A-Level Accounting Year 12

Topic 2- Double Entry

Mr. Barry

A-Level Accounting Year 12

Learning Outcomes

• Recording of transactions in accounts in the accounting system

• Double-entry accounts – how debits and credits work

• Bank Account – money received and money paid

• Accounts for income and expenses – some example transactions

Mr. Barry

Mr. Barry A-Level Accounting Year 12

Double-entry system• Most accounting systems are based on

double-entry accounts• Double-entry involves two entries for

each transaction – a debit entry and a credit entry• The two entries are for the same amount but are made in separate accounts

Payment of insurance through the bank involves entries in two accounts – Insurance Account and Bank Account

Receipt of rent paid by a tenant involves entries in two accounts – Rent Received Account and Bank Account

• A double-entry account has two sides – a debit side and a credit side

Mr. Barry A-Level Accounting Year 12

Insurance Account

creditdebit

• The debit side is on the left of the double-entry account and the credit side is on the right

• You can remember the sides by thinking “DRive on the left and CRash on the right!”

• The account is headed up with its name, for example Insurance Account, Bank Account

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Debits and Credits in double-entry

• The two equal entries in the accounts for every transaction involve a DEBIT entry and a CREDIT entry• The DEBIT entry is always recorded on the left-hand side of one account

• The CREDIT entry is always recorded on the right-hand side of the other account

Insurance Account

Bank Account

Debit entry

Credit entry

debit

debit

credit

credit

Mr. Barry A-Level Accounting Year 12

Using bank accounts• An organisation such as a business will need

to use a bank account set up at a bank• Bank Account in the accounting system of a

business is a separate record of the money paid into and out of the bank

• Bank Account in the accounting system of a business can be thought of as a ‘mirror image’ of the bank account held at the bank

• As a result of this, the terms ‘debit’ and ‘credit’ are often used differently by the bank and a business• When using double-entry accounting you must keep to the rules set out on the next screen and ignore the way banks refer to ‘debits’ and ‘credits’

Mr. Barry A-Level Accounting Year 12

Bank Account – the rules for debits and credits• Bank Account in a business records:

• Money paid into the bank is ALWAYS a DEBIT entry for the business

• Money paid out of the bank is ALWAYS a CREDIT entry for the business

Bank Account

Money out

debit

credit

- payments into the bank, sales for example

The rule for Bank Account that ‘money in = debit’ and ‘money out = credit’ NEVER changes and must not be confused with the way banks talk about debits and credits

- payments out of the bank, such as insurance and expenses

Money in

Mr. Barry A-Level Accounting Year 12

debit credit

How to write up the double-entry accounts• So far the double-entry accounts have been shown

as a simple ‘T’

• The ‘T’ shows the structure of the account, but you will need to know how to enter all the transaction details• The details are entered in sets of columns which are headed up:

- ‘date’ – the date of the transaction

- ‘details’ – the name of the other account involved - ‘£’ – the amount of the transaction, shown as ‘£’

date

details

£ date

details

£

Mr. Barry A-Level Accounting Year 12

debit credit

Paying the insurance – the entry in Bank account• The details of the transaction

are:

• Starting with Bank Account, insurance is money paid out, so it will be a credit entry:

- date – this is 10 January, abbreviated to ‘10 Jan’

- amount – this is £300

date

details

£ date

details

£

10 January, insurance of £300 paid through the bank

• This involves two accounts: Bank Account and Insurance Account

Bank Account money out

money in

10 Jan Insurance

300

- details – the other account involved is the Insurance Account

Mr. Barry A-Level Accounting Year 12

debit credit

Paying the insurance – the entry in Insurance Account• The details of the transaction

are:

• A credit entry has been made in Bank Account and so a debit will need to be entered in Insurance Account to complete the double entry:

- date – this is 10 January, abbreviated here to ‘10 Jan’

date

details

£ date

details

£

10 January, insurance of £300 paid through the bank

Insurance Account

10 Jan Bank 300

- details – this is the other account involved ie Bank Account - amount – this is £300, the amount that was entered in

Bank Account

Mr. Barry A-Level Accounting Year 12

Summary of the double-entry - paying insurance by cheque

Firstly, credit Bank Account:

Secondly, debit Insurance Account:

Mr. Barry A-Level Accounting Year 12

Sample transactions – payments into the bank

• We will now show two ‘paying in’ transactions being entered in the accounts using double-entry

• The transactions relate to a shop run by Sam and both involve money being paid into the bank in September

• The transactions are:

• We will now explain how these transactions are entered in the accounts

3 September Sam pays into the bank a cheque for ````````````£350 for rent received from a tenant ````````````who has a flat above his shop

5 September Sam pays his sales takings of £5,500 ````````````from the shop into the bank

Mr. Barry A-Level Accounting Year 12

debit

date

details

£ date

details

£

Bank Account

3 Sep Rent Received 350

• Starting with Bank Account you can see that it is money received, so it must be a debit entry:

On 3 September Sam pays into the bank a cheque for £350 for rent received

Capital Account

Rent Received Account

debit

date

details

£ £details

date

3 Sep Bank 350

• The other account is Rent Received Account, and this will therefore be a credit entry:

money in

money out

credit

credit

Mr. Barry A-Level Accounting Year 12

debit

date

details

£ date

details

£

Bank Account

5 Sep Sales 5,500

• This is money received into the bank, so it must be another debit entry to Bank Account:

On 5 September Sam pays into the bank a cheque for £5,500 for sales from the shop

Capital Account

Sales Account

debit

date

details

£ £details

date

5 Sep Bank 5,500

• The other account will be Sales Account and this will therefore be a credit entry:

money in

money out

credit

credit

Mr. Barry A-Level Accounting Year 12

Sample transactions – payments out of the bank• Here are two further transactions from Sam’s double-

entry accounts

• This time the transactions involve payments out of the bank

• The transactions are:

• We will now show how these transactions are entered in the double-entry accounts

8 September Sam buys some stock for his shop ````````````writing out a cheque for £3,500 for ````````````his supplier. These are ‘purchases’ for ````````````the business

10 September Sam pays his electricity bill, writing out ``````````` a cheque for £325 to the power company

Mr. Barry A-Level Accounting Year 12

debit

date

details

£ date

details

£

Bank Account

8 Sep Purchases 3,500

• This is a payment out of the bank, so it must be a credit entry to Bank Account:

On 8 September Sam writes out a cheque for £3,500 for purchases for the shop

Capital Account

Purchases Accountdebit

date

details

£ £details

date

8 Sep Bank 3,500

• The other account used will be Purchases Account and this must be a debit entry:

money in

money out

credit

credit

Mr. Barry A-Level Accounting Year 12

debit

date

details

£ date

details

£

Bank Account

10 Sep

Electricity 325

• This is a payment out of the bank, so it must be a credit entry to Bank Account:

On10 September Sam writes out a cheque for £325 to pay an electricity bill

Capital Account

Electricity Accountdebit

date

details

£ £details

date

Bank 325

• The other account will be Electricity Account and this must be a debit entry:

money in

money out

credit

credit

10 Sep

Mr. Barry A-Level Accounting Year 12

debit

date

details

£ date

details

£

Bank Account

Purchases 3,500

• After these four transactions the Bank Account will look like this:

Summary of the Bank Account transactions

money in

money out

credit

• Remember that the other double-entry accounts we have used will have the entries on the opposite side:

- for payments into the bank (rent received, sales) the other account will have a CREDIT entry

- for payments out of the bank (purchases, electricity) the other account will have a DEBIT entry

10 Sep 8 Sep

Electricity 3 Sep Rent Received

5,500

350 325 5 Sep Sales

Mr. Barry A-Level Accounting Year 12

debit

Sales

• Another way of working out which side the debit or credit should go – except for Bank Account, which has its own rules - is to remember the following diagram:

Debits and Credits – which side of the account?

credit

Income

Purchases

Expenses

An easy way to remember these words are by remembering the first letters of these phrases:

Dead Parrots Exploding (for the debit side) Cause Serious Injuries (for the credit side)

Mr. Barry A-Level Accounting Year 12

• Transactions are recorded in accounts in the accounting system

Summary

• The double-entry system requires two equal entries – a debit and a credit – for each transaction in two separate accounts

• Debit entries are recorded on the left-hand side of an account and credits on the right

• It is important to work out which account should have the debit and which account should have the credit• The Bank Account is easy to remember because debits (on the left) are always ‘money in’ and the credits (on the right) are always ‘money out’

• If a transaction involves the Bank Account, work out the bank entry first (debit or credit) and the other entry will always be on the opposite sideMr. Barry A-Level Accounting Year 12