The Double Entry System of Book-Keeping (Copy)
Cheat Sheet: 2.1 The Double Entry System of Book-keeping
O Level and IGCSE Accounting Quick Revision
What is the Double Entry System?
- A system of recording where every transaction affects two accounts.
- Each transaction has a debit and a credit of equal value to keep the accounting equation balanced.
- Based on:
Assets = Liabilities + Owner’s Equity
Basic Rules of Debit and Credit
| Account Type | Increase Recorded As | Decrease Recorded As |
|---|---|---|
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Owner’s Equity | Credit | Debit |
| Revenue/Income | Credit | Debit |
| Expenses | Debit | Credit |
Golden Rules of Accounting (Shortcut Logic)
| Type of Account | Rule |
|---|---|
| Personal Account | Debit the receiver, credit the giver |
| Real Account | Debit what comes in, credit what goes out |
| Nominal Account | Debit all expenses and losses, credit incomes and gains |
Ledger Accounts Format (T-Accounts)
Example:
Cash Account
| Debit (Dr) | Credit (Cr) |
|---|---|
| + Cash received | − Cash paid |
Example Transactions and Entries
| Transaction | Debit Account | Credit Account |
|---|---|---|
| Owner invests $10,000 | Cash | Capital |
| Bought inventory for $2,000 cash | Inventory | Cash |
| Sold goods for $3,000 cash | Cash | Sales |
| Paid rent of $500 | Rent Expense | Cash |
| Bought machinery on credit ($5,000) | Machinery | Trade Payables |
| Paid supplier $2,000 | Trade Payables | Cash |
Posting to Ledger Accounts
Transaction: Bought stationery for $400 cash
Accounts affected:
- Debit: Stationery Expense
- Credit: Cash
Ledger Entries:
Stationery Expense A/C
| Debit | Credit |
|---|---|
| Cash $400 |
Cash A/C
| Debit | Credit |
|---|---|
| Stationery $400 |
Balancing Ledger Accounts
Step-by-step:
- Add both sides (Dr and Cr)
- Find the higher total
- Insert the balance carried down (c/d) on the side with the lower amount
- Bring the balance brought down (b/d) to the opposite side for the next period
Division of the Ledger
| Ledger Type | Description |
|---|---|
| Sales Ledger | Contains accounts of all credit customers |
| Purchases Ledger | Contains accounts of all credit suppliers |
| General Ledger | Contains all nominal and real accounts |
Quick Summary Table
| Task | What to Do |
|---|---|
| Record a transaction | Apply double entry: debit one, credit one |
| Prepare a ledger account | Use T-account format |
| Balance an account | Total both sides, find difference |
| Transfer balances to statements | Assets, liabilities, capital, income, expenses |
| Interpret balances | Dr/Cr side shows value and nature |