Chapter 2: Double Chapter 2: Double Entry BookkeepingEntry Bookkeeping

Part 1Part 1

DR CR

Learning objective:Learning objective:

To understand the basic principles of double entry.

DDOUBLE - OUBLE - EENTRYNTRY ACCOUNTING SYSTEMACCOUNTING SYSTEM

Every business transaction will involve twotwo parties

Each party must give upgive up something (outout) in order toto receive receive something

in return. (inin)

Can you guess ? Can you guess ? What does a business gives and receives in return ?

1) When a business sells its goods for cash.2) When a business purchase goods with cash.3) When a business purchase a motor vehicle

with cash.4) When a trade receivable (trade debtor) pays to

the business with cash.5) When the business pays to a trade payable

(trade creditor) with cash.

WWhen the business sells its hen the business sells its goods for cash, itgoods for cash, it willwill give upgive up its its goodsgoods to its customer and to its customer and willwill receive cashreceive cash in return.in return.

Cash IN

Goods OUT

Example 1

BusinessBusiness’s goods

WWhen a business purchase goods hen a business purchase goods with cash, itwith cash, it willwill give upgive up its cashits cash to its suppliers andto its suppliers and willwill receive receive goodsgoods in return.in return.

Goods IN

Cash OUT

Example 2

BusinessBusiness’s goods

WWhen a business purchase a hen a business purchase a motor vehicle, itmotor vehicle, it willwill give upgive up its its cashcash to the seller and to the seller and willwill receive motor vehiclereceive motor vehicle in return.in return.

Example 3

Motor Vehicle IN

Cash OUT

BusinessMotor Vehicle

When a trade receivable pays cash to When a trade receivable pays cash to the business, the business the business, the business will will receive cashreceive cash and and will give a receipt will give a receipt to to the trade receivable acknowledging the trade receivable acknowledging the debt has been settled. the debt has been settled.

Example 4

BusinessTrade receivable

Cash IN

Receipt/Trade receivable

OUT

When a business pays cash to a trade When a business pays cash to a trade payable, the business payable, the business will give out will give out cashcash and and will receive a receipt will receive a receipt from from the trade payable acknowledging the the trade payable acknowledging the outstanding amount has been outstanding amount has been settled. settled.

Example 5

BusinessTrade Payable

Receipt/Trade payable

IN

CashOUT

Hence,

For every business transaction, two accounts will be involved.

One account will have a debit entry (receiving) and another account will have a credit entry(giving).

To Summarize To Summarize 1) When a business sells its goods for cash. Debit Cash a/c Credit Inventory a/c *2) When a business purchase goods with cash. Debit Inventory a/c * Credit Cash a/c3) When a business purchase a motor vehicle

with cash. Debit Motor vehicle a/c Credit Cash a/c4) When a trade receivable (trade debtor) pays

the business with cash. Debit Cash a/c Credit Trade receivable a/c5) When the business pays to a trade payable

(trade creditor) with cash. Debit Trade payable a/c Credit Cash a/c

IMPORTANT NOTE NO 1Normally when goods bought or sold, it will affect the inventory account, either goods in (debit) or goods out (credit).

However, sometimes “goods in” maybe goods returned by the customers and “goods out” may comprise goods returned to suppliers.

Therefore, specific accounts need to be used:Sales a/c - goods sold to customer. (goods out – credit)Sales returns a/c - goods returned by customers.(Return inwards a/c) (goods in – debit)Purchases a/c - goods bought from suppliers. (goods in – debit)Purchases returns a/c – goods returned to suppliers(Return outwards a/c) (goods out – credit)

So far we have learned about three categories of accounts:1)Assets

Things owned by the business. Examples include premises , motor vehicle, inventory , trade receivable, bank, and cash.

All assets are debit entries because the business receives them in return for giving something else.

2)Liabilities Things owed (IOU) by the business. Examples include trade

payable, and loan.

All liabilities are credit entries because the business gives them IOUs in return for receiving goods or cash.

3)Capital Resources invested by the owner. Examples include cash

and motor vehicle. Capital is a credit entry because the business gives the ownership to the investor .

IMPORTANT NOTE NO 2

Another three categories:

4) Income Income arising from the business activities. Examples include sales, rental received, and interest received.

All income are credit entries because the business is giving goods or services in return for receiving cash/bank.

5) ExpensesDay to day running expenses of the business. Examples include purchases , wages, and general expenses.

All expenses are debit entries because the business is receiving goods or services by giving out cash/bank.

6) DrawingsAmount of resources taken out by the owner from the business. Examples include motor vehicle and cash.

All drawings are debit entries because the owner is reducing his ownership in the business.

Carriage Costs

Carriage cost is basically transportation cost.

There are two types of carriage costs:

1)Carriage inwards – Cost of transporting the goods from the supplier to the place of business.

2)Carriage outwards – Cost of transporting the goods from the place of business to the customer.

Both carriage costs are expenses. Therefore, both carriage costs are debit entries.

IMPORTANT NOTE NO 3

QUIZ TIME

?

ARE YOU READY ?

Account to be debited

Account to be credited

1) Bought a computer on credit from Commodore Ltd. Computer

Commodore Ltd

2) The proprietor (owner) took a computer for his own private use at home.

Drawings Computer

3) A trade receivable, J.Pike paid the business by cheque. Bank J. Pike

4) Repaid part of a loan from Lloyds Bank in cash

Loan Cash

5) Returned goods to a trade payable, M. Sandy. M. Sandy Purchases returns

6) Paid for carriage on goods sold to V. Anderson by cash. Carriage outwards Cash

7) Bought a car on credit from Wiley Motors Motor vehicle Wiley Motors

THE END (PART 1)