The Double Entry System | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)

Barter System

• Initially, the world worked on the barter system.
  • One person who has one thing in excess would find someone who needs this excess thing.
  • And can provide him with something he wants in return.
  • For example, if A has 2 kg extra rice, and he needs wheat, he needs to find someone who has extra wheat and would trade it for the extra rice.
• It was possible for the world to work on this principle initially
• However, with trade and the growth of the population, it became important to involve money
• One can sell what he has excess of for money.
• Later, he can use that money to buy something he needs.
• So there is now no need for a presence of co-existence of needs to trade.
• Instead, money makes it possible.

Double Entry System

• They double entry system springs from the use of money.
• We know that there must be an equal entry on both sides of the equation to ensure that any entry does not increase one side by a huge level.
• Here are some rules that we use in double entry system:
  • Asset, Loss, Expenses
    • Debited when they increase
    • Credited when they decrease
  • Liabilities, Income, Profits, Owner’s Equity
    • Credited when they increase
    • Debited when they decrease
• We need to consider each of the account that is being affected in the entry to determine what will be debited and what will be credited.
• For example
  • If a business buys a car for 1,000,000 PKR from the cash at bank.
    • Cash at bank is an asset which is reducing in this transaction.
    • Business car is an asset that is increasing in this transaction
    • Therefore
      • Business Car will be debited by 1,000,000 RS
      • Cash at Bank will be credited by 1,000,000 RS
• Another Example
  • Business pays back its overdraft of 10,000 RS from the cash in hand
  • Here
    • Cash is an asset that is reducing by 10,000 so it will be credited.
    • Bank Overdraft is a liability that is also being reduced, which means it will be debited by RS 10,000.

How To Pass A Double Entry?

• Basically for a double entry, you first mention the entry with the debit, then the credit.
• Debit entry is aligned with the left hand margin, while the credit entry is on the next line, with a 2 finger space from the margin.
• You can write the narrative beneath the entry
  • In the exam, only do it if he explicitly asks for narratives
  • A narrative is a small sentence that tells you what the entry is about.