Vous êtes sur la page 1sur 18

Chapter 2: Double Entry Bookkeeping Part 1

DR CR

Learning objective:
To understand the basic principles of double entry.

ACCOUNTING SYSTEM Every business transaction will involve two parties

DOUBLE - ENTRY

Each party must give up something (out) in order to receive something in return. (in)

Can you guess ?


What does a business gives and receives in return ?
1) When a business sells its goods for cash. 2) When a business purchase goods with cash. 3) When a business purchase a motor vehicle with cash. 4) When a trade receivable (trade debtor) pays to the business with cash. 5) When the business pays to a trade payable (trade creditor) with cash.

Example 1

When the business sells its goods for cash, it

will give up its goods to its customer and will receive cash in return. Cash IN

Goods OUT
Businesss goods

Business

Example 2

When a business purchase goods with cash,

it will give up its cash to its suppliers and will receive goods in return. Goods IN

Cash OUT
Businesss goods

Business

Example 3

When a business purchase a motor vehicle,

it will give up its cash to the seller and will receive motor vehicle in return. Motor Vehicle IN

Motor Vehicle

Cash OUT

Business

Example 4

When a trade receivable pays cash to the business, the business will receive cash and will give a receipt to the trade receivable acknowledging the debt has been settled.

Cash IN Receipt/Trade receivable OUT

Trade receivable

Business

Example 5

When a business pays cash to a trade payable, the business will give out cash and will receive a receipt from the trade payable acknowledging the outstanding amount has been settled.

Receipt/Trade payable IN
Cash OUT
Trade Payable

Business

Hence,

For every business transaction, two accounts will be involved. One account will have a debit entry (receiving) and another account will have a credit entry(giving).

To Summarize
1) When a business sells its goods for cash. Debit Cash a/c Credit Inventory a/c * 2) When a business purchase goods with cash. Debit Inventory a/c * Credit Cash a/c 3) When a business purchase a motor vehicle with cash. Debit Motor vehicle a/c Credit Cash a/c 4) When a trade receivable (trade debtor) pays the business with cash. Debit Cash a/c Credit Trade receivable a/c 5) When the business pays to a trade payable (trade creditor) with cash. Debit Trade payable a/c Credit Cash a/c

IMPORTANT NOTE NO 1
Normally when goods bought or sold, it will affect the inventory account, either goods in (debit) or goods out (credit). However, sometimes goods in maybe goods returned by the customers and goods out may comprise goods returned to suppliers. Therefore, specific accounts need to be used: Sales a/c - goods sold to customer. (goods out credit) Sales returns a/c - goods returned by customers. (Return inwards a/c) (goods in debit) Purchases a/c - goods bought from suppliers. (goods in debit) Purchases returns a/c goods returned to suppliers (Return outwards a/c) (goods out credit)

IMPORTANT NOTE NO 2
So far we have learned about three categories of accounts: 1) Assets Things owned by the business. Examples include premises , motor vehicle, inventory , trade receivable, bank, and cash. All assets are debit entries because the business receives them in return for giving something else.

2) Liabilities Things owed (IOU) by the business. Examples include trade payable, and loan.
All liabilities are credit entries because the business gives them IOUs in return for receiving goods or cash. 3) Capital Resources invested by the owner. Examples include cash and motor vehicle. Capital is a credit entry because the business gives the ownership to the investor .

Another three categories:

4) Income Income arising from the business activities. Examples include sales, rental received, and interest received.
All income are credit entries because the business is giving goods or services in return for receiving cash/bank. 5) Expenses Day to day running expenses of the business. Examples include purchases , wages, and general expenses. All expenses are debit entries because the business is receiving goods or services by giving out cash/bank.

6) Drawings Amount of resources taken out by the owner from the business. Examples include motor vehicle and cash.
All drawings are debit entries because the owner is reducing his ownership in the business.

IMPORTANT NOTE NO 3
Carriage Costs Carriage cost is basically transportation cost. There are two types of carriage costs: 1) Carriage inwards Cost of transporting the goods from the supplier to the place of business.

2) Carriage outwards Cost of transporting the goods from the place of business to the customer.
Both carriage costs are expenses. Therefore, both carriage costs are debit entries.

QUIZ TIME
ARE YOU READY ?

Account to be debited
1) Bought a computer on credit from Commodore Ltd. Computer

Account to be credited
Commodore Ltd

2) The proprietor (owner) took a computer for his own private use at home. 3) A trade receivable, J.Pike paid the business by cheque. 4) Repaid part of a loan from Lloyds Bank in cash
5) Returned goods to a trade payable, M. Sandy.

Drawings
Bank Loan M. Sandy Carriage outwards Motor vehicle

Computer
J. Pike Cash Purchases returns Cash Wiley Motors

6) Paid for carriage on goods sold to V. Anderson by cash.


7) Bought a car on credit from Wiley Motors

THE END (PART 1)