capital accounts are carried forward as
closing balances at the end of the period, and become opening balances at the
beginning of the next period.
Collecting the balances
If the basic principle of double entry has been correctly applied throughout the period
it will be found that the credit balances equal the debit balances in total.
This is called a trial balance. It does not matter in what order the various accounts
are listed. It is just a method used to test the accuracy of the double entry
bookkeeping.
What if the trial balance shows unequal debit and credit balances?
A trial balance can be used to test the accuracy of the double entry accounting
records. It works by listing the balances on ledger accounts, some of which are debits
and some credits. Total debits should equal total credits.
If the two columns of the list are not equal, there must be an error in recording the
transactions in the accounts. A list of account balances, however, will not disclose
the following types of errors.
P a g e 25 | 26
The trial balance should reveal errors where the rules of double entry have been
broken, such as:
(a) One-sided entries
(b) Where an entry has been posted as a credit to one account and a credit to a
second account and no debit entry has been made (or two debits and no credits)
From trial balance to financial statements
The statement of profit or loss

A profit or loss ledger account is opened up to gather all items relating to income and
expenses. When rearranged, these items make up the statement of profit or loss.
The first step in the process of preparing the financial statements is to open up
another ledger account, called the profit or loss account. In it a business summarises
its results for the period by gathering together all the ledger account balances
relating to the statement of profit or loss. This account is still part of the double
entry system, so the basic rule of double entry still applies: every debit must have an
equal and opposite credit entry.
So, what do we do with this new ledger account? The first step is to look through the
ledger accounts and identify which ones relate to income and expenses.
The statement of financial position
The balances on all remaining ledger accounts (including the profit or loss account)
can be listed and rearranged to form the statement of financial position.
Now that we have dealt with those relating to income and expenses, which ones are
left? The answer is that we still have to find out what to do with the cash, capital,
bank loan, trade accounts payable, shop fittings, trade accounts receivable and the
drawings accounts.
Are these the only ledger accounts left? No: don't forget there is still the last one we
opened up, called the profit or loss account. The balance on this account represents
the profit earned by the business and, if you go through the arithmetic, you will find
that it either has a credit balance – a profit or a debit balance – a Loss (Not
surprisingly, this is the figure that is shown in the statement of profit or loss.)
P a g e 26 | 26

Double Entry Bookkeeping

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PRINCIPLES OF DOUBLE ENTRY BOOK-KEEPING AND BOOKS OF

The role of source documents

Types of source documents

(h) Credit note. A document sent by a supplier to a customer in respect of goods

(i) Debit note. A document sent by a customer to a supplier in respect of goods

(j) Remittance advice. A document sent to a supplier with a payment, detailing

BOOKS OF PRIME ENTRY

The need for books of prime entry

Books of prime entry are books in which we first record transactions.

The main books of prime entry are as follows.

Sales and purchase day books

Invoices and credit notes are recorded in day books.

The sales day book

The purchase day book records other people's invoices

The sales returns day book

The purchase returns day book

The cash book

Types of cash books

1. Single / one column Cash Book

Example: cash book

Generate the cash book?

2. Double / Two column cash book

Recording cash transactions:

Recording bank transactions:

Recording contra entries:

A contra entry is made in the following circumstances:

(1). When cash is deposited into the bank account:

(3). When a check received from a receivable or customer on a date subsequent

Balancing and posting a double column cash book

The following example summarizes the whole explanation given above.

Some key points regarding discount columns

Format of Tripple /Three Column Cash Book

The common format of three column cash book is given below:

Hints for recording in three/triple column cash book

(3). Payment by check or cash: If payment is made by check, it will be recorded in

What are Contra entries?

Contra entries may be of the following types:

Posting three column cash book to ledger accounts

Required: Record the above transactions in a three/triple column cash book.

What is petty cash?

The petty cash book

A petty cash book is a cash book for small payments.

Example: petty cash and the imprest system

Dual effect (duality concept)

Every transaction is recorded twice so that every debit is balanced by a credit.

A debit entry will:

A credit entry will:

Recording of transactions within the double entry framework

Explanation of the accounting equation and effect of transactions on statement of

The accounting equation is ASSETS = CAPITAL + LIABILITIES.

1. Double entry system for assets, liabilities and capital

The elements of the financial statements

In order to appropriately report the financial performance and position of a business

Payables and receivables

Trade accounts payable and trade accounts receivable

CAPITAL AND REVENUE ITEMS

The difference between capital and revenue items

• capital items will be reported in the statement of financial position, because

A journal should be laid out in the following way: