Information about Double Entry Bookkeeping System
In accountancy, the double-entry bookkeeping (or double-entry accounting) system is the basis of the standard system used by businesses and other organizations to record financial transactions. It was first described by the Italian mathematician Luca Pacioli, in his Summa de arithmetica, geometrica, proportioni et proportionalita (Venice, 1494). Its premise is that a business's (or other organization's) financial condition and results of operations are best recorded in accounts. Each account maintains a "history" of changes in monetary values about a particular aspect of the business.
This system is called double-entry because each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and at least one account being credited, with the total debits of the transaction equal to the total credits. This requirement has a benefit to the bookkeeper, but also introduces confusion to the layman. The benefit is that the accuracy of the accounts can be checked quickly - for, when all the accounts that have debit balance are summed, they should equal the sum of all the accounts which have a credit balance. Without this requirement, there would be no quick means to check accuracy. The confusion arises because a healthy business with money in the bank will have a debit balance in the account called "Bank". This is contrary to the layman's experience that, when the layman's bank balance is healthy, his bank statement shows a credit balance. An easy way to visualise this is to consider that the bank writes the statement from its own point of view; hence if you are in credit, you are a liabilty on their balance sheet - you can turn up and draw your money out.
To understand why the double-entry account called "Bank" is normally in debit, consider the recording of the transaction where the owner of a business contributes cash to the business. The two accounts affected by this transaction are "Bank" and "Capital". Given that the reader can easily accept that the "Capital" account is credited, then applying the double-entry rule that at least one account must be debited, it is clear that the account called "Bank" has to be debited. Note that the terms "debit" and "credit" do not mean that one term is somehow good and the other is somehow bad, or that one is positive and the other is negative. In bookkeeping, debits and credits are simply a way of making an account change.
If a business's assets increase, then the relevant asset account is debited. Therefore, if a business receives money, its assets have increased, and so the account called "Bank" is debited. If the money received was because the business had taken out a loan, the account that would be credited is the liability account called "Loan". This latter point demonstrates that when liabilities are increased, the affected liability account is credited. (This also helps explain why the layman's healthy bank statement shows a credit balance, because from the viewpoint of the bank, the layman's account is a liability account. For, each time the layman deposits money to a healthy bank account, the bank's liabilities are increased because the bank now owes the layman more money.)
Consider also these two examples, if Business A sells an item for cash to Business B, the bookkeeper of the Business A would credit the account called "Sales" and debit the account called "Bank". Conversely, the bookkeeper of Business B, would debit the account called "Purchases" and credit the account called "Bank".
Historically, debit entries have been recorded on the left hand side and credit values on the right hand side of a general ledger account. The ledger accounts are set up as T accounts so called because they resemble the letter T when the account is empty.
After a certain period, typically a month, the columns in each journal are each totalled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. The process of transferring summaries or individual transactions to the ledger is called Posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing which is simply a process to arrive at the balance of the account.
To quickly check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree - this agreement is not by chance - it happens because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree therefore, an error has been made in either the journals or made during the posting process. The error(s) must be located and rectified and the totals of debit column and credit column re-calculated to check for agreement before any further processing can take place.
Once there are no errors, the accountant produces a number of adjustments and changes the balance amounts of some of the accounts. For example, the "Inventory" account and "Office Supplies" asset accounts are changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the expense accounts associated with usage of inventory and with the usage of office supplies are adjusted. Other refinements necessary to ensure that accounting principles are complied with are also done at this time. This results in a listing called, not surprisingly, the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements.
Finally financial statements are drawn from the trial balance, which may include:
This can be further expanded and the (extended) equation becomes:
or
Finally, the equation may be rearranged algebraically as follows:
This equation must be true, for any time period. If it is, then the accounts are said to be in balance. If the accounts are not in balance, an error has occurred.
For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in any transaction must equal the sum of all credits made. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.
Debits and credits are then defined as follows:
Paying supplier for the computer
Credit and debit items are summarized at the end of a recording period in a trial balance which is a list of all the debit and credit balances. The trial balance acts as a self checking mechanism for the correctness of entries in the individual accounts and also as a starting point for the preparation of the Final Account which is made up of the balance sheet and the trading, profit and loss account.
The following table summarizes the basic accounts. A "+" indicates an increase; a "−" indicates a decrease.
As a mnemonic device for students:
Note that only Assets and Expenses show an Increase for Debits and Decrease for Credits. All other accounts are the reverse. First memorize the acronyms AID (Assets Increase Decrease) & EID (Expenses Increase Decrease)and then keep in mind that the table reads Debits on the left and Credits on the right.
Debit entries are made on the left side of the vertical line and credit entries are made on the right side of the vertical line.
Books of first entry (a.k.a. Books of prime entry)
Bank Account Ledger
Trade Creditors Ledger
Trade Debtors Ledger
From the above we will create:
The amount value is posted as a credit to the individual supplier's ledger a/c
The analysis amount is posted a debit to the relevant general ledger a/c
From example above:
Line 1 - Amount value 1000 is posted as a credit to the Supplier's ledger a/c ELE01-Electricity Company
Line 1 - Electricity value 1000 is posted as a debit to the Electricity general ledger a/c code
Double-entry has been observed Dr = 1000 Cr = 1000
Line 2 - Amount value 1600 is posted as a credit to the Supplier's ledger a/c WID01-Widget Company
Line 2 - Widget value 1600 is posted as a debit to the Widget general ledger a/c code
Double-entry has been observed Dr = 1600 Cr = 1600
The totals of each column are posted as follows:
Amount total value 2600 posted as a credit to the Trade creditors control a/c
Electricity total value 1000 posted as a debit to the Profit & loss control a/c
Widget total value 1600 posted as a debit to the Profit & loss control a/c
Double-entry has been observed Dr = 2600 Cr = 2600
Each individual line is posted as follows: The amount value is posted as a debit to the individual supplier's ledger a/c
The analysis amount is posted as a credit to the relevant general ledger a/c
From example above:
Line 1 - Amount value 1000 is posted as a debit to the Supplier's ledger a/c ELE01-Electricity Company
Line 1 - Trade creditors value 1000 is posted as a credit to the Bank general ledger a/c code
Double-entry has been observed Dr = 1000 Cr = 1000
Line 2 - Amount value 900 is posted as a debit to the Supplier's ledger a/c WID01-Widget Company
Line 2 - Trade creditors value 900 is posted as a credit to the Bank general ledger a/c code
Double-entry has been observed Dr = 900 Cr = 900
Line 3 - Amount value 400 is posted as a debit to the Wages general ledger a/c code
Line 3 - Others value 400 is posted as a credit to the Bank general ledger a/c code
Double-entry has been observed Dr = 400 Cr = 400
The totals of each column are posted as follows:
Amount total value 2300 posted as a credit to the Profit & loss control a/c
Trade Creditors total value 1900 posted as a debit to the Trade creditors control a/c
Other total value 400 posted as a debit to the Wages control a/c
Double-entry has been observed Dr = 2300 Cr = 2300
The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.
The amount value is posted as a debit to the individual customer's ledger a/c
The analysis amount is posted as a credit to the relevant general ledger a/c
From example above:
Line 1 - Amount value 2500 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing
Line 1 - Parts value 2500 is posted as a credit to the Sales-parts general ledger a/c code
Double-entry has been observed Dr = 2500 Cr = 2500
Line 2 - Amount value 3200 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing
Line 2 - Service value 3200 is posted as a credit to the Sales-service general ledger a/c code
Double-entry has been observed Dr = 3200 Cr = 3200
The totals of each column are posted as follows:
Amount total value 5700 posted as a debit to the Trade debtors control a/c
Sales-parts total value 2500 posted as a credit to the Profit & loss control a/c
Sales-service total value 3200 posted as a credit to the Profit & loss control a/c
Double-entry has been observed Dr = 5700 Cr = 5700
Each indivdual line is posted as follows: The amount value is posted as a credit to the individual customer's ledger a/c
The analysis amount is posted as a debit to the relevantgeneral ledger a/c
From example above:
Line 1 - Amount value 2500 is posted as a credit to the Customer's ledger a/c JJM01 - JJ Manufacturing
Line 1 - Customers value 2500 is posted as a debit to the Bank general ledger a/c code
Double-entry has been observed Dr = 2500 Cr = 2500
The totals of each column are posted as follows:
Amount total value 2500 posted as a credit to the Trade debtors control a/c
Customers total value 2500 posted as a debit to the Profit & loss control a/c
Double-entry has been observed Dr = 2500 Cr = 2500
The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.
These items are entered in the ledger below; each matching credit and debit have been numbered to make finding them in the ledger easier.
The amount in equity (in the form of retained earnings) has changed with a net credit of $500,000. Since equity has a normal balance of credit, this means there is now $500,000 more in equity than at the beginning of the month.
c/d - carried down
b/d - brought down
c/f - carried forward
b/f - brought forward
Dr - debit
Cr - credit
P&L - Profit & Loss
This system is called double-entry because each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and at least one account being credited, with the total debits of the transaction equal to the total credits. This requirement has a benefit to the bookkeeper, but also introduces confusion to the layman. The benefit is that the accuracy of the accounts can be checked quickly - for, when all the accounts that have debit balance are summed, they should equal the sum of all the accounts which have a credit balance. Without this requirement, there would be no quick means to check accuracy. The confusion arises because a healthy business with money in the bank will have a debit balance in the account called "Bank". This is contrary to the layman's experience that, when the layman's bank balance is healthy, his bank statement shows a credit balance. An easy way to visualise this is to consider that the bank writes the statement from its own point of view; hence if you are in credit, you are a liabilty on their balance sheet - you can turn up and draw your money out.
To understand why the double-entry account called "Bank" is normally in debit, consider the recording of the transaction where the owner of a business contributes cash to the business. The two accounts affected by this transaction are "Bank" and "Capital". Given that the reader can easily accept that the "Capital" account is credited, then applying the double-entry rule that at least one account must be debited, it is clear that the account called "Bank" has to be debited. Note that the terms "debit" and "credit" do not mean that one term is somehow good and the other is somehow bad, or that one is positive and the other is negative. In bookkeeping, debits and credits are simply a way of making an account change.
If a business's assets increase, then the relevant asset account is debited. Therefore, if a business receives money, its assets have increased, and so the account called "Bank" is debited. If the money received was because the business had taken out a loan, the account that would be credited is the liability account called "Loan". This latter point demonstrates that when liabilities are increased, the affected liability account is credited. (This also helps explain why the layman's healthy bank statement shows a credit balance, because from the viewpoint of the bank, the layman's account is a liability account. For, each time the layman deposits money to a healthy bank account, the bank's liabilities are increased because the bank now owes the layman more money.)
Consider also these two examples, if Business A sells an item for cash to Business B, the bookkeeper of the Business A would credit the account called "Sales" and debit the account called "Bank". Conversely, the bookkeeper of Business B, would debit the account called "Purchases" and credit the account called "Bank".
Historically, debit entries have been recorded on the left hand side and credit values on the right hand side of a general ledger account. The ledger accounts are set up as T accounts so called because they resemble the letter T when the account is empty.
History
The origins of a primitive double-entry system have been traced as far back as the 12th century. Some sources suggest that Giovanni di Bicci de' Medici first introduced this method for the Medici bank. The earliest extant records that follow the modern double-entry form are those of Amatino Manucci, a Florentine merchant at the beginning of the 14th century[1]. By the end of the 15th century, the merchant venturers of Venice used this system widely. Luca Pacioli, a monk and collaborator of Leonardo da Vinci, first codified the system in a mathematics textbook of 1494 [2]. Pacioli is often called the "father of accounting" because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it.[3]The bookkeeping and accounting process
In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Columns in the journal, normally correspond to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach.After a certain period, typically a month, the columns in each journal are each totalled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. The process of transferring summaries or individual transactions to the ledger is called Posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing which is simply a process to arrive at the balance of the account.
To quickly check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree - this agreement is not by chance - it happens because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree therefore, an error has been made in either the journals or made during the posting process. The error(s) must be located and rectified and the totals of debit column and credit column re-calculated to check for agreement before any further processing can take place.
Once there are no errors, the accountant produces a number of adjustments and changes the balance amounts of some of the accounts. For example, the "Inventory" account and "Office Supplies" asset accounts are changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the expense accounts associated with usage of inventory and with the usage of office supplies are adjusted. Other refinements necessary to ensure that accounting principles are complied with are also done at this time. This results in a listing called, not surprisingly, the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements.
Finally financial statements are drawn from the trial balance, which may include:
- the income statement, also known as a statement of financial results, profit and loss statement, or simply P&L
- the balance sheet
- the cash flow statement
- the statement of retained earnings
An explanation of debits and credits
Double-entry bookkeeping is governed by the accounting equation. At any point in time, the following (basic) equation must be true:- assets = liabilities + equity
This can be further expanded and the (extended) equation becomes:
- assets = liabilities + equity + (revenue − expenses)
or
- assets = liabilities + (capital − drawings) + (revenue − expenses)
- A = L + C − D + R − E
Finally, the equation may be rearranged algebraically as follows:
- A + E + D = L + R + C
This equation must be true, for any time period. If it is, then the accounts are said to be in balance. If the accounts are not in balance, an error has occurred.
For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in any transaction must equal the sum of all credits made. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.
Debits and credits are then defined as follows:
- debit: an increase in one of the accounts with a normal balance of debit or a decrease in one of the accounts with a normal balance of credit. A debit is recorded on the left hand side of a T account
- credit: an increase in one of the accounts with a normal balance of credit or a decrease in one of the accounts with a normal balance of debit. A credit balance is recorded on the right hand side of a 'T' account
- Debit accounts = Asset and Expenses (also debit money received into bank accounts)
- Credit accounts = Gains (income) and Liabilities (also credit money paid out of bank accounts)
- Assets
- Accounts receivable: debts promised by other entities but not yet paid
- Drawings by the owners on equity
- Expenses
- Losses (that is, when expenses exceed revenue)
- Liabilities
- Accounts payable and taxes, notes or loans payable: debts promised to outsiders but not yet paid
- Revenue
- Profit (that is, when revenue exceeds expenses)
- Capital
Examples of debits and credits
Purchase of a Computer- Debit Computer A/c (Fixed Asset A/c)
- Credit Creditors A/c (Liability A/c)
Paying supplier for the computer
- Debit Creditors A/c (Liability A/c) You are reducing a Liability A/c
- Credit Bank A/c (Asset A/c) Money going Out, an asset account is being reduced
Credit and debit items are summarized at the end of a recording period in a trial balance which is a list of all the debit and credit balances. The trial balance acts as a self checking mechanism for the correctness of entries in the individual accounts and also as a starting point for the preparation of the Final Account which is made up of the balance sheet and the trading, profit and loss account.
The following table summarizes the basic accounts. A "+" indicates an increase; a "−" indicates a decrease.
| Account | Debit | Credit |
|---|---|---|
| Assets | + | − |
| Expenses | + | (−) |
| Liabilities | − | + |
| Shareholder Equity | − | + |
| Revenue | (−) | + |
| Account | Debit | Credit | Account Debit Credit |
|---|---|---|---|
| Assets | Inc. | Dec. | A I D |
| Expenses | Inc. | Dec. | E I D |
| Liabilities | Dec. | Inc. | |
| Shareholder Equity | Dec. | Inc. | |
| Revenue | Dec. | Inc. |
An explanation of a T account
A T account is called such because it looks like the letter "T" when drawn like so:| Debits | Credits |
|---|---|
Double-entry working examples
Example 1
In this example the following will be used:Books of first entry (a.k.a. Books of prime entry)
- Sales Invoice Daybook (records customer Invoice Daybook)
- Bank Receipts Daybook (records customer & non customer receipts)
- Purchase Invoice Daybook (records supplier Invoice Daybook)
- Bank Payments Daybook (records supplier & non supplier payments)
- Customer Ledger Cards
- Supplier Ledger Cards
Bank Account Ledger
Trade Creditors Ledger
Trade Debtors Ledger
From the above we will create:
- Trial Balance
- Profit and Loss Statement (Dr & Cr Formating, classic format)
- Profit and Loss Statement (List Format, Modern version used today)
- Balance Sheet (Dr & Cr Formatting, classic format)
- Balance Sheet (List Format, Modern version used today)
Purchases/creditors
Purchase invoice daybook
The amount value is posted as a credit to the individual supplier's ledger a/c
The analysis amount is posted a debit to the relevant general ledger a/c
From example above:
Line 1 - Amount value 1000 is posted as a credit to the Supplier's ledger a/c ELE01-Electricity Company
Line 1 - Electricity value 1000 is posted as a debit to the Electricity general ledger a/c code
Double-entry has been observed Dr = 1000 Cr = 1000
Line 2 - Amount value 1600 is posted as a credit to the Supplier's ledger a/c WID01-Widget Company
Line 2 - Widget value 1600 is posted as a debit to the Widget general ledger a/c code
Double-entry has been observed Dr = 1600 Cr = 1600
The totals of each column are posted as follows:
Amount total value 2600 posted as a credit to the Trade creditors control a/c
Electricity total value 1000 posted as a debit to the Profit & loss control a/c
Widget total value 1600 posted as a debit to the Profit & loss control a/c
Double-entry has been observed Dr = 2600 Cr = 2600
Bank payments daybook
Each individual line is posted as follows: The amount value is posted as a debit to the individual supplier's ledger a/c
The analysis amount is posted as a credit to the relevant general ledger a/c
From example above:
Line 1 - Amount value 1000 is posted as a debit to the Supplier's ledger a/c ELE01-Electricity Company
Line 1 - Trade creditors value 1000 is posted as a credit to the Bank general ledger a/c code
Double-entry has been observed Dr = 1000 Cr = 1000
Line 2 - Amount value 900 is posted as a debit to the Supplier's ledger a/c WID01-Widget Company
Line 2 - Trade creditors value 900 is posted as a credit to the Bank general ledger a/c code
Double-entry has been observed Dr = 900 Cr = 900
Line 3 - Amount value 400 is posted as a debit to the Wages general ledger a/c code
Line 3 - Others value 400 is posted as a credit to the Bank general ledger a/c code
Double-entry has been observed Dr = 400 Cr = 400
The totals of each column are posted as follows:
Amount total value 2300 posted as a credit to the Profit & loss control a/c
Trade Creditors total value 1900 posted as a debit to the Trade creditors control a/c
Other total value 400 posted as a debit to the Wages control a/c
Double-entry has been observed Dr = 2300 Cr = 2300
The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.
Supplier ledger cards
| A/c Code: ELE01 - Electricity Company | |||||||
|---|---|---|---|---|---|---|---|
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 17 July 2006 | Bank Payments Daybook | BP701 | 1000 | 10 July 2006 | Invoice | PI1 | 1000 |
| 31 July 2006 | Balance c/f | 0 | |||||
| 1000 | 1000 | ||||||
| 1 August 2006 | Balance b/f | 0 | |||||
| A/c Code: WID01 - Widget Company | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 19 July 2006 | Bank Payments Daybook | BP702 | 900 | 12 July 2006 | Invoice | PI2 | 1600 |
| 31 July 2006 | Balance c/f | 700 | |||||
| 1600 | 1600 | ||||||
| 1 August 2006 | Balance b/f | 700 align=right | |||||
Sales/customers
Sales daybook
The amount value is posted as a debit to the individual customer's ledger a/c
The analysis amount is posted as a credit to the relevant general ledger a/c
From example above:
Line 1 - Amount value 2500 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing
Line 1 - Parts value 2500 is posted as a credit to the Sales-parts general ledger a/c code
Double-entry has been observed Dr = 2500 Cr = 2500
Line 2 - Amount value 3200 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing
Line 2 - Service value 3200 is posted as a credit to the Sales-service general ledger a/c code
Double-entry has been observed Dr = 3200 Cr = 3200
The totals of each column are posted as follows:
Amount total value 5700 posted as a debit to the Trade debtors control a/c
Sales-parts total value 2500 posted as a credit to the Profit & loss control a/c
Sales-service total value 3200 posted as a credit to the Profit & loss control a/c
Double-entry has been observed Dr = 5700 Cr = 5700
Bank receipts daybook
Each indivdual line is posted as follows: The amount value is posted as a credit to the individual customer's ledger a/c
The analysis amount is posted as a debit to the relevantgeneral ledger a/c
From example above:
Line 1 - Amount value 2500 is posted as a credit to the Customer's ledger a/c JJM01 - JJ Manufacturing
Line 1 - Customers value 2500 is posted as a debit to the Bank general ledger a/c code
Double-entry has been observed Dr = 2500 Cr = 2500
The totals of each column are posted as follows:
Amount total value 2500 posted as a credit to the Trade debtors control a/c
Customers total value 2500 posted as a debit to the Profit & loss control a/c
Double-entry has been observed Dr = 2500 Cr = 2500
The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.
Customer ledger cards
| A/c Code: JJM01 - JJ Manufacturing | |||||||
|---|---|---|---|---|---|---|---|
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 2 July 2006 | Sales invoice daybook | SI1 | 2500 | 20 July 2006 | Bank receipts daybook | BR1 | 2500 |
| 2 July 2006 | Sales invoice daybook | SI2 | 3200 | 31 July 2006 | balance c/f | 3200 | |
| 5700 | 5700 | ||||||
| 1 August 2006 | Balance b/f | 3200 | align=right | ||||
| Sales parts | |||||||
|---|---|---|---|---|---|---|---|
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 31 July 2006 | Balance c/f | 2500 | 2 July 2006 | Sales invoice daybook | SI1 | 2500 | |
| 2500 | 2500 | ||||||
| 1 August 2006 | Balance b/f | 2500 | |||||
| Sales service | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 31 July 2006 | Balance c/f | 3200 | 29 July 2006 | Sales invoice daybook | SI2 | 3200 | |
| 3200 | 3200 | ||||||
| 1 August 2006 | Balance b/f | 3200 | |||||
| Electricity | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 10 July 2006 | Electricity Co. | PI1 | 1000 | 31 July 2006 | Balance c/f | 1000 | |
| 1000 | 1000 | ||||||
| 1 August 2006 | Balance b/f | 1000 | |||||
| Widgets | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 12 July 2006 | Widget Co. | PI2 | 1600 | 31 July 2006 | Balance c/f | 1600 | |
| 1600 | 1600 | ||||||
| 1 August 2006 | Balance b/f | 1600 | |||||
| Other a/c | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 28 July 2006 | Owner's Wages | BP703 | 400 | 31 July 2006 | Balance c/f | 400 | |
| 400 | 400 | ||||||
| 1 August 2006 | Balance b/f | 400 | |||||
| Bank Control A/c | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 31 July 2006 | Bank receipts daybook | BR-Jul | 2500 | 31 July 2006 | Bank payments daybook | BP-Jul | 2300 |
| 31 July 2006 | Balance c/f | 200 | |||||
| 2500 | 2500 | ||||||
| 1 August 2006 | Balance b/f | 200 | |||||
| Trade Debtors Control A/c | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 1 July 2006 | Balance b/f | 0 | 31 July 2006 | Bank receipts daybook | BR-Jul | 2500 | |
| 31 July 2006 | Sales Invoice Daybook | SI-Jul | 5700 | 31 July 2006 | Balance c/f | 3200 | |
| 5700 | 5700 | ||||||
| 1 August 2006 | Balance b/f | 3200 | |||||
| Trade Creditors Control A/c | |||||||
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 31 July 2006 | Bank Payments Daybook | BP-Jul | 1900 | 1 July 2006 | Balance b/f | 0 | |
| 31 July 2006 | Balance c/f | 700 | 31 July 2006 | Purchase Daybook | PI-Jul | 2600 | |
| 2600 | 2600 | ||||||
| 1 August 2006 | Balance b/f | 700 | |||||
| Profit & loss control A/c | |||||||
|---|---|---|---|---|---|---|---|
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 31 July 2006 | Purchase invoice daybook | PI-Jul | 2600 | 31 July 2006 | Sales invoice daybook | SI-Jul | 5700 |
| 31 July 2006 | Bank payments daybook | BP-Jul | 400 | ||||
| 31 July 2006 | Balance c/f | 2700 | |||||
| 5700 | 5700 | ||||||
| 1 August 2006 | Balance b/f | 2700 | |||||
The supplier ledger cards shows the breakdown of how the trade creditors control a/c is made up. The trade creditors control a/c is the total of outstanding creditors and the suppliers ledger cards shows the amount due for each individual supplier. The total of each individual supplier account added together should equal the total in the trade creditors control a/c.
Each Bank a/c shows all the money in and out through a bank. If you have more than one bank account for your company you will have to maintain separate bank account ledger in order to complete bank reconciliation statements and be able to see how much is left in each account.
The Bank control a/c keeps the total for all bank accounts. The balance of each individual bank account, when added together, must equal the balance in the bank control a/c.
Bank account
| Bank A/c | |||||||
|---|---|---|---|---|---|---|---|
| Date | Details | Reference | Amount | Date | Details | Reference | Amount |
| 1 July 2006 | Balance b/f | 0 | 17 July 2006 | Bank Payments Daybook | BP701 | 1000 | |
| 20 July 2006 | Bank Receipts Daybook | BR1 | 2500 | 19 July 2006 | Bank Payments Daybook | BP702 | 900 |
| 28 July 2006 | Bank Payments Daybook | BP703 | 400 | ||||
| 31 July 2006 | Balance c/f | 200 | |||||
| 2500 | 2500 | ||||||
| 1 August 2006 | Balance b/f | 200 | |||||
Unadjusted trial balance
| Trial balance as at 31 July 2006 | |||||||
|---|---|---|---|---|---|---|---|
| A/c description | Debit | Credit | |||||
| Sales-parts | 2500 | ||||||
| Sales-service | 3200 | ||||||
| Widgets | 1600 | ||||||
| Electricity | 1000 | ||||||
| Other | 400 | ||||||
| Bank Control A/c | 200 | ||||||
| Trade Debtors Control A/c | 3200 | ||||||
| Trade Creditors Control A/c | 700 | ||||||
| 6400 | 6400 | ||||||
| Both sides must have the same overall total | |||||||
| Debits = Credits. | |||||||
The individual supplier accounts are not to be listed in the trial balance, as the Trade creditors control a/c is the summary of each individual supplier a/c.
The individual bank accounts are not to be listed in the trial balance, as the Bank control account is the summary of each individual bank a/c. see note 2 below
The profit & loss control account is not to be listed in the trial balance, as the profit & loss control account is a summary of the trial balance.
Important notes:
1. This example is designed to show double entry. There are methods of creating a trial balance that significantly reduce the time it takes to record entries in the general ledger and trial balance.
2. In practice it is the norm to list each bank account in the trial balance. This allows you to distinguish between bank accounts which are overdrawn or not and which bank accounts are loans or savings accounts.
Classification Of Accounts
A. According to Modern approach, Accounts are classified into five groups:
B. According to Traditional approach, Accounts are classified into three groups:
- Real: all the assets except Debtors
- Nominal: all the expenses, incomes, losses and gains.
- Personal: all the accounts of persons, company or firms. These are further classified into three types
- Natural: all the accounts of persons e.g. Debtors and Creditors
- Artificial: all the accounts of a company, a firm, or any other business organization e.g. Bank, Sharma Traders etc.
- Representative: all the expense O/S or prepaid, revenue in advance or accrued.
Journal
Journal is the book where we record the transaction's entry for first time.
for e.g.
a)business started with cash. Cash A/C ...Dr To Capital A/C
Adjusted trial balance
| Trial balance as at 31 July 2006 | |||||||
|---|---|---|---|---|---|---|---|
| A/c description | Debit | Credit | |||||
Profit-and-loss statement and balance sheet
=Classic format (debits and credits)
=| for the month ending 31 July 2006 | |||||||
|---|---|---|---|---|---|---|---|
| Dr | Cr | ||||||
| x | Cost of Sales | Sales | |||||
| x | Widgets | 1600 | Sales-parts | 2500 | |||
| x | Sales-service | 3200 | |||||
| x | 1600 | ||||||
| x | Gross Profit | 4100 | 5700 | ||||
| x | Less expenses | ||||||
| x | Electricity | 1000 | |||||
| x | Other | 400 | |||||
| x | |||||||
| x | 1400 | ||||||
| x | Net Profit | 2700 | |||||
| x | |||||||
| x | 5700 | 5700 | |||||
| x | |||||||
| as at 31 July 2006 | |||||||
|---|---|---|---|---|---|---|---|
| Dr | Cr | ||||||
| x | Current Assets | Current Liabilities | |||||
| x | Bank A/c | 200 | Trade Creditors | 700 | |||
| x | Trade Debtors | 3200 | Capital & Reserves | ||||
| x | Revenue Reserves a/c | 2700 | |||||
| x | |||||||
| x | 3400 | 3400 | |||||
| x | |||||||
=Modern format (list method)
=| for the month ending 31 July 2006 | ||
|---|---|---|
| Dr | ||
| x | Sales | |
| x | Sales-parts | 2500 |
| x | Sales-service | 3200 |
| x | ||
| x | 5700 | |
| x | Widgets | 1600 |
| x | ||
| x | Gross Profit | 4100 |
| x | Less expenses | |
| x | Electricity | 1000 |
| x | Other | 400 |
| x | ||
| x | 1400 | |
| x | ||
| x | Net Profit | 2700 |
| x | ||
| as at 31 July 2006 | |||
|---|---|---|---|
| Dr | |||
| x | Current Assets | ||
| x | Bank A/c | 200 | |
| x | Trade Debtors | 3200 | |
| x | |||
| x | 3400 | ||
| x | Current Liabilities | ||
| x | Trade Creditors | 700 | |
| x | |||
| x | 700 | ||
| x | |||
| x | Net Current Assets | 2700 | |
| x | |||
| x | Capital & Reserves | ||
| x | Revenue Reserves a/c | 2700 | |
| x | |||
| x | 2700 | ||
| x | |||
Example 2
Transactions
XYZ Company is closing its books for the end of the month. Each of the daily journals has been summarized and the amounts are ready to be transferred to the general ledger. The amounts to be transferred are:- Purchase raw materials by using line of credit: $500,000
- Pay workers from cash in bank to make goods: $1,500,000
- Pay sales force from cash in bank to sell goods: $1,000,000
- Sell goods for cash: $3,500,000
These items are entered in the ledger below; each matching credit and debit have been numbered to make finding them in the ledger easier.
Ledgers
| Transaction | Debit | Credit | Balance |
|---|---|---|---|
| Expenses | |||
| Balance forward | -0- | ||
| 1 Raw materials | $ 500 | $ 500 | |
| 2 Labor | $ 1500 | $ 2000 | |
| 3 Sales costs | $ 1000 | $ 3000 | |
| 5 Income summary | ($ 3000) | -0- | |
| Total | $ 3000 | $ 3000 | |
| Revenue | |||
| Balance forward | -0- | ||
| 4 Revenue from sales | $ 3500 | $ 3500 | |
| 6 Income summary | ($ 3500) | -0- | |
| Total | $ 3500 | $ 3500 | |
| Cash | |||
| Balance forward | $11000 | ||
| 2 Labor | $ 1500 | $ 9500 | |
| 3 Sales costs | $ 1000 | $ 8500 | |
| 4 Revenue from sales | $ 3500 | $12000 | |
| Total | $ 3500 | $ 2500 | |
| Accounts Payable | |||
| Balance forward | $ 1000 | ||
| 1 Raw materials | $ 500 | $ 1500 | |
| Total | -0- | $ 500 | |
| Income summary | |||
| Balance forward | -0- | ||
| 5 Expense | $ 3000 | −$ 3000 | |
| 6 Revenue | $ 3500 | $ 500 | |
| 7 Retained earnings | $ 500 | -0- | |
| Total | $ 3500 | $ 3500 | |
| Retained earnings | |||
| Balance forward | $10000 | ||
| 7 Income summary | $ 500 | $10500 | |
| Total | -0- | $ 500 | |
| Total all accounts: | $13500 | $13500 | |
The amount in equity (in the form of retained earnings) has changed with a net credit of $500,000. Since equity has a normal balance of credit, this means there is now $500,000 more in equity than at the beginning of the month.
Abbreviations used in bookkeeping
A/c or a/c - accountc/d - carried down
b/d - brought down
c/f - carried forward
b/f - brought forward
Dr - debit
Cr - credit
P&L - Profit & Loss
See also
External links
- eXtensible Business Reporting Language
- Institute of Certified Bookkeepers
- Irish Bookkeepers Association
- A double entry GnuCash How-to
- GnuCash data entry concepts
- Bean Counter's bookkeeping tutorial
- Free Bookkeeping Course
- Bookkeeping Terms
- Computer database modeling
- A Concise Explanation of the Accounting Equation
Accountancy (profession) or accounting (methodology) is the measurement, statement or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies,
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Anthem
Il Canto degli Italiani
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Il Canto degli Italiani
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mathematician is a person whose primary area of study and research is the field of mathematics.
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Problems in mathematics
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Fra Luca Bartolomeo de Pacioli (sometimes Paciolo) (1445–1514 or 1517) was an Italian mathematician and Franciscan friar, collaborator with Leonardo da Vinci, and seminal contributor to the field now known as accounting.
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14th century - 15th century - 16th century
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The general ledger, sometimes known as the nominal ledger as named originally by Phil Smith, is the main accounting record of a business which uses double-entry bookkeeping.
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Giovanni di Bicci de' Medici (1360 – February 20 or February 28, 1429) was the founder of the famous and powerful Medici dynasty of Florence and the Medici bank; father of Cosimo de' Medici (Pater Patriae
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The Medici Bank (1397 – 1494) was the largest and most respected bank in Europe during the 15th century.[1] There are some estimates that the Medici family was for a period of time the wealthiest family in Europe.
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Often considered the inventor of double-entry bookkeeping, Amatino Manucci was a partner in Giovanni Farolfi & Company, a merchant partnership in 14th century Florence. The financial records that he kept for the firm are the oldest extant examples of the double-entry system.
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Country Italy
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Region Tuscany
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Country Italy
Region Veneto
Province Venice (VE)
Mayor Massimo Cacciari (since April 18 2005)
Area km
Population
- Total (as of January 1 2004)
- Density /km
Time zone
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Region Veneto
Province Venice (VE)
Mayor Massimo Cacciari (since April 18 2005)
Area km
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Fra Luca Bartolomeo de Pacioli (sometimes Paciolo) (1445–1514 or 1517) was an Italian mathematician and Franciscan friar, collaborator with Leonardo da Vinci, and seminal contributor to the field now known as accounting.
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Leonardo da Vinci
Self-portrait in red chalk, circa 1512 to 1515. [a]
Birth name Leonardo di Ser Piero
March 15 1452
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Self-portrait in red chalk, circa 1512 to 1515. [a]
Birth name Leonardo di Ser Piero
March 15 1452
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An invoice or bill is a commercial document issued by a seller to a buyer, indicating the products, quantities and agreed prices for products or services with which the seller has already provided the buyer.
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A receipt is a written acknowledgement that a specified article or sum of money has been received as an exchange. The receipt acts as the title to the property obtained in the exchange.
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A bank account is a monetary account with a banking institution recording the balance of money for a customer.
Bank accounts may have a positive or credit balance where the bank holds money on behalf of the customer; or a negative or debit
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Bank accounts may have a positive or credit balance where the bank holds money on behalf of the customer; or a negative or debit
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Single-entry accounting system is a one sided accounting entry to maintain financial information.
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Overview
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A ledger (from the English dialect forms liggen or leggen, to lie or lay; in sense adapted from the Dutch substantive logger), is the principal book for recording transactions.
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A ledger (from the English dialect forms liggen or leggen, to lie or lay; in sense adapted from the Dutch substantive logger), is the principal book for recording transactions.
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Financial statements (or financial reports) are formal records of a business' financial activities. These statements provide an overview of a business' profitability and financial condition in both short and long term.
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An Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement for companies that indicates how Revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed
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In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a financial year.
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In financial accounting, a cash flow statement or statement of cash flows is a financial statement that shows a company's incoming and outgoing money (sources and uses of cash) during a time period (often monthly or quarterly).
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The statement of retained earnings also known as "statement of owner's equity" and "statement of net assets" for non-profit organizations, is one of the basic financial statements as per Generally Accepted Accounting Principles, and it explains the changes in company's retained
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Debit and credit are formal bookkeeping and accounting terms that have opposite meanings and come from Latin. Debit comes from , which means "to owe". The Latin means "debt". Credit comes from the Latin word , which means "to believe".
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Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders.
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Algebra is a branch of mathematics concerning the study of structure, relation and quantity. The name is derived from the treatise written by the Arabic[1] mathematician, astronomer, astrologer and geographer,
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Debit and credit are formal bookkeeping and accounting terms that have opposite meanings and come from Latin. Debit comes from , which means "to owe". The Latin means "debt". Credit comes from the Latin word , which means "to believe".
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The basic accounting equation is the foundation for the double-entry bookkeeping system. It shows how assets were financed: either by borrowing money from someone else (liability) or by paying your own money (shareholder's equity).
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