Double Entry System

Topics: Double-entry bookkeeping system, Debits and credits, Bank Pages: 11 (2651 words) Published: June 24, 2013

CHAPTER 2

DOUBLE ENTRY SYSTEM AND BALANCING OFF THE LEDGER
OBJECTIVES.
At the end of the chapter reader is expected to understand
- what a double entry system is
- peculiarity of double entry system in accounting.
- how a transaction can be posted in order to adhere with double entry system. - what make up a ledger
- how ledger can be balanced up.

INTRODUTION
To make a relevant disclosure of transaction in accounting sense, it is necessary to open up all the items affected by a transaction. Payment made is taken from a unit of account for the purpose of acquiring another benefit to be enjoyed by another item/account. Likewise amount received into the business is from an activity for the benefit of another portion of item says cash or bank. To this end, one account/item is giving while another one is taking/receiving it.

WHAT IS DOUBLE ENTRY SYSTEM (DES)?
This is a rudimentary system of ensuring that a transaction passes or enters into two affected accounts i.e. receiver’s A/C and giver’s A/C. It denotes that for every CREDIT ENTRY made there must be corresponding DEBIT ENTRY and vise visa. This implies that an account (personal or impersonal) Receiving a benefit would be debited with the value of the benefit while account giving will be credited with the same value. Let take a look at ledger structure before proceeding on our discussion of double Entry system. Account ledger has two sides Denoted with ‘T’ as it’s shown below:

Dr Cr

One side of the ledger/Account (Left side) is known as debit side denoted by “DR” while the second side (Right side) is known as credit side denoted by “CR”. However, the account receiving the benefit given by the transaction will be debited while the other one giving will be credited with the same value. Debit side of the account is to accommodate value or amount and activities enjoy by the stated account while credit side of the account is to accommodate value and activity giving out by the account. To this end, Double entry system can be used to justify the assertion explained above that for every financial activity / transaction two accounts/ledgers is to be opened to accommodate such activity, while one is Debited another one is credited.

SUMMARY:
Debit - Receiving Account / Ledger
Credit - Giver’s Account / Ledger

ILLUSTRATION 1
The following relate to business activities of Ararom Ltd for the period: N 1/1/01Bought goods by cash15,000

1/2/01Bought goods on credit from Ade20,000
3/1/01Bought motor vehicle paid by cheque 50,000
7/1/01 Paid rent by cash 12,000 20/1/01 Sold goods and received cheque 25,000 Required:
Enter the above transactions in the relevant account following principle of double Entry system.

SOLUTION
1/01/01Bought goods by cash N15,000
The transaction affects two Accounts:
I Purchase Account (Goods bought to be resold is called purchases) (Receiver A/C) Receiving the benefit enquired by cash.
II Cash account: From where the money is taken (Business purse Separated from Personal purse).

Entry
Dr – Purchase A/C (Being a receiver)
Cr – Cash A/C (Being a Giver).
Dr Purchase A/CCr Dr Cash A/C Cr
N N N N 1/1/01Cash (N1) 15,000 1/1/01 Purchases (N2) 15,000 2/1/01 Altd 20,000 7/1/01 Rent 12,000

N1 Cash Appears in Purchases A/C Indicates the account from where the amount is taken for the benefit enjoy by purchases...
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