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Business Studies

What is double entry bookkeeping

Double entry book-keeping means that every debit entry must have a corresponding credit entry. This is a principle or rule that is followed globally in book-keeping system.

Further Explanation

The fundamental concept of accounting is that every business transaction in money or money-worth has two effects: the receipts of a benefit by one account and the giving of a like benefit by another account. Thus, if a value is given, it is also received. The meaning of this is that where there is a giver, there is also a receiver who is called a debtor. The first Golden Rule of bookkeeping therefore states that, you debit the receiver and credit the giver.

In the process of debiting the account receiving the value and crediting the account surrendering the value, you end up recording every transaction twice, once as a debit entry and again as a credit entry. In effect, every credit entry must have a corresponding debit entry, and every debit must have a corresponding credit entry.

DRCR

The double entry system divides the page into two halves as shown above. Every business that is established must have assets, liabilities, and capital

An Asset is anything of value that is owned by a business. A liability is an amount owed by a business to others, while Capital is the total investment in a business.

Therefore, an account is opened for every asset owned by a business and every liability owed by the business. Each account has a separate title and page given to it.

Double Entry Treatment of Asset

Example: Olundi, a wood seller, started business on January 1 with ₦5000 in cash. He purchased the following to enable him run the business.

Jan 9. He bought furniture from Londa & Co. Ltd. For ₦2000 in cash

Jan 12. He bought office equipment from Banuna & Co. Ltd. For ₦1000.

Solution:

Jan 1. B. Olundi started business with ₦5000 cash as capital. With this introduction of ₦5000 into the business, two accounts should be opened. The capital account gave the money and should be credited, while the cash account received the money and should be debited.

Jan 9. On the purchase of furniture from Londa & Co. Ltd. For cash, the cash account will be credited because the account gave out the money, while the furniture Account will be debited for receiving the value of ₦2000.

Jan 12. He purchased office equipment from Banuna & Co. Ltd. The office account will be debited for receiving the value of ₦1000 while the cash account will be credited for giving the money.

Cash Account

DRCR
Jan 1. To capital a/c 5000.00Jan 9. Furniture 2000.00
Jan 10.Office equipment a/c 1000.00
31 Balance c/d 2000.00
5000.005000.00
Feb 1. 2000.00

Capital Account

DRCR
Jan1. To cash a/c
5000

Furniture Account

DRCR
Jan 1. To cash a/c
2000.00

Office Equipment Account

DRCR
Jan. 12 to cash a/c
1000.00

Double Entry Treatment of Liabilities

Liabilities are debts owed by a business to others. For example, if Mr. Akinola sells good to Mr. Adewale worth ₦10,000 on credit. Mr. Akinola must keep a record to show that there is some money due from Mr. Adewale. Credit transactions involve the opening of Personal AccountA personal account is an account which bears the name of the a customer or a supplier.

Example:

January 10  Bought on credit from Amadu Electronics Company, an electric Cooker worth ₦10,000

January 24  Sold on credit goods worth ₦25,000 to B. Solape

The two accounts will be opened for the credit transactions as follows:

Amadu Electronics Company Account

DRCR
Jan. 10 Purchases
10,000
Jan. 10 Purchases
10,000

Purchases  Account

DRCR
Jan. 10 Amadu Electronics Company
10,000
Jan. 31 Balance c/d
10,000
  1. Solape Account
DRCR
Jan. 24 Sales
25,000

Sales Account

DRCR
Jan. 31 Balance c/d
25,000
Jan. 24 B. Solape
25,000

Double Entry Treatment of Expenses

Meaning of Expenses

Expenses mean spending money belonging to a business to gain more money. It is recorded on the debit side of the books.

Types of Expenses

Rent, wages/salaries, postages, stationery, insurance telephone, electricity, motor expenses, etc.

Example: 

June 12  Vehicle expenses of ₦2000 paid by cheque.

Solution: 

Credit Bank account, and debit Vehicle expenses account.

Bank 

DRCR
Jan. 10 Vehicle expenses
2,000

Vehicle Expenses

DRCR
June 12 Bank
2,000

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