Chapter 2
SOURCES AND RECORDING OF DATA
Unit -2.1 THE DOUBLE ENTRY SYSTEM
The double entry system: - When the dual aspects (the debit and credit) of transactions are
recorded in the books according to definite rules, it is called double entry system of accounting.
Dual aspect concept: -This concept states that for every debit there should be a corresponding
credit. For each business transaction both debit and credit aspects are recorded.
Posting:- is the act of using one book to transfer entries into accounts in another book, thereby
performing or completing double entry.
Ledgers:- are books that collect groups of similar accounts.
Account:- An account is a brief and systematic record of transactions which are similar in nature.
Some important Journal Entries
Sales:- Sold goods for cash or cheque or on credit, it is termed as sales.
➢ Goods sold for cash or cheque
Dr. Cash/Bank
Cr. Sales
➢ Goods sold on credit
Dr. Trade receivables
Cr. Sales
Purchases:- When the goods bought for resale in the business, it is termed as purchases. Purchases
can also be for cash or cheque or on credit.
➢ Goods bought for cash or cheque
Dr. Purchases
Cr. Cash/Bank
➢ Goods bought on credit
Dr. Purchase
Cr. Trade payables
Drawings:- When the owner took cash, assets or goods from the business for his personal use, it is
called as drawings. At the end of the financial year, the total of the drawings account is transferred
to the capital account. This reduces the amount owed by the business to the owner of the business.
➢ Cash drawings
Dr. Drawings
Cr. Cash/Bank
➢ Goods drawings
Dr. Drawings
Cr. Purchases
➢
Non-current assets drawings
Dr. Drawings
Cr. Non-current assets
Return outward or purchase return: - The faulty, damaged or not ordered goods may be returned
to the suppliers. These goods are known as purchases returns or returns outward.
Dr. Trade payables
Cr. Purchase returns
Return inward or sales return: - Customer may return the faulty, damaged or not ordered goods to
the business. These goods are known as Sales return or return inward.
Dr. Return inward
Cr. Trade receivables.
Carriage inward or carriage on purchases: The term carriage refers to the cost of carrying or
transporting goods. Carriage inwards is part of the cost of purchasing goods as it occurs when a
business has to pay for goods it has purchased to be delivered to its premises.
Dr. carriage inward
Cr. Cash/bank/trade payable
Carriage outward or carriage on sales: Carriage outwards is a selling expense as it occurs when a
business pays for goods to be delivered to the customer's premises.
Dr. Carriage outward
Cr. Cash/bank/trade payable
Balancing ledger accounts
At the end of each month, it is usual to balance any account of assets and liabilities which
contain more than one entry. The balance is the difference between the two sides of the account and
represents the amount which is left in that account.
Steps in balancing ledgers
1. Find the sum of debit side amount and credit side amount
2. Identify the bigger side
3. Draw total line and write the total on both sides with the bigger amount.
4. The totals of an account must be on the same level and must be the same figure.
5. Find the difference between two side totals
6. Write balance carried down on the smaller side with the difference amount.
7. Bring down the balance to next month
Running balance method: - This is another form of presentation of leger account which uses only
one column each for the date, details and folio and has three money columns side-by-side - one for
debit, one for credit and one for balance after each transaction.
The advantage of this method is that it shows the balance of the account after every transaction.
The layout of a ledger account using running balance format is as follows:
Date
Details
Folio
Debit
Credit
Balance