The Double Entry System (Cambridge (CIE) O Level Accounting)

The Double Entry System

What is the double entry system?

• The double entry system is used by book-keepers 

  • The double entry system is used to improve the accuracy of financial statements

• The double entry system is closely linked to the accounting equation

  • Assets = Liabilities + Capital

• The equation is always balanced

• Each transaction causes both sides of the equation to:

  • increase

  • or decrease

  • or remain the same

• Each transaction is entered into two accounts

  • One is called a debit entry

  • One is called a credit entry

What is the layout of a ledger account?

• Each account will be split into two sides

  • The debit entries appear on the left

    • This side is sometimes labelled as Dr

  • The credit entries appear on the right

    • This side is sometimes labelled as Cr

• When you make an entry you need to include:

  • The date of the transaction

  • The details of the transaction

    • This is normally the name of the other account involved

  • The value of the transaction

What are the advantages of maintaining double entry records?

• It is straightforward to prepare financial statements

• It can help give an accurate calculation of the profit or loss

• It reduces the possibility of fraud

• It gives easy access to information for the bank or other lenders

Debits & Credits

What is a debit entry?

• A debit entry is mainly used for:

  • Increasing the value of an asset

    • The left-hand side of the accounting equation increases

  • Decreasing the value of a liability or the capital

    • The right-hand side of the accounting equation decreases

What is a credit entry?

• A credit entry is mainly used for:

  • Increasing the value of a liability or the capital

    • The right-hand side of the accounting equation increases

  • Decreasing the value of an asset

    • The left-hand side of the accounting equation decreases

Which accounts should I debit?

• Debit an asset account when its value is increasing

  • You receive cash

    • Debit the cash account

  • A customer buys goods on credit

    • Debit their trade receivables account

• Debit a liability account when its value is decreasing

  • You make a repayment on a bank loan

    • Debit the bank loan account

  • You pay an invoice to a credit supplier

    • Debit their trade payables account

• Debit other accounts when the transaction decreases the capital

  • You take out assets for personal use

    • Debit the drawings account

  • You pay an expense which decreases the profit

    • Debit the relevant expense account

    • Such as purchases, rent paid, discount allowed, etc

Which accounts should I credit?

• Credit a liability account when its value is increasing

  • You take out a bank loan

    • Credit the bank loan account

  • You buy goods on credit from a supplier

    • Credit their trade payables account

• Credit an asset account when its value is decreasing

  • You pay rent by bank transfer

    • Credit the bank account

  • A credit customer pays their invoice

    • Credit their trade receivables account

• Credit other accounts when the transaction increases the capital

  • You put more personal assets (such as money) into the business

    • Credit the capital account

  • You receive income which increases the profit

    • Credit the relevant income account

    • Such as sales, rent received, discount received, etc

How do I decide whether an account should be debited or credited?

• STEP 1
  Identify the asset, liability or capital

  • Usually this is cash, trade receivables or trade payables

• STEP 2
  Determine whether its value is increasing or decreasing

• STEP 3
  Debit or credit that account

  • Debit the account if:

    • It is an asset account and its value is increasing

    • It is a liability or the capital account and its value is decreasing

  • Credit the account if:

    • It is an asset account and its value is decreasing

    • It is a liability or the capital account and its value is increasing

• STEP 4
  Put an equal entry on the opposite side for the second account

Do I debit or credit accounts for expenses & incomes?

• When you pay an expense you will debit that account

  • This is because expenses decrease the profit

    • The capital will decrease

  • The other part of the double entry is to credit the cash or bank account

    • Your cash is decreasing

• When you receive an income you will credit that account

  • This is because income increases the profit

    • The capital will increase

  • The other part of the double entry is to debit the cash or bank account

    • Your cash is increasing

Do I debit or credit accounts for drawings & capital?

• When the owner takes out money or goods from the business for themselves you will debit the drawings account

  • This is because taking drawings decreases the capital

  • The other part of the double entry is to credit the cash or bank account

    • The company’s cash is decreasing

• When the owner adds their own money to the business you will credit the capital account

  • This is because introducing money increases the capital

  • The other part of the double entry is to debit the cash or bank account

    • The company’s cash is increasing