Principles And Practice of Double Entry

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

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.

PROCEDURES FOR DOUBLE ENTRY
The following are the procedures for double entry practice:
  1. The keeping of books of account.
  2. The division of each book into separate accounts.
  3. Each account is divided into two halves, left hand side (Dr) and right hand side (Cr)
  4. All transactions must be recorded in two accounts, one account is debited and another account is credited.
  5. 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

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)
                                               Dr cash account (Receiver)

ALSO READ: Duties Of An Accountant

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)