Double-entry Accounting
Accounting is based on double-entry. The double-entry principle states that every transaction must be posted twice in the accounts. That is to say, every transaction involves two accounts: the receiving account and the giving account. The account that receives the value is debited while the one that gives value is credited.
Double-entry must be completed for every transaction in the ledger accounts. The first step is to identify the two accounts involved; then post the entries in the two accounts, i.e. the date, brief description and amount. The description is the other account in which the double entry is completed. The subsidiary books (journals) are not based on the double-entry except the cash book (or cash journal). This is because the cash book is both a ledger account and a journal for cash transactions.
Example
Record the following transactions in the ledger accounts of Mr. Smith, a sole trader, for the month of January.
Transaction 1
On January 1, Mr. Smith started the business with cash of $5,000.
Solution:
*Account to be debited: Cash account is debited as it receives the value.
*Account to be credited: The account that gives value, i.e. Mr. Smith’s capital account. It shows his contribution to the business as the business is distinct from the owner.
Cash Account
| $ Jan 1 Capital 5,000 |
$
Capital Account
| $ |
| $ Jan 1 Cash 5,000 |
Cash Account
Date | Details | Amount $ |
| Date | Details | Amount $ |
|---|---|---|---|---|---|---|
Jan 1 | Capital | 5,000 |
Transaction 2
On January 3, Mr. Smith paid rent of $500 by cheque.
Solution:
*Account to be debited: Rent account, the receiver of the value.
*Account to be credited: Bank account, the giver of the value. The bank account is used because the transaction involves payment by cheque.
Rent Account
| $ Jan 3 Bank 500 |
| $ |
Bank Account
$
| $ Jan 3 Rent 500 |
Transaction 3
Mr. Smith purchased goods for resale with $2,000 cash from Mark on January 5.
Solution:
*Account to be debited: Purchases account is the receiver as goods are brought into the business. The purchases account is for goods that the business deals in or buys for resale.
*Account to be credited: Cash account is credited as cash is given out in exchange for the goods. No account is opened for Mark because it is a cash purchase; he is not a creditor and there is no need for keeping a record for him in the business.
Purchases Account
| $ Jan 5 Cash 2,000 |
| $ |
Cash Account
| $ Jan 1 Capital 5,000 |
| $ Jan 5 Purchases 2,000 |
Transaction 4
Cash sales of $4,000 were made to George on January 6.
Solution:
*Account to be debited: Cash account as cash is received by the business. There is no need to open an account for George because he is not owing the business.
*Account to be credited: Sales account as the giver of the goods valued at $4,000 to customers.
Cash Account
| $ Jan 1 Capital 5,000 Jan 6 Sales 4,000 |
| $ Jan 5 Purchases 2,000 |
Sales Account
| $ |
| $ Jan 6 Cash 4,000 |
Transaction 5
On January 10, Mr. Smith sold goods worth $500 on credit to ABC Enterprises.
Solution:
*Account to be debited: ABC Enterprises account, the receiver of the goods; it has not paid for the goods (the debtor) and there is a need to keep a record for it in the business. If it was a cash sale, a cash account is needed and not an account for ABC Enterprises.
*Account to be credited: Sales account, the giver of goods valued at $500.
ABC Enterprises Account
| $ Jan 10 Sales 500 |
| $ |
Sales Account
| $ |
| $ Jan 6 Cash 4,000 Jan 10 ABC Ent. 500 |
Transaction 6
Goods worth $1,000 were purchased on credit from P. Limited on January 15.
Solution:
*Account to be debited: Purchases account, the receiver of the goods.
*Account to be credited: P. Limited account, gave value and has not been paid; it is a creditor and the account is, therefore, credited.
Purchases Account
| $ Jan 5 Cash 2,000 Jan 15 P. Limited 1,000 |
| $ |
P. Limited Account
| $ |
| $ Jan 15 Purchases 1,000 |
Transaction 7
On January 18, a customer, George, returned goods worth $600 which was refunded in cash.
Solution:
*Account to be debited: Sales returns account as the receiver of the goods. This is a cash transaction and there is no need to keep any account for George.
*Account to be credited: Cash account as the giver of cash to the customer for the goods returned.
Sales Returns Account
| $ Jan 18 Cash 600 |
| $ |
Cash Account
| $ Jan 1 Capital 5,000 Jan 6 Sales 4,000 |
| $ Jan 5 Purchases 2,000 Jan 18 Sales Returns 600 |
Transaction 8
On January 20, Mr. Smith returned goods worth $1,000 to suppliers and a refund was made by cheque.
Solution:
*Account to be debited: Bank account as a cheque of $1,000 was received for goods returned to suppliers.
*Account to be credited: Purchases returns account as goods are given back to suppliers.
Bank Account
| $ Jan 20 Purchases Returns 1,000 |
| $ Jan 3 Rent 500 |
Purchases Returns Account
| $ |
| $ Jan 20 Bank 1,000 |
Transaction 9
Mr. Smith bought machinery for use in the business at a cost of $1,500 on January 25. He paid in cash
Solution:
*Account to be debited: Machinery account as value is being received. It is not recorded in the purchases account because it is not a good bought for resale. It is an asset.
* Account to be credited: Cash account as cash is given out in exchange for the asset.
Machinery Account
| $ Jan 25 Cash 1,500 |
| $ |
Cash Account
| $ Jan 1 Capital 5,000 Jan 6 Sales 4,000 |
| $ Jan 5 Purchases 2,000 Jan 18 Sales Returns 600 Jan 25 Machinery 1,500 |
Transaction 10
On January 28, Mr. Smith took some goods worth $500 for personal use.
Solution:
*The oner ‘s Drawings account is receiving value and is debited. Since the oner is distict from the business, any thing he receive from the business (cash or good) ill be recorded in a draings account opened for him
*Th puchases account is credited as goods are given out to the oner.
Drawings Account
| $ Jan 28 Purchases 500 |
| $ |
| $ |
| $ Jan 5 Cash 2,000 Jan 15 P. Limited 1,000 |
Purchases Account
| $ Jan 28 Drawings 500 |