The Double Entry System

The double entry system

The double entry system

What is the double entry system?

• The double entry system is used by book-keepers 

  • The double entry system is used to improve the accuracy of financial statements

• The double entry system is closely linked to the accounting equation

  • Assets = Liabilities + Capital

• The equation is always balanced

• Each transaction causes both sides of the equation to:

  • increase

  • or decrease

  • or remain the same

• Each transaction is entered into two accounts

  • One is called a debit entry

  • One is called a credit entry

What is the layout of a ledger account?

• Each account will be split into two sides

  • The debit entries appear on the left

    • This side is sometimes labelled as Dr

  • The credit entries appear on the right

    • This side is sometimes labelled as Cr

• When you make an entry you need to include:

  • The date of the transaction

  • The details of the transaction

    • This is normally the name of the other account involved

  • The value of the transaction

What are the advantages of maintaining double entry records?

• It is straightforward to prepare financial statements

• It can help give an accurate calculation of the profit or loss

• It reduces the possibility of fraud

• It gives easy access to information for the bank or other lenders

Debits & credits

Debits & credits

What is a debit entry?

• A debit entry is used to:

  • increase the value of an asset

    • The left-hand side of the accounting equation increases

  • decrease the value of a liability or the capital

    • The right-hand side of the accounting equation decreases

What is a credit entry?

• A credit entry is used to:

  • increase the value of a liability or the capital

    • The right-hand side of the accounting equation increases

  • decrease the value of an asset

    • The left-hand side of the accounting equation decreases

Which accounts should I debit?

• Debit an asset account when its value is increasing

  • You receive cash

    • Debit the cash account

  • A customer buys goods on credit

    • Debit their trade receivables account

• Debit a liability account when its value is decreasing

  • You make a repayment on a bank loan

    • Debit the bank loan account

  • You pay an invoice to a credit supplier

    • Debit their trade payables account

• Debit other accounts when the transaction decreases the capital

  • You take assets from the business for personal use

    • Debit the drawings account

  • You pay an expense which decreases the profit

    • Debit the relevant expense account

    • Such as purchases, rent paid, discount allowed, etc

Which accounts should I credit?

• Credit a liability account when its value is increasing

  • You take out a bank loan

    • Credit the bank loan account

  • You buy goods on credit from a supplier

    • Credit their trade payables account

• Credit an asset account when its value is decreasing

  • You pay rent by bank transfer

    • Credit the bank account

  • A credit customer pays their invoice

    • Credit their trade receivables account

• Credit other accounts when the transaction increases the capital

  • You put more personal assets (such as money) into the business

    • Credit the capital account

  • You receive income which increases the profit

    • Credit the relevant income account

    • Such as sales, rent received, discount received, etc

How do I enter the transactions into the accounts using the double-entry system?

• STEP 1
  Identify the accounts involved in the transaction

  • One is usually cash, bank, trade receivables or trade payables

• STEP 2
  Identify whether each account affects the assets, liabilities or capital

  • Usually this is cash, trade receivables or trade payables

• STEP 3
  Determine whether the value of each account is increasing or decreasing

• STEP 4
  Debit or credit the account

  • Debit the account if:

    • It is an asset account and its value is increasing

    • It is a liability or the capital account and its value is decreasing

  • Credit the account if:

    • It is an asset account and its value is decreasing

    • It is a liability or the capital account and its value is increasing

Examples where assets increase and liabilities or capital increase

Examples where assets decrease and liabilities or capital decrease

Examples where assets increase and decrease

Examples where liabilities or capital increase and decrease