DOUBLE ENTRY BOOK KEEPING
The principle of double of double entry states that for every debit entry, there must be a corresponding credit entry and vice-versa. It is the foundation of book keeping.
Accounting attempts to record both effects of a transaction or event on the entity's financial statements. This is the application of double entry concept. Without applying double entry concept, accounting records would only reflect a partial view of the company's affairs. Imagine if an entity purchased a machine during a year, but the accounting records do not show whether the machine was purchased for cash or on credit. Perhaps the machine was bought in exchange of another machine. Such information can only be gained from accounting records if both effects of a transaction are accounted for.
ALSO READ: Types Of Accounting
ALSO READ: Types Of Accounting
Study has shown that many students failed accounts due to lack of indepth knowledge of the double entry principles. The principle operates on the basics that every financial transaction must have two aspects
DR = Receiver (receiving account)
CR = Giver (giving account)
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance.
PROCEDURES FOR DOUBLE ENTRY
The following are the procedures for double entry practice:
- The keeping of books of account.
- The division of each book into separate accounts.
- Each account is divided into two halves, left hand side (Dr) and right hand side (Cr)
- All transactions must be recorded in two accounts, one account is debited and another account is credited.
- The giver (giving account) is credited with and the value of whatever it receives and the receiver (receiving account) is debited with the same amount.
CASH AND CREDIT TRANSACTIONS
Financial transactions may be classified to cash and credit transactions
CASH TRANSACTIONS
In this classification of transaction, the buyers pay for goods and services bought immediately. Here, no account will be opened in respect of a supplier or customer.
STEPS IN RECORDING CASH TRANSACTIONS
- Prepare two accounts.
- Identify the "GIVING ACCOUNT" and the "RECEIVING ACCOUNT"
- Now apply the principle Cr (Giver), Dr (Receiver).
All transaction must pass through the cash book.
ALSO READ: Depreciation Of Fixed Assets: Causes Of Depreciation
ALSO READ: Depreciation Of Fixed Assets: Causes Of Depreciation
CREDIT TRANSACTIONS
The majority of commercial transactions are termed credit transactions, which means that the transfer of ownership takes place before payment to the supplier i.e settlement is deferred to a future date. Example: Mr John bought goods but he did not pay until 3 months later.
STEPS IN RECORDING CREDIT TRANSACTIONS
- Prepare day books: Sales, Purchases, Returns, and Journal proper.
- Prepare two accounts.
- Identify the "GIVING ACCOUNT" and the "RECEIVING ACCOUNT"
- Apply the principle of double-entry.
ILLUSTRATION OF THE PRINCIPLE OF DOUBLE-ENTRY
Jan 1 Mr Frank started business with $1000 cash
EFFECT
Increase in capital: Capital account
Decrease in asset: Cash account
ACTION REQUIRED: Cr Capital account (Giver)
Dr Cash account (Receiver)
Jan 2 Paid $100 cash for rent
EFFECT
Increase in expenditure: Rent account
Decrease in asset: Cash account
ACTION REQUIRED: Cr Rent account (Giver)
Dr Cash account (Receiver)
Jan 3 Received refund for insurance $50 cash
EFFECT
Increase in assets: Cash account
Decrease in expenditure: Insurance account
ACTION REQUIRED: Cr Cash account (Giver)
Dr Insurance account (Receiver)
Jan 4 Bought motor vehicle $50 paying by cheque
EFFECT
Increase in assets: Motor vehicle account
Decrease in assets: Bank account
ACTION REQUIRED: Cr Vehicle account (Receiver)
Dr Bank account (Giver)
Jan 6 Cash sales $100
EFFECT
Increase in sales: Sales account
Increase in assets: Cash account
ACTION REQUIRED: Cr sales account (Giver)
Jan 7 Cash purchases $100
EFFECT
Increase in purchases: Purchases account
Decrease in assets: Cash account
ACTION REQUIRED: Cr Cash account (Giver)
Dr Purchases account (Receiver)
Jan 9 Received loan $200 cash from Michael
EFFECT
Increase in assets: Cash account
Increase in liability: Loan account
ACTION REQUIRED: Cr Loan account (Giver)
Dr Cash account (Receiver)
Jan 10 Put cash $100 into the bank
EFFECT
Increase in assets: Bank account
Reduction in Asset: Cash account
ACTION REQUIRED: Cr Cash account (Giver)
Dr Bank account (Receiver)
Jan 12 Sold goods $60 on credit to Samuel
EFFECT
Increase in assets: Samuel account
Increase in sales: Sales account
ACTION REQUIRED: Cr Sales account (Giver)
Dr Samuel account (Receiver)
1 Comments
Enter your comment...my name is Abubakar Muhammad madayana,I am an accountant contact me on speak2madayana35@gmail.com
ReplyDelete