CHAPTER THREE
Double Entry Accounting
System
The double entry system
Double entry system is a system where each
transaction is entered twice, one on the debit side
and one on the credit side.
The double entry system divides each page into
two halves. The left hand side of each page is
called the debit side, while the right hand side is
called the credit side.
The title of the account is written across the top
of the account at the centre
When recording a transaction each item record
should also include a date when the transaction
took place.
T Accounts
SHAPED
LIKE a T Debit
Credit
T Accounts
Debit means
Left
Credit means
Right
Debi
t
Credit
T Accounts
Abbreviation
for Debit
Dr.
Cr.
Abbreviation
for Credit
T Accounts
ACCOUNT NAME
CASH
Dr. Cr.
Rules of Double Entry Recording
1. Every transaction affects at least two
accounts.
2. There must be at least one debit and one
credit entry
3. The total debits must be equal to the total
credits
4. The particulars in the account refer to the
name of the other account where the double
entry is recorded.
Every T Account has:
An Increase Side,
and
A Decrease Side
But, Some
Accounts Increase
on the Debit Side
And, Some
Accounts Increase
on the Credit Side
ASSET ACCOUNTS
Increase on
Debit Side
Dr.
Cr.
Decrease on
Credit Side
LIABILITY ACCOUNTS
Decrease on
Dr.
Debit Side
Cr.
Increase on
Credit Side
CAPITAL ACCOUNT
Decrease on
Debit Side
Dr.
Cr.
Increase on
Credit Side
JUST LIKE
LIABILITY ACCOUNTS
EXAMPLE:
PURCHASE FURNITURE FOR
RM800 CASH
STEP #1
Name the accounts affected:
FURNITU
RE
CASH
STEP #2
Determine Classification of
Accounts
AS
AS S
SE
T
ET
CASH
FURNITURE
Did furniture
increase or decrease
in this transaction?
INCREASED
FURNITURE
DR.
RM80
0
CR.
What about cash?
increase or decrease
in this transaction?
DECREASED
CASH
DR.
+
CR.
RM80
0
DEBITS = CREDITS
FURNITURE
DR.
CR.
Cash
$800
CASH
DR.
CR.
Furniture
$800
EXAMPLE:
Ahmad, the owner, invested
$25,000 cash in the
business.
INCREASED OR
DECREASED?
INCREASED
INCREASED
CAPITAL
DR.
CR.
Cash
$25,000
CASH
DR.
+
Capital
$25,000
CR.
DOUBLE-ENTRY ACCOUNTING FOR RECORDING
ASSETS, LIABILITIES AND OWNERS EQUITY
DEBIT
CREDIT
Asset
Fixed Asset
Current Asset
Liability
Long term Liability
Current Liability
Capital
DOUBLE-ENTRY ACCOUNTING FOR RECORDING ASSETS
For asset accounts, we will debit the asset account if the value is
increase; and we will credit the asset account if the value is
decreased.
Example
Ahmad bought a furniture for RM500 in cash.
Account name
To record
Entry in the account
Furniture Account
+ (an increase)
debit RM500
Cash Account
- (a decrease)
credit RM500
DOUBLE-ENTRY ACCOUNTING
FOR RECORDING LIABILITIES
AND OWNERS EQUITY (CAPITAL)
For liability and owners equity accounts, we will credit the account
if the value is increase; and we will debit the account if the value is
decreased.
Example 1
Ahmad borrowed BankXX for RM2,000 to pay its debt to Syarikat
Kamdar (creditor).
Account name
BankXX Loan Account
Syarikat Kamdar
To record
Entry in the account
+ an increase
Credit RM2,000
- a decrease
Debit RM2,000
Example 2
Ahmad started the business with initial cash capital of RM10,000.
Account name
To record
Entry in the account
Capital Account
Credit RM1,000
Cash Account
Debit RM1,000
Fill in the blanks:
Transaction
Bought a machinery with cheque for
RM500
Sell a second hand van to Encik Abu
for RM6,000 in cash.
Bought a furniture from Syarikat
Gagah for RM600 on credit.
Zainal started a business with
RM80,000 cash.
Paid Syarikat Anis RM200 using a
cheque.
Account name
Machinery
Bank account
To
record
Entry in the
account
Transaction
Account name
To
record
Entry in the
account
Bought a machinery with cheque
for RM500
Machinery account
Bank account
+
-
Debit
Credit
Sell a second hand van to Encik
Abu for RM6,000 in cash.
Van account
Cash account
Credit
Debit
Bought a furniture from Syarikat
Gagah for RM600 on credit.
Furniture account
Syarikat gagah
(creditor)
+
-
Debit
Credit
Zainal started a business with
RM80,000 cash.
Capital account
Cash account
+
+
Credit
Debit
Paid Syarikat Anis (creditor) for
RM200 using a cheque.
Syarikat Anis(creditor)
Bank account
Debit
Credit
DOUBLE ENTRY FOR
EXPENSES AND REVENUE
What is expenses?
sacrifice made ; for running the business on
a day-to-day basis.
Example: to pay petrol to use in a vehicle.
What is revenue?
An income to the business.
Example: interest received, rent received.
DOUBLE ENTRY FOR
EXPENSES AND REVENUE
DEBIT
REVENUE
EXPENSES
CREDIT
+
We will credit all the revenue account when the revenue is
increased.
No entry will be made at the debit side of the revenue account.
Example 1:
RM1,000 cash is received for renting a building by the firm.
Account name
To record
Entry in the account
Rent received account
Credit RM1,000
Cash account
Debit RM1,000
We will debit all the expenses account when the expenses is
increased.
No entry will be made at the credit side of the expenses account.
Example 1:
Paid salary RM500 in cash.
Account name
To record
Entry in the account
Salary account
Debit RM500
Cash account
Kredit RM500
Example 2:
Petrol expenses are paid by cheque RM300.
Account name
To record
Entry in the account
Petrol expenses account
Debit RM300
Bank account
Kredit RM300
DOUBLE ENTRY FOR GOODS
Goods referring to purchase and sale activity.
Purchase of goods refer to the goods that youre buying in
intention to sell it back and make profit out of it.
Sale of goods mean that youre selling the product and make
profit out of it.
Transaction
Accounts involved
Entry in the account
Cash purchase
Purchase account
Cash account
Debit
Credit
Credit purchase
Purchase account
Creditor account
Debit
Credit
Cash sales
Cash account
Sales account
Debit
Credit
Credit sales
Debtor account
Sales account
Debit
Credit
DOUBLE-ENTRY FOR
RETURN INWARDS AND RETURN OUTWARDS
Return inwards happen when goods which had been sold to
someone (debtor) are now returned by him/her back to the
firm (us).
This could be for various reasons such as:
a.
b.
c.
We have sent him/her goods of the wrong size,wrong colour
or the wrong model;
The goods may have damaged in transit;
The goods are of poor quality;
Transaction
Return inwards
Accounts involved
Entry in the account
Return inwards account Debit
Debtor account Credit
Return outward happen when goods that we (the firm) are
previously brought are returned to the seller (creditor).
a.
b.
c.
The reason might be:
We received goods of the wrong size, the wrong colour or the
wrong model;
The goods may have been damaged in transit;
The goods are of poor quality;
Transaction
Return outwards
Accounts involved
Entry in the account
Creditor account Debit
Return outwards account Credit
DOUBLE-ENTRY FOR DRAWINGS
Traders will often take items out of their business goods or cash for
their own use, without paying for them.
There is nothing wrong about this, but an entry should be made to
record the event.
Transaction
Cash drawings
Goods drawings
Accounts involved
Entry in the account
Drawings account Debit
Cash account Credit
Drawings account Debit
Purchases account Credit
Example 1
2012
Jan 1
Puan Keembung started her business with cash of RM50,000.
Jan 3
The business bought a machine RM4,000 with cash.
Jan 15
The business bought a furniture for RM500 on credit from Pak Abu.
Jan 28
The business make a bank loan of RM10,000 to buy a delivery van.
Jan 31
Pay Pak Abu in cash RM450.
Required:
Record the above transaction in the ledger and prepare the
Trial Balance as at 31 Jan 2012.
Example2
February
1
Puan Kenanga started her business with cash of RM5,000.
Bought goods from Pak Hitam on credit for RM300.
15
Goods sold to Pak Utih on credit for RM500.
20
Bought goods with cash of RM100.
24
Goods returned by Pak Utih RM50.
26
Cash sales for RM800
27
Puan Kenanga withdrew RM400 cash from the business for
her own use.
28
Goods returned to Pak Hitam RM100.
Required:
Record the above transaction in the ledger and prepare the
Trial Balance as at 28 February 2011.
