Virtual Kollage: The double entry principle

Posted by / Sunday, 1 May 2016 / No comments

The double entry principle




DOUBLE ENTRY PRINCIPLE 
The double entry principles of book keeping states that, for every financial transaction, there should be a debit entry and a corresponding credit entry.  It states that every debit entry must have a corresponding entry and vise versa. The following are the double entry rules that must be observed.


1.      Personal Account: Debit the receiver
                            Credit the giver

2.      Real Account:        Debit inflows     (i.e. when receiving value)
                             Credit outflows  (i.e. when giving out value)

3.      Nominal Account:  Debit expenses
                             Credit income and gains

Another way of looking at the double entry rule is to group all transaction into two groups.
  1. Assets and Expenses
  2. Capital, Liability and Revenue

Assets and expenses 
This account generally keeps debit balances. Therefore, increases in assets or expenses are debited and decreases in assets and expenses are credited.

Capital, liability and revenue 
This one generally keeps credit balances. Therefore, increases in capital, liability and revenue are credited and decreases in capital, liability and revenue are debited.

The double entry rule is summarized below


Assets and Expenses
Capital, Liability and Revenue
Increase
Debit
Credit
Decrease
Credit
Debit



Example 1
Complete the following table showing the accounts to be debited and those to be credited.

Accounts to be debited
Accounts to be credited

1. Bought equipment for cash



2. Introduced capital in cash



3. Bought land and building from Anita  Ltd.



4. Sold goods to Joe for cash



5. Withdrew cash from the business for personal use



6. Received loan from a friend in cheque



7. Purchased goods for resale from Kuntu Blancson



8. Received cash from Dani Alve



9. Paid telephone expenses by cash



10. Paid rent by cash




Example 2
The following transaction occurred in the books of Arroyo Enterprise for the month of January 2009.
2009
Jan. 1. Arroyo invested $7,500 cash in the business.
Jan. 2. Purchased motor vehicle for the business paying cash of $6,000.
Jan. 4. Arroyo transferred his personal bank account with a balance of $8,000 into the business.
Jan. 6. Purchased goods for resale from Keri amounting to $5,000 on credit.
Jan. 9. Sold goods for cash $800.
Jan.11. Received a loan from Avado of $2,000.
Jan.18. Sold goods to Alas on credit $4,000.
Jan.22. Alas paid $3,500, being $2,000 cash and the remainder by cheque.
Jan.28. Sold goods of $1,200 to Kaka and  receiving a cheque.
Jan.29. Bought furniture issuing cheque of $1,500.
Jan.31. Arroyo withdrew $500 cash from the business.
You are required to record the above transactions in the relevant accounts and balance the accounts.

Example 3.
Write up the various accounts required in the books of Wisdom, a sole trader, in respect of the transactions below.
2009
March  1.  Started business with $9,500 at the bank and transferred his motor van of $5,000 into the business.
March  5.  Bought office equipment of $500 on credit from Kingdom Limited.
March  8.  Bought motor van paying by cheque $3,000.
March 12. Borrowed $100 from Emperor by cheque.
March 14. Wisdom introduced additional $2,000 into the business in the form of cash.
March 14. Paid $500 of the cash in hand into his bank account.
March 19. Returned some of the office equipment to Kingdom Limited costing $150.
March 23. Bought more office equipment paying by cash $450.
March 26. Received a loan in cash from Milton $400.
March 27. Sold goods to Katy on credit $4,500.
March 27. Purchased goods from Tommy and Jimmy on credit $4,000 and $1,500 respectively.
March 28. Received cash from Katy $1,200.
March 28. Sold motor vehicle receiving cheque $950.
March 29. Withdrew $200 cash and $700 from the bank for private expenses.
March 29. Paid Tommy and Jimmy $2,500 and $1,200 respectively.

<Back to Home Page

Related Posts