Chapter 3: Double Entry Bookkeeping Flashcards
3.1 Introduction
The double entry bookkeeping method is used for recording every commercial transaction and is more technical than the dual effect used in chapter 2. It is a system of recording the dual effect of every transaction and we only need to construct the accounting equation and balance sheet.
3.2 The Double Entry System
Ledger or T accounts – the basic unit of the double entry system is the ledger or T account, divided into two sides, the left side is the debit side and the right side is the credit side. A ledger or T account or simply account, groups together transactions of the same type, for example all expenditure on electricity will be recorded in the electricity account. At the end of the year you can see the total spent on electricity.
Debits and credits –
Debit – a debit transaction occurs when there is an increase in an asset or an expense or an increase in drawings made by the proprietor.
Credit – a credit arises when there is an increase in liabilities, income or capital
Sometimes transactions result in a reduction in individual items so if there is a decrease in liabilities, income and capital, this is a debit and if there is a decrease in an asset or an expense, this is a credit.
Debits always equal credits every time a transaction occurs.
For example, if a business owner puts £1,000 cash into the business, you need to create two T accounts. One for the bank account debit (left hand side) of £1,000 and another one for £1,000 of credit (right hand side) for a capital account. On the T accounts you must put some narrative for the transaction, for example the day of the transaction due to the number of transactions that could be recorded.
For every transaction the left-hand side should equal the right-hand side.
Banks prepare statements that define credit and debit transactions differently, a bank statement shows a cash payment as a debit and a cash receipt as a credit.
