THE PRINCIPLE OF DOUBLE ENTRY

THE PRINCIPLE OF DOUBLE ENTRY

The principle of double entry requires that the dual effect of every transaction should be recorded by posting a debit entry to one account and a corresponding credit entry to another account. Simply put; “For every debit entry, there must be a corresponding credit entry and vice versa”.

An account can be defined as a record in double entry system that is kept for capital and each class of asset, liability, revenue and expense.

Layout of an account

Title of the account
Debit side	Credit side

Each transaction carried out must affect either of the following class of accounts; capital, asset, liability, revenue or expense.

The amount of resources supplied by the owner of a firm is known as capital.

Assets are the resources of the business e.g. land, building, cash, furniture, fixture & fittings stock, debtors, machinery.

Liabilities are the indebtedness of the firm for the resources owned by the firm or the indebtedness of the firm to outsiders. It consists of money owed for goods supplied to the firm, for expenses and also for loan made to the firm e.g. loan, trade creditor, rent owing e.t.c.

Revenue consists of monetary value of goods and services that have been delivered to customers e.g. sales, discount received, commission receivable, rent receivable e.t.c.

Expenses consist of the monetary value of the assets used up in obtaining the assets. That is, those costs incurred in the operations of the firm e.g. rent, wages, salaries e.t.c.

RULES FOR DOUBLE ENTRY RECORDING

1.     To record an increase in asset debit the asset account. To record a decrease in asset credit the asset account.

2.     To record an increase in capital/liability account, credit the capital account; To record a decrease in capital debit the capital account.

3.     To record an increase in revenue, credit the revenue account; to record a decrease in revenue debit the revenue account/income account.

4.     To record an increase in expense, debit the expense account; to record a decrease in expense credit the expense account.

PROCEDURES FOR DOUBLE ENTRY RECORDING

       i.      Identify the transaction

     ii.      Identify the accounts affected by the transaction

  iii.      Identify the class of the accounts affected

  iv.      Identify how the accounts were affected (increase or decrease)

     v.      Apply the  rules of double entry to record the transaction in the accounts

Example: You are required to enter up the necessary accounts for the month of May from the following information relating to a small printing firm.

2013.

May  1  Started business with capital in cash of N 800 and N 2,200 in the bank

2  Bought goods on credit from the following persons: J. Wadada N 610;     P. Green N 214, M. Taylor N 174, S Gemade N 345, P John N 542.

4  Sold goods on credit to: J. Shuwa N 340, G. Buchi N 720, F. Tunde               N 1,152

6  Paid rent by cash N 180

9  J. Shuwa paid us N 3, 400 by cheque

10  F. Tunde paid us N 1, 000 by cheque

12  We paid the following by cheque; m. Taylor N 174, J. Wadada N 610

15  We paid carriage by cash N 38

18  Bought goods on credit from P. Green N 291, S. Gemade N 940

21  Sold Goods on credit to G. Buchi  N 810

31  Paid rent by cheque N 230

Solution

Capital Account
31/5/13 Bal c/d	N 3, 000 3, 000	1/5/13 Cash 1/5/13 Bank 1/6/13 Bal b/d	N     800 2, 200 3, 000 3, 000
Cash Account
1/5/13 Capital 1/6/13	N 800      ____       800 582	6/5/13   Rent 15/5/13 Carriages 1/6/13 Bal c/d	N     180       38     581     800

Bank A/C

		N			N
1/5/13	Capital	2,200	12/5/13	M. Taylor	174
9/5/13	J. Shuwa	340	12/5/13	J. Wadada	610
10/5/13	F. Tunde	1,000	31/5/13	Rent	230
		____	31/5/13	Bal c/d	2,526
		3,540			3,540
1/6/13	Bal b/d	2,526

Purchases A/C

		N			N
2/5/13	J. Wadada	610	31/5/13	Bal c/d	3116
``	J. Shuwa	340
``	P. Green	214
``	M. Taylor	174
``	S. Gemade	345
``	P. Tolu	542
18/5/13	P. Green	291
``	S. Gemade	940_			____
		3116			3116
1/6/13	Bal b/d	3116

J Wada A/C

		N			N
12/5/13	Bank	610	2/5/13	Purchases	610

P. Green A/C

		N			N
31/5/13	Bal c/d	505	2/5/13	Purchases	214
			18/5/13	Purchase	291
		505			505
			1/6/13	Bal. b/d	505

M. Tayor A/C

		N			N
2/5/13	Bank	174	2/5/13	Purchases	174

S. Gemade A/C

		N			N
31/5/13	Bal c/d	1,285	2/5/13	Purchases	245
			18/5/13	Purchases	940
		1,285			1,285
			1/6/13	Bal c/d	1,285

P. Tolu A/C

		N			N
31/5/13	Bal c/d	542_	2/5/13	Purchases	542__
			1/6/13	Bal c/d	542

Sales A/C

		N			N
31/5/13	Bal c/d	3022	4/5/13	J. Shuwa	340
			``	G. Buchi	720
			``	F. Tunde	1,152
		____	21/5/13	G. Buchi	810_
		3022			3022
			6/6/13	Bal. b/d	3022

J. Shuwa  A/C

		N			N
31/5/13	Sales	340	9/5/13	Bank	340

G. Buchi A/C

		N			N
4/5/13	Sales	720	31/5/13	Bal c/d	1,530
21/5/13	Sales	810__			____
		1,530			1530
16/5/13	Bal b/d	1,530

F. Tunde A/C

		N			N
4/5/13	Sales	1,152	10/5/13	Bank	1000
		_____	31/5/13	Bal c/d	152
		1,152			1,152
16/5/13	Bal b/d	152

G. Buchi A/C

		N			N
6/5/13	Cash	180	31/5/13	Bal c/d	410
31/5/13	Bank	230			____
		410			410_
1/6/13	Bal b/d	410

Carriage A/C

		N			N
15/5/13	Cash	38	31/5/13	Bal c/d	38
1/6/13	Bal b/d	38

THE LEDGER

The ledger could be defined as the principal book of account in which the permanent records of transactions are kept based on double entry principles.

Sub-Division of the ledger: For convenience and internal control purposes, the ledger may be divided into:

       i.            Sales Ledger or Debtor’s Ledger: This will contain the accounts of credit customers.

     ii.            Purchases ledger or creditor’s Ledger: This ledger will contain the accounts of credit suppliers.

  iii.            General Ledger or Nominal Ledger: This ledger will contain all other accounts except those of trade debtors and trade creditors.

The Layout of a Ledger

Title of the Account

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount

CLASSIFICATION OF ACCOUNTS

There are two broad classification of accounts. These are Personal Accounts and Impersonal Accounts.

Personal Accounts: These are the accounts of persons, natural or corporate, who have business dealings with the organization. These include debtors accounts, creditor’s accounts, capital account, drawings account and bank account.

Impersonal Accounts: These are the accounts of non-persons. It can further be divided into real accounts and nominal accounts.

Real accounts relate to tangible assets such as building, motor vehicle, furniture and fillings stock e.t.c.

Nominal Accounts: Refers to expenses and intangible asset as well as revenue/income accounts. Examples; revenue accounts, sales account, commission received account, discount received account, interest received account.

Examples: Expenses accounts, salaries, rent, depreciation, repairs and maintenance accounts e.t.c.

Intangible Assets: Include; Goodwill, patent and trademark accounts.

THE TRIAL BALANCE

The trial balance can be defined as a list of balances of accounts extracted from the ledger and drawn up to test the arithmetic accuracy of the accounting entries.

The debit balance are listed under the debit column while the credit balances are listed under the credit column of the trail balance. Both columns should be equal if the double entry principles have been correctly applied. Where the trail balance did not balance it is an indication of errors. However there could be errors, yet the trail balance may balance. The balancing of the trail balance therefore simply means that certain types of errors were not committed-particularly errors that undermine the double entry.

The trail balance serves two purposes:

1.     It serves as a check on the arithmetical accuracy of the entries.

2.     It is the basis upon which the final accounts are prepared.

Example: You are to enter up the necessary amount for the month of May from the following details and then balance off the accounts and extract a trail balance as at 31 May 2014.

May  1  Started firm with capital in cash of N 25, 000

2  Bought goods on credit from the following persons: D. Kollo N 5, 400;   

C. Kamara N 8,200, K. Oloye N 2,500: D. Adisa N 7,600, L. Aliyu  N 6,400.

4  Sold goods on credit to: Fulani N 4,300, B. Bagura N 6,200, H. Tani N17,600

6  Paid rent by cash N 1,200

9  C. Fulani paid his account by cheque N 4, 300

10  H. Tani paid us by cheque N 15,000

12 We paid the following by cheque; K. Oloye N 2,500 D. Kollo N 5,400

15  We paid carriage by cash N 2,300

18  Bought goods on credit from C. Kamara N 4,300 D. Adisa N 11, 000

21  Sold Goods on credit to B. Bagura  N 1,800

31  Paid rent by cheque N 1,800

Capital A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
31/5/14	Bal c/d		25,000	1/5/14 1/6/14	Cash Bal b/d	G.L	25,000 25,000

Cash A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
1/5/14 1/6/14	Capital Bal b/d	G.L	25,000 _____ 25,000 21,500	6/5/14 15/6/14 31/5/14	Rent Carriages Bal c/d	G.L G.L	1,200 2,300 21,500 25,000

Bank A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
9/5/14 1/6/14	Fulani H. Tani Bal b/d	S.L S.L	4,300 15,000 ______ 19,300 9,600	12/5/14 12/5/14 31/5/14 31/5/14	K.Oloye D. Kollo Rent Bal c/d	P.L P.L G.L	2,500 5,400 1,800 9,600_ 19,300

Purchases A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
1/5/14 `` `` `` 18/5/14 1/6/14	D. Kollo C. Kamara K. Adisa L. Aliyu C. Kamara D. Adisa Bal b/d	P.L P.L P.L P.L P.L P.L	5,400 8,200 2,500 7,600 6,400 4,300 11,000 45,400 45,400	31/5/14	Bal c/d		45,480 ______ 45,400

SALES A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
31/5/14	Bal c/d		34,800 ______ 34,800	4/5/14 `` `` 21/5/14 1/6/14	Fulani B. Bugura H. Tani B. Bagura Bal b/d	S.L S.L S.L S.L	4,300 6,200 17,600 6,700_ 34,800 34,800

Rent A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
6/5/14 31/5/14 1/6/14	Cash Bank Bal b/d	G.L G.L	1,200 1,800 3000_ 3000	31/5/14	Bal c/d		3000 ____ 3000

Carriages A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
15/5/14 1/6/14	Cash Bal b/d	G.L	2,300 2,300	31/5/14	Bal c/d		2,300

C. Kamara A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
31/5/14	Bal C/d		12,500 ______ 12,500	2/5/14 18/5/14 `` 1/6/14	Purchases Purchases Bal b/d	G.L G.L	8,200 4,300_ 12,500 12,500

K. Oloye

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
31/5/14	Bal c/d	G.L	2,500	2/5/14	Purchases	G.L	2,500

D. Kollo A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
12/5/14	Bank	G.L	5,400	2/5/14	Purchases	G.L	5,400

D. Adisa A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
31/5/14	Bal c/d		18,600 ______ 18,600	2/5/14 18/5/14 1/6/14	Purchases Purchases Bal b/d	G.L G.L	7,600 11,000 18,600 18.600

L Aliyu A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
31/5/14	Bal c/d		6,400	2/5/14 1/6/14	Purchases Bal b/d	G.L	6,400 6,400

B. Bagura A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
4/5/14 21/5/14 1/6/14	Sales Sales Bal b/d	G.L G.L	6,200 6,700 12,900 12,900	31/5/14	Bal c/d		12,900 ______ 12,900

C. Fulani A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
4/5/14	Sales	G.L	4,300	9/5/14	Bank	G.L	4,300

H. Tani  A/C

Date	Particulars	Folio	Amount	Date	Particulars	Folio	Amount
4/5/14 1/6/14	Sales Bal b/d	G.L	17,600 ______ 17,600 2,600	10/5/14 31/5/14	Bank Bal c/d	G.L	15,000 2,600 17,600

TRIALS BALANCE AS AT 31^ST MAY 2014

Capital	Dr. N	Cr. N
Cash		25,000
Bank	21,500
Purchases	9,600
Sales	45,400
Rent		34,800
Carriages	3000
C.Kamara	2,300
D. Adisa		12,500
L. Aliyu		18,600
B. Bagura	12,900
H. Tani	2,600__	______
	97,300	97,300

Notes:

From the above example, it can be seen that

i.                    Only accounts with balances b/d appear in the Trial Balance

ii.                  Capital and abilities have credit balances

iii.                Assets and expenditures have debit balances

iv.    The trial balance consists of a list of all the balances brought down at the end of the period or whenever the accounts are closed.

The above trial balance can as well be shortened by aggregating debtors and creditors merging them and purchases and sales.

      

TRIAL BALANCE

	Dr. N	Cr. N
Capital		25,000
Cash	21,500
Bank	9,600
Purchases	45,400	34,800
Rent	3000
Carriage	2,300
Debtors and creditors	15,500	37,500
	97,300	97,300