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Double entry system for assets, liabilities and capital
Every transaction affects two things.
For every transaction, we will have to show an increase or decrease of that item and another entry to show a decrease or increase of that item. This is known as the double entry system. That is, for every debit entry, there is a corresponding credit entry.
A debit entry is always an asset or expense while a credit entry is a liability, capital or income.
|
Accounts |
To Record |
Entry in Account |
|
Assets |
An increase A decrease |
Debit Credit |
|
Liabilities |
An increase A decrease |
Credit Debit |
|
Capital |
An increase A decrease |
Credit Debit |
| Equation | ||
| Assets = | Capital + | Liabilities |
| ↑ Debit | ↑ Credit + | ↑ Credit |
| ↓ Credit | ↓ Debit+ | ↓ Debit |
Revenue = Income earned
Revenue is:
- Rent received.
- Commission received.
- Discount received.
- Bank interest received.
Revenue – is the value of goods and services that has been supplied or charged to customers and it is also known as income earned.
Expenses = Operating cost such as rent
Expenses – this is the operating cost of the business such as rent, telephone, electricity, and insurance. Expenses are the value of all the assets that has been used to obtain the revenues.
Revenue > Expenses = Profit
Revenues < Expenses = Loss
Revenue = Expenses = Breakeven
Profit increases capital while loss decrease capital.
Drawings = is when the owner takes cash out of the business for private or personal use. Drawings reduce capital.
Drawings are always debited.
Old capital + profit – drawings = New capital
Old capital – loss – drawings = New capital
Example: Enter the following transactions in double entry system.
2009
October 1: Rent paid by cheque $116
October 3: Stationery bought by cash $26
October 5: Rent received by cheque $300
| $$\text{Rent A/C}$$ | |
|
$$ \text{Debit Side} $$ $$\begin{align} & \text{2009} &&&&& $ \\ & \text{October 1 Bank} &&&&& 116 \\ \end{align}$$ |
$$ \text{Credit Side} $$ $$\begin{align} & \\ & \\ \end{align}$$ |
| $$\text{Bank A/C}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \text{2009} & $ \\ & \text{October 5 Rent Received} & 300 \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \text{2009} & $ \\ & \text{October 1 Rent Paid} & 116 \\ \end{align}$$ |
| $$\text{Stationery A/C}$$ | |
|
$$ \text{Debit Side}$$ $$\begin{align} & \text{2009} &&&&& $ \\ & \text{October 3 Cash} &&&&& 26 \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \\ & \\ \end{align}$$ |
| $$\text{Cash A/C}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \text{2009} &&&& $ \\ & \text{October 3 Stationery} &&&& 26 \\ \end{align}$$ |
| $$\text{Rent Received A/C}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \text{2009} &&&&& $ \\ & \text{October 5 Bank} &&&&& 300 \\ \end{align}$$ |
Summary
Rent A/C – debited
Bank A/C – credited
Stationery A/C – debited
Cash A/C – credited
Bank A/C – debited
Rent received A/C – credited
Example:
2010
July 1: The owner starts the company with $1,000 cash.
July 2: A motor van was bought for $280.
July 3: Fixtures bought on credit from Standards Furniture Store for $120.
July 4: The company paid the amount owing to Standards Furniture Store in cash $120.
Write up the assets, liabilities and capital accounts to record these transactions.
Doubly Entry
T Accounts
| $$\text{Capital Account}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \text{July 1 Cash} &&&&& 1,000 \\ & \\ \end{align}$$ |
1) Cash – Debit and Capital - Credit
| $$\text{Cash Account}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \text{July 1 Capital} &&&&& 1,000 \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \text{July 2 Motor Van} && 280 \\ & \text{July 4 Paid Standards} && 120 \\ \end{align}$$ |
2) Motor Van Debit and Cash Credit
| $$\text{Motor Van Account}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \text{Jul 2 Cash} &&&&&&& 280 \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \\ & \\ \end{align}$$ |
| $$\text{Fixtures Account}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \text{Jul 3 Standards} &&&&& 120 \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \\ & \\ \end{align}$$ |
3) Fixtures Debit and Standards Credit
| $$\text{Standards Account}$$ | |
|
$$\text{Debit Side}$$ $$\begin{align} & \text{Jul 4 Cash} &&&&&&& 120 \\ & \\ \end{align}$$ |
$$\text{Credit Side}$$ $$\begin{align} & \text{Jul 3 Fixtures} &&&&& 120 \\ & \\ \end{align}$$ |
Balancing Off of Accounts
There are five stages in balancing off accounts:
- Add both sides to determine their totals. Do not write anything permanent in the account at this stage.
- Deduct the smaller total from the larger total to find the balance.
- Enter the balance on the side with the smallest total. This means that the totals will now be equal.
- Enter totals on a level with each other.
- Enter the balance on the line below the totals. The balance below the totals should be on the opposite side to the balance shown above the totals.