Friday, 3 February 2012

Principles of Double Entry

A double entry principle states that for every debit entry there must be a corresponding credit entry. This is the major reason why its ledger account has both a debit and credit side.

Each firm keeping books must have a debit and credit recorded at the time the transaction take place. Therefore the double entry must be made in a firm book i.e. both debit and credit.

The following rules are points for identifying debit and credit items. They should be carefully noted and understood.
1.   Every debit must have a credit and every credit must have a debit, each transaction is recorded twice.
2.   The asset and revenue/income are debit balance while liability and expenses/losses are credit balances.
3.   The receiving account is always debited and the giving account is always credited.

A Double Entry Example
The key factor of a double entry system is the presence of a “cash book” account. This account contains the entries made when assets (e.g. money) are taken into a released from the accounting system.
Using accountant’s T charts to represent this, we use the following example that issues two accounts only. The cash book and an account in the name of Smith.
a.    N300 is entered into this system to be allocated to the Smith account. The N300 is credited to the Smith account (credits are on the right, debits on the left). To match this, a debit of N300 is allocated to the cash book.

Cash Book                                                       Smith                         


300                                                                       300

b.    If N50 is taken out of the system from the smith account, N50 is debited from the Smith account and credited to the cash book.
                    Cash Book                               Smith


a.                300                                                    300
b.                           50                                  50

c.    If another account is added in the name of Pattel and N100 is debited from Smith and N100 credited to Pattel
              Cash book                            Smith                              Pattel


a.          300                                              300
b.                   50                            50
c.                                                   100                                       100

d.   To complete the picture N60 is taken out of the system from the Pattel account with a debit from Pattel and a credit to the cash book

    Cash book                            Smith                              Pattel


a.          300                                                 300
b.                   50                                 50
c.                                                        100                                          100
d.                  60                                                                       60
At the end of this, the Smith account balance is N150, Pattel account N40 and the Cash book is N-190, the negative sum of the other account. On this simple basis, very complex asset tracking system can be built.

No comments:

Post a Comment