Double Entry

Businesses need to keep records of their transactions. The process of keeping record is called bookkeeping. The simplest form of bookkeeping is single entry. Every transaction is recorded once. This is unreliable because:

1. If an arithmetic mistake is made, it is very difficult to find and correct it
2. If a transaction is omitted, it is difficult to find it

Now, a more reliable method of bookkeeping is double entry.

Businesses record their accounts in books called ledgers. A ledger is a main book that contains various accounts.

There are three main ledgers:

1. The sales ledger
2. The purchases ledger
3. The general ledger

The sales ledger: Is the ledger that records the accounts of debtors. The ledger is also known as the debtors' ledger. A debtor is a person who owes money to the business, that is a person to whom the business sold goods on credit. So when the business has a new customer, it will open an account in the sales ledger for that customer.

The purchases ledger: Is the ledger that records the accounts of creditors. This ledger is also known as the creditors' ledger. A creditor is a person whom the business owes money, that is a person from whom the business bought goods on credit. When the business has a new supplier, it will open an account in the purchases ledger for that supplier.

The general ledger: Is a ledger that records all accounts other than debtors' and creditors' accounts. Examples of accounts recorded in the general ledger are fixed assets and expenses.

Double entry: Is a bookkeeping system whereby every transaction is recorded twice in the ledger. It is recorded on the left as debit (DR), and on the right as credit (CR). Every transaction involves the giving and receiving of a benefit.

Suppose that a company takes 50,000/- from the bank to pay wages.

• The bank account gives the benefit, and so is credited 50,000/-
• The wages account receives the benefit, and so is debited 50,000/-

Suppose the company buys assets worth 100,000/- from ABC Limited.

• ABC Limited has given the benefit, and so is credited 100,000/-
• The fixed assets account has received the benefit, and so is debited 100,000/-

When transactions are written in a ledger, they are said to be posted to the ledger.

Example 1

The transactions shown in the table below belong to XYZ Traders; Post them to the relevant ledgers.

June 1: Started business with capital 50,000

June 2: Bought furniture for cash 10,000

June 4: Purchased goods for cash 2,000

June 5: Bought goods from John on credit 4,000

June 5: Sold goods for cash 3,000

June 6: Paid rent 500

June 7: Sold goods to Pwagu on credit 5,000

June 8: Bought goods from Masatu on credit 6,000

June 9: Paid electricity bill in cash 1,000

June 10: Sold goods to Alyoce on credit 8,000

June 11: Received cash from Pwagu 2,000

June 12: Withdrew cash for personal use 7,000

June 15: Paid cash to Masatu 3,000

Solution

In the first transaction, money is taken from the capital account and placed cash account. Hence the capital account is credited and the cash account is debited. In the 'Particular' column, write the other account involved in the transaction.

In the second transaction, furniture is bought for cash. So the cash account is credited and the furniture account is debited.

Pwagu and Aloyce are customers, so they each have accounts in the sales ledger, John and Masatu are suppliers, so they each have accounts in the purchases ledger.

Other items are capital, cash, furniture, purchases, sales, rent, electricity and drawing. They all have accounts in the general ledger.

General ledger

Capital account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
				June 1	Cash		50,000

Cash account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 1	Capital		50,000	June 2	Furniture		10,000
June 5	Sales		3,000	June 4	Purchases		2,000
June 11	Pwagu		2,000	June 6	Rent		500
				June 9	Electricity		1,000
				June 12	Drawings		7,000
				June 15	Masatu		3,000

Furniture account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 2	Cash		10,000

Purchases account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 4	Cash		2,000
June 5	John		4,000
June 8	Masatu		6,000

Sales account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
				June 5	Cash		3,000
				June 7	Pwagu		5,000
				June 10	Alyoce		8,000

Rent account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 6	Cash		500

Electricity account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 9	Cash		1,000

Drawing account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 12	Cash		7,000

Purchases ledger

John account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
				June 5	Purchases		4,000

Masatu account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 15	Cash		3,000	June 8	Purchases		6,000

Sales ledger

Pwagu account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 7	Sales		5,000	June 11	Cash		2,000

Aloyce account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 10	Sales		8,000

Note: Check that for each transaction there are two equal entries, one for debit and one for credit, for instance:

June 11: Received cash from Pwagu, 2,000

• Pwagu's account is credited 2,000
• The cash account is debited 2,000

This is what is meant by double entry.

Closing the accounts is the process of balancing the accounts. This involves determining the totals of the debits and credits, and finding the difference between the two sides. The difference is the balancing figure, which is placed in the side that is less. This makes the two sides equal.

Example 2

Consider the following account from Example 1. Close this account.

Cash account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 1	Capital		50,000	June 2	Furniture		10,000
June 5	Sales		3,000	June 4	Purchases		2,000
June 11	Pwagu		2,000	June 6	Rent		500
				June 9	Electricity		1,000
				June 12	Drawings		7,000
				June 15	Masatu		3,000

Solution

This account is closed as follows:

• The total debit is 55,000/-
• The total credit is 23,500/-
• The difference is 31,500/-

Since the credit side is less by 31,500/-, we place this amount on the credit side with the entry "balance c/d" (where "c/d" stands for carried down) in the 'Particular' and 'Folio' columns.

This is shown in the following table:

Cash account

Date	Particular	Folio	Amount	Date	Particular	Folio	Amount
June 1	Capital		50,000	June 2	Furniture		10,000
June 5	Sales		3,000	June 4	Purchases		2,000
June 11	Pwagu		2,000	June 6	Rent		500
				June 9	Electricity		1,000
				June 12	Drawings		7,000
				June 15	Masatu		3,000
				June 30	Balance	c/d	31,500
			55,000				55,000
July 1	Balance	b/d	31,500

The balance c/d shows the amount that stands on the account on the closing date. It appears as balance b/d (b/d means brought down) on the opening date of the next trading period, on the other side of the ledger.