Double-entry bookkeeping system

Accountants as well as bookkeepers deal with figures. Some of these figures are used to prepare balance sheets, some figures are used to prepare profit and loss accounts so that the net profit of a business can be determined.

In the “real world” these figures will be derived from the transactions undertaken by a business on a daily basis. There are two main ways in which businesses record their financial transactions. They use either

· a double-entry bookkeeping system; or

· a single-entry bookkeeping system.

We will look at the double-entry bookkeeping system that provides the accountant with the information needed in order to provide the data required to prepare the final accounts.

As the name implies, double-entry bookkeeping recognizes that there are two sides or aspects to every business transaction.

I fill my car with $20 diesel. The two aspects of this transaction are:

- I receive the diesel

- The filling station gives me the diesel.

I buy a pair of trainers costing $53:

- I receive the trainers

- The sports shop gives me the trainers.

There are two more aspects to these transactions.

When I give the filling station attendant my $20 note:

· she receives the cash

· I give the cash.

When I give the shop assistant my $53:

· he receives the cash

· I give the cash.

This way of recording both sides of any transaction is known as the dual aspect principle of accounting.

An account contains the detailed record of financial transactions undertaken by a business. All financial transactions involving the business are recorded in a format called an account.

You can find each account on a separate page in the ledger. In fact, if a great many transactions of a similar nature are undertaken, an account may spread over several pages.

The ledger is the book where are all accounts are kept. For convenience’s sake, this one book is divided into several smaller books. You can imagine that large businesses like Marks and Spencer or McDonald’s could not possible keep all their financial records in one book.

Each account has two sides:

(a) the left side is known as the debit side

(b) the right side is known as the credit side.

An account
DEBIT The debit side of an account is always the receiving side or the side that shows gains in value. “Debit” is often abbreviated shows gains in to “Dr”.	CREDIT The credit side of an account is always the giving or losing side or the side that shows value given. “Credit” is often abbreviated to “Cr”.

Dr An account Cr
RECEIVES Or GAINS	GIVES Or LOSES

An account in the ledger would be headed thus:

Dr******account Cr

Note that there should always be a heading; if the account shown is not a personal account, the heading should include the word “account”.

Purchases are any items that are purchased with the intention of selling them to customers. They are revenue expenditure.

Sales are any items that are sold in the normal course of business to customers. They are revenue income.

The golden rule of the game of “double entry” is that every time you enter something on the debit side (left side) of an account, you must enter an equivalent amount on the credit side (right side) of another account.

Credit customers are people or businesses that we sell goods to; they will pay for their goods at some time in the future. The goods are sold on credit.

Credit suppliers are people or businesses that we purchase goods from; we will settle the debt that we owe at some future date. The goods are purchased on credit. Until we pay for the goods that we have purchased, the credit suppliers will be creditors.

All accounts are entered in one book called the ledger. Because the number of accounts could run into many hundreds, it is obviously more convenient to split the ledger into a number of different books. What we do is to put:

o all credit customers’ accounts together

o all credit suppliers’ accounts together and

o all other accounts in another ledger.

All transactions involving credit customers will be found in the sales ledger (also known as the debtors’ ledger). All transactions with credit suppliers will be found in the purchases ledger (also known as the creditors’ ledger). All other transactions will be found in the general ledger.

The tricky ones are:

· The sales account will not be found in the sales ledger. The sales ledger is reserved for the accounts of our credit customers. The sales account would be found in the general ledger.

· The purchases account will not be found in the purchases ledger. The purchase ledger is reserved for the accounts of credit suppliers only. The purchases account would be found in the general ledger.

· We only record credit transactions in sales ledger and purchases ledger.

If a sale is made for cash, it is not entered in the sales ledger. If something is purchased for cash, it is not entered in the purchases ledger. These transactions appear in the general ledger.

Ledger accounts may be classified under the following headings:

· Personal – these are accounts that record transactions with credit customers and credit suppliers.

· Nominal accounts, real accounts and liability accounts will all be found in the general ledger.

· Nominal accounts record expenses, profits, losses and gains.

· Real accounts record the acquisition and disposal of fixed assets like land, buildings, equipment and vehicles.

· Liability accounts record the acquisition and repayment of loans and overdraft.

Remember that each account would be in a different ledger according to this classification.