CHAPTER 2: THE DOUBLE ENTRY BOOK-KEEPING Part 1 Learning outcome • To record the correct double entry for any transactions involving bank and cash. What is double entry book-keeping? • In general, book-keeping is the process of recording transactions in a “T” account. • The procedure used is the double entry system. • Hence, the term “ double entry bookkeeping”. “T” Account Debit SHAPED LIKE a “T” Credit “T” Account Debit means Left Credit means Right Debit Credit “T” Account Abbreviation for Debit Dr Cr Abbreviation for Credit The “T” Account Detailed Format Dr Date Name/Title of account Details $ Date Date of transaction $ Details Amount Name of account to be credited Cr Amount Name of account to be debited Date of transaction Every “T” Account has: ● An increase side, and ● A decrease side ● But, certain accounts increase on the debit side ● And, certain accounts increase on the credit side Why? The Duality Concept • Every business transactions will involve two parties. • One party will give (out) something and the other party will receive (in) something in return. • This is called the duality concept. You need to remember! For every double entry recording of a transaction, one account will be debited, and another account will be credited. The amount will be the same on both sides. Cash account Dr 300 Cr opposite but equal amount Sales account Dr Cr 300 Rule No 1 Assets Liabilities Debit Credit Premises Trade payables Office equipment Bank overdraft Motor vehicle Bank loan Inventory Trade receivables Bank Cash Example 1 The business purchased a motor vehicle and paid $8 000 in cash. Step 1: Identify the accounts affected The business purchased a motor vehicle and paid $8 000 in cash. Motor vehicle Cash Step 2: Determine the classification of accounts Motor Vehicl e Cash Step 3: Determine which side is (+) and which side is (-) in both accounts Now that we know the classification, we can identify increase and decrease sides. Motor vehicle account Dr + Cr Cash account Dr + Cr A business purchased a motor vehicle and paid $8 000 in cash. Did motor vehicle increase or decrease in this transaction? Increased Motor vehicle account Dr + $8 000 Cr A business purchased a motor vehicle and paid $8 000 in cash. What about cash? Increase or decrease in this transaction? Decreased Cash account Dr + Cr $8 000 Step 4: Record the double entry Motor vehicle account Dr Cr + $8 000 Cash account Dr Cr + $8 000 Example 2 The business sold goods for cash, $1 500. Step 1: Identify the accounts affected The business sold goods for cash, $1 500. Inventory Cash Step 2: Determine the classification of accounts Inventory Cash Step 3: Determine which side is (+) and which side is (-) in both accounts Now that we know the classification, we can identify increase and decrease sides. Cash account Dr + Cr Inventory account Dr + Cr The business sold goods for cash, $1 500 Did cash increase or decrease in this transaction? Increased Cash account Dr + $1 500 Cr The business sold goods for cash, $1 500 Did inventory increase or decrease in this transaction? Decreased Inventory account Dr Cr + $1 500 Step 4: Record the double entry Cash account Dr Cr + $1 500 Inventory account Dr Cr + $1 500 Example 3 The business bought goods, $700, with cash. Step 1: Identify the accounts affected The business bought goods, $700, in cash. Cash Inventory Step 2: Determine the classification of accounts Cash Inventory Step 3: Determine which side is (+) and which side is (-) in both accounts Now that we know the classification, we can identify increase and decrease sides. Inventory account Dr + Cr Cash account Dr + Cr The business bought goods, $700, in cash. Did inventory increase or decrease in this transaction? Increased Inventory account Dr + $700 Cr The business bought goods, $700, in cash. What about cash? Increase or decrease in this transaction? Decreased Cash account Dr + Cr $700 Step 4: Record the double entry Inventory account Dr Cr + $700 Cash account Dr Cr + $700 Example 4 The business paid a cheque amounting $1 000 to a trade payable. Step 1: Identify the accounts affected The business paid a cheque amounting $1 000 to a trade payable. Trade payable Bank Step 2: Determine the classification of accounts Trade payable Bank Step 3: Determine which side is (+) and which side is (-) in both accounts Now that we know the classification, we can identify increase and decrease sides. Trade payable account Dr Bank account Cr Dr + + Cr The business paid a cheque amounting $1 000 to a trade payable. Did trade payable increase or decrease in this transaction? Decreased Trade payable account Dr Cr + $1 000 The business paid a cheque amounting $1 000 to a trade payable. Did bank increase or decrease in this transaction? Decreased Bank account Dr Cr + $1 000 Step 4: Record the double entry Trade payable account Dr $1 000 Cr + Bank account Dr Cr + $1 000 Example 5 The business received a cheque amounting $3 500 from a trade receivable. Step 1: Identify the accounts affected The business received a cheque amounting $3 500 from a trade receivable. Bank Trade receivable Step 2: Determine the classification of accounts Bank Trade receivable Step 3: Determine which side is (+) and which side is (-) in both accounts Now that we know the classification, we can identify increase and decrease sides. Bank account Dr + Cr Trade receivable account Dr + Cr The business received a cheque amounting $3 500 from a trade receivable. Did bank increase or decrease in this transaction? Increased Bank account Dr + $3 500 Cr The business received a cheque amounting $3 500 from a trade receivable. What about trade receivable? Increase or decrease in this transaction? Decreased Trade receivable account Dr + Cr $3 500 Step 4: Record the double entry Bank account Dr Cr + $3 500 Trade receivable account Dr Cr + $3 500 Summary Transactions Bought motor vehicle with cash Sold goods on cash basis Bought goods with cash Paid a cheque to a trade payable Received a cheque from a trade receivable Debit (Dr) Motor vehicle Cash Credit (Cr) Cash Inventory Inventory Trade payable Cash Bank Bank Trade receivable Quiz Choose the appropriate answer in the bracket 1) An increase in an asset account should be on the ______________ (debit or credit) side. 2) A decrease in a liability account should be on the _______________ (debit or credit) side. 3) Debit is on the _________ (left or right) hand side of a T- account 4) Credit is on the __________ (left or right) hand side of a T-account 5) A transaction involving goods is represented by two accounts. One of the accounts is called the _________ (goods or inventory) account. 6) A transaction involving a cheque is represented by two accounts. One of the accounts is called the _________ (bank or cheque) account.
