Double entry accounting Debit Credit

Needs for accounts Many transactions occur in all businesses every day and it would be almost impossible to draw up a new balance sheet after every transaction. Therefore, a device called an account is needed (eg. Bank) to record the changes that occur. Account is abbreviated as a/c. An account is a record where all the changes to a particular item are shown. Every balance sheet item has an account. All these accounts are kept together in a ledger. A ledger is a book, set of loose cards or file of all the accounts. There are 2 common methods of presenting ledger accounts: T format Columnar format

Ledger Account- T format looks like this: Debit side Bank (A) Credit side Date Particular Amount ($) 2010 1 Jul Capital (O. Beer) 12 000 Debit side Capital O. Beer (P) Credit side Date Particular Amount ($) 2010 1 Jul Bank 12 000

Ledger Account- Columnar format looks like this: Bank Date Particular Debit ($) Credit ($) Balance ($) 2010 Jul 1 Jul 3 Capital Vehicle 12 000 8 600 3 400 Capital Date Particular Debit ($) Credit ($) Balance ($) 2010 Jul 1 Bank 12 000 Vehicles Date Particular Debit ($) Credit ($) Balance ($) 2010 Jul 3 Bank 8 600

Account rules- nature of accounts A basic rule of accounting is: Asset accounts have a debit nature. Debit is recorded on the left hand side of the T account. Increases to asset accounts are recorded on the debit side (left). Decreases to asset accounts are recorded on the opposite side, ie the credit side (right hand side) Debit is abbreviated as Dr. Credit is abbreviated as Cr. Therefore, increases to accounts are recorded on the same side as the nature of the account & decreases to accounts are recorded on the opposite side to the nature of the account

Consider these 2 ledger accounts : Transaction 1: On 1 July 2010, the owner Oliver Beer invested $12 000 to start the business. This means that 2 accounts are affected: Bank and Capital. This is known as double entry. Debit side Bank (A) Credit side Date Particular Amount ($) 2010 1 Jul Capital (O. Beer) 12 000 Notice that for every transaction, the total debit always equals the total credit. This is called ‘Double Entry’ accounting Capital O. Beer (P) Date Particular Amount ($) 2010 1 Jul Bank 12 000

Consider another transaction: On 3 July 2010, the business bought a vehicle for $8 600. This means that 2 accounts are affected: Bank and Vehicles. Vehicles (A) increases by $8 600 and Bank (A) decreases by $8 600, so we record bank on the credit side and vehicle on the debit side, following the basic accounting rules. Debit side Bank (A) Credit side Date Particular Amount ($) 2010 1 Jul Capital (O. Beer) 12 000 3 Jul Vehicle 8 600 There is no need to create another ‘Bank’ a/c, just add the transaction to the existing account. Debit side Vehicles (A) Credit side Date Particular Amount ($) 2010 1 Jul Bank 8 600 For each transaction, there has to be an affect on the debit side and the credit side for the balance sheet to balance

Account rules- nature of accounts A basic rule of accounting is: Liability accounts have a credit nature. Credit is recorded on the right hand side of the T account. Increases to liability accounts are recorded on the credit side (right). Decreases to liability accounts are recorded on the opposite side, ie the debit side (left hand side) Debit is abbreviated as Dr. Credit is abbreviated as Cr. Therefore, increases to accounts are recorded on the same side as the nature of the account & decreases to accounts are recorded on the opposite side to the nature of the account

Consider another transaction: On 5 July 2010, the business took out a mortgage to purchase premises from Lender Institution for $100 000. This means that 2 accounts are affected: Premises and Mortgage on Premises. Premises (A) increases by $100 000 and Mortgage on Premises (L) increases by $100 000 . Debit side Premises (A) Credit side Date Particular Amount ($) 2010 Jul 5 Mortgage on Premises 100 000 Debit side Mortgage on Premises (L) Credit side Date Particular Amount ($) 2010 Jul 5 Premises 100 000

Account rules- nature of accounts A basic rule of accounting is: Owner’s equity has a credit nature. Credit is recorded on the right hand side of the T account. Increases to proprietorship is recorded on the credit side (right). Decreases to proprietorship is recorded on the opposite side, ie the debit side (left hand side) Debit is abbreviated as Dr. Credit is abbreviated as Cr. Therefore, increases to accounts are recorded on the same side as the nature of the account & decreases to accounts are recorded on the opposite side to the nature of the account

Consider another transaction: On 8 July 2010, the owner withdrew $1 200 to pay for a holiday with his wife. This means that 2 accounts are affected: Bank and Drawings. Bank (A) decreases by $1 200 and Drawings (-P) increases by $1 200 so we record bank on the credit side and drawings on the debit side, following the basic accounting rules. Debit side Bank (A) Credit side Date Particular Amount ($) 2010 1 Jul Capital (O. Beer) 12 000 3 Jul 8 Jul Vehicle Drawings 8 600 1 200 Debit side Drawings (-P) Credit side Date Particular Amount ($) 2010 Jul 8 Bank 1 200

Analysing transactions Every transaction affects two or more accounts. To analyse transactions into their debit or credit elements, complete the following steps by determining: What ledger accounts are affected by the transactions. What type of account each of these is (A, L or P). The nature of account (Dr or Cr?). Whether the account is increasing or decreasing. Which side of the ledger account is affected. Remember: For every transaction, the total debit amounts must equal the total credit amounts. This is called ‘Double Entry’ Debit Credit

Using a table to analyse transactions Date Transactions Accounts A,L, O/E Nature Increase/decrease Dr/Cr Amount 2012 Jan 1 Owner introduced $45 000 cash into business Bank Capital A O/E Debit Credit Increase Dr Cr $45 000 3 Bought vehicle for $25 000 cash Vehicles Decrease $25 000 5 Bought furniture on credit from Woodform for $5 000 Furniture Creditors L $5 000 7 Borrowed $75 000 from ABC Bank to help start up the business Loan (ABC Bank $75 000 10 Paid Woodform $5 000 cash 12 Bought stock worth $ 6 500 from XY Suppliers Stock $6 500