Accounting Lecture 02
Double Entry system
Learning Outcomes
By the end of the session, you should have a good understanding of:
What does a double entry system mean.
How to identify the dual impact of a transaction
How to record the transactions using double entry system
What is Double Entry System?
o The double-entry system of accounting or bookkeeping means that for every business transaction,
amounts must be recorded in a minimum of two accounts. The double-entry system also requires that
for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
Debits and Credits:
Every accounting transaction must be either a credit or debit. Quite simply, either you are crediting
money or debiting money to the overall balance. In bookkeeping texts, you will see debits abbreviated
as "Dr." and credits abbreviated as "Cr."
Accounting Equation
The first step to understand the double entry system is to know the Basic Accounting equation
As you recall;
Assets = Liabilities + Equity
Simple rule to follow:
Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Capital/ Equity Credit Debit
Basically; Left hand side of the equation increase – Debit, Right hand side increase – Credit and vice versa
Steps of double entry
Step 01 – Identify which elements of the accounting equation are impacted by the
transaction
For example – If the owner introduced equity or capital worth of $5000 in cash, the elements impacted
are; Assets (because cash is an asset) and Capital (because it is the owner’s equity)
Step 02 – Identify what is the impact to each of the elements
For the previous example – Cash increases therefore it is an asset increase and capital also increases
Step 03 – Record the debit and credit entry in relevant account
Cash Account Dr. 5000
Capital Account Cr. 5000
Example
To illustrate further on double entry, let's assume that the company borrows $10,000 from its
bank.
The company's Cash account must be increased by $10,000 and a liability account must be
increased by $10,000.
To increase an asset, a debit entry is required. To increase a liability, a credit entry is required.
Hence, the Cash account will be debited for $10,000 and the liability Loans Payable will be credited
for $10,000.
Cash Account Dr. 10,000
Loan Payable Cr. 10,000
Types of Transactions
There are overabundance of transactions that take place in an organization on a daily basis.
All of these transaction will have a dual impact on the books of accounts. We will learn
some of the basic transactions that occurs in a business.
Scenario
Let’s assume that Mr. Anthony Barry Coles Starts a business named ABC company. Here are few
of the transactions that could took place during the first months of operations.
Ex 01 – Owner introducing capital
The owner of ABC Ltd. Introduces $10,000 as capital to the company
Double entry:
Cash Account Dr. 10,000
Capital Account Cr. 10,000
Ex.02 Purchase of Non Current Asset
ABC Ltd purchased a Motor vehicle in cash worth of $5000.
Motor Vehicle Account Dr. $5000
Cash Account Cr. $5000
Further improvement to the accounting
equation
There are two more elements that needs to be introduced; Income and Expenses
The basic accounting equation can be further expanded as follows;
Assets + Expenses = Capital + Liabilities + Income
Same rules to follow as before;
Increase Decrease
Expenses Debit Credit
Income Credit Debit
Ex. 03 Purchase of inventory in cash
ABC Ltd purchased $1000 worth of inventory in cash for resale
Purchases A/c Dr. 1000
Cash Account Cr. 1000
EX. 04 – Purchases of inventory on Credit
ABC Ltd. Purchased $4000 worth of inventory for resale on credit from Mango Ltd.
Purchase Account Dr. 4000
Mango Ltd. Cr. 4000
If the name of the organization is not given, the credit entry should be written as Accounts
Payable or creditors
Example
The company made a cash sale of $400.
Here, a sale is identified as an income and they have earned cash from the sale.
Elements impacted here are; Asset (increase) and Income (increase)
Asset increase is a debit entry and Income increase is a credit entry;
Therefore this can be recorded as;
Cash Account – Dr.
Sales Account – Cr.
Ex 05 – Credit Sales
ABC Ltd makes a sale worth of $5000 to Sharp & Co. on credit.
Sharp & co. Dr. 5000
Sales A/c Cr. 5000
If the name of the customer is not given, debit entry should be Accounts Receivable or
Debtors.
Ex 06 – Interest Income
ABC Ltd. Received interest on their investment worth of $3000
Cash Account Dr. 3000
Interest income Cr. 3000
Ex. 07 Rent Expenses
ABC Ltd. Paid rent for their building worth of $400
Rent A/c Dr. 400
Cash A/c Cr. 400
Important to note;
The statement of Financial position will only show Assets, Liabilities and Capital at the
end of a given financial year.
The Income Statement will show Income and Expenses occurred during the year.
