5: LEDGER ACCOUNTS AND DOUBLE ENTRY

1 Introduction
1.1 This chapter is designed to enable you to explain the principles of double entry and apply
these principles to the preparation of accounting records within the nominal/general ledger.

1.2 In Chapter 4 we saw how transactions were categorised in books of prime entry, the next
step is to summarise the information in a format nearer to that of the final financial
statements.

The nominal ledger

1.3 (a) Each item in the statement of financial position or statement of profit or loss will have
an "account" (which might be a page in a book or a record on a computer).
(b) All the accounts are collected together in the nominal ledger.
(c) The books of prime entry are totalled up and two entries will be made in these
accounts with each of these totals – this is called double entry.

The dual effect

1.4 The method used stems from the fact that every transaction affects two things, for example:
(a) A sole trader pays $6,000 in the business bank account:
Cash increases by $6,000
Capital increases by $6,000
(b) A sole trader purchases on credit some goods for sale for $400:
Purchases increase by $400
Trade payables increase by $400
(c) A sole trader sells some of those goods for cash of $150:
Cash increases by $150
Sales increase by $150
(d) A sole trader pays his rent with cash for $100:
Rent expenses increase by $100
Cash decreases by $100

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2 Ledger accounts (T-accounts)

2.1 Debit CAPITAL Credit
$ $

Decrease Capital Increase Capital

We make two entries from each total extracted from the books of prime entry, and call one a
Debit (Dr), and the other one a Credit (Cr).

TOTAL DEBITS = TOTAL CREDITS

Principles of double entry bookkeeping

2.2 The cash account is a good starting point:
Dr CASH Cr
$ $

CASH IN = DEBIT CASH OUT = CREDIT

General rules
2.3 (a) DEBIT entry represents:
(i) an increase in an asset;
(ii) a decrease in a liability;
(iii) an item of expense.
(b) CREDIT entry represents:
(i) an increase in a liability;
(ii) a decrease in an asset;
(iii) an item of income.
This can be remembered as follows

Debits Credits
(increase) (increase)

Expenses Liabilities

Assets Income

Drawings Capital

(and credits will decrease these) (and debits will decrease these)

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Lecture example 1 Preparation question

Required
What is the double entry for each of the following?
Explain each entry in terms of the general rules above.

Solution

Transaction Debit Credit

(a) Sales for cash.

(b) Sales on credit.

(c) Purchase for cash.

(d) Purchase on credit.

(e) Pay electricity bill.

(f) Receive cash from a credit customer.

(g) Pay cash to a credit supplier.

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Transaction Debit Credit

(h) Borrow money from the bank.

Lecture example 2 Technique demonstration

Douglas
Douglas had the following transactions during January:
(1) Introduced $5,000 cash as capital;
(2) Purchased goods on credit from Richard, worth $2,000;
(3) Paid rent for one month, $500;
(4) Paid electricity for one month, $200;
(5) Purchased car for cash, $1,000;
(6) Sold half of the goods on credit to Tish for $1,750;
(7) Drew $300 for his own expenses;
(8) Sold goods for cash, $2,100.
Required
Post transactions (1) to (8) to the relevant ledger accounts.

Solution
Cash
$ $

Capital
$ $

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Trade payables
$ $

Purchases
$ $

Rent
$ $

Electricity
$ $

Car
$ $

Drawings
$ $

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Trade receivables
$ $

Sales
$ $

3 Flow of information
3.1 In Lecture example 2 the original transactions were posted to the ledger accounts. A
business would firstly categorise this information in the books of prime entry. The totals
from the books of prime entry are then posted to the nominal ledger using double entry.
3.2

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4 Balancing off the ledger accounts

4.1 The totals from the books of prime entry may be posted to the nominal ledger each month. A
business will want to know the balance on each account. This is done by 'balancing off' each
account.

Lecture example 3 Technique demonstration

The following information has been posted to the cash account below.
Required
Balance off the cash account to determine the amount of cash held at the end of January.

Solution
Dr Cash Cr
$ $
2/1 Sales 500 1/1 Purchases 300
10/1 Sales 500 25/1 Telephone 50

Steps
4.2 (1) Add the debit and credit sides separately.
(2) Fill in the higher of the two totals on both sides.
(3) Literally 'balance' the account (what number do we need and on which side to make
the two sides equal?) – balance c/d
(4) Complete the 'double entry' – balance b/d on opposite side.

Lecture example 4 Technique demonstration

Douglas
Refer to Lecture example 2.
Required
Balance off the ledger accounts for Douglas

Solution
Complete in the solution space for Lecture example 2.

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