Week 10

lec 19, 20
 Nature of transaction
 The double entry system
 The accounts for double entry
Examples, problems and Exercise
 Nature of a transaction

In previous lectures, we saw how various events had changed

two items in the balance sheet. Events which result in such
changes are known as ‘transactions’.
This means that if the proprietor asks the price of some goods,
but does not buy them, then there is no transaction. If the
proprietor later asks the price of some other goods, and then
buys them, then there would be a transaction, and two balance
sheet items would then have to be altered.
 The double entry system

We have seen that every transaction affects two items.

This is the bookkeeping stage of accounting and the process we
use is called double entry. You will often hear it referred to as
double entry bookkeeping. Either term is correct.
 Why do you think it is called ‘double
entry’?
if we want to show the double effect of every transaction when
we are doing our bookkeeping, we have to show the effect of
each transaction on each of the two items it affects.
 For each transaction this means that a bookkeeping entry will
have to be made to show an increase or decrease of one item,
and another entry to show the increase or decrease of the other
item. From this description, you will probably see that the term
‘double entry bookkeeping’ is a good one, as each entry is
made twice (double entry)
 The accounts for double entry

Each account should be shown on a separate page in the

accounting books. The double entry system divides each page
into two halves. The left-hand side of each page is called the
debit side, while the right-hand side is called the credit side.
The title of each account is written across the top of the account
at the centre.
 example

for example, if you paid £10 by cheque for a kettle, you could
say ‘debit the kettle account with £10 and credit the bank
account with £10’. To actually make this entry, you enter £10
on the left-hand (i.e. debit) side of the kettle account and on the
right-hand (i.e. credit) side of the bank account.
 Asset, capital and liabilities

 to increase an asset we make a DEBIT entry

 to decrease an asset we make a CREDIT entry
 to increase a liability/capital account we make a CREDIT entry
 to decrease a liability/capital account we make a DEBIT entry.
 Placing these in a table

Accounts To record Entry in the

account
Assets An increase Debit
A decrease Credit
Liabilities An increase Credit
A decrease Debit

Capital An increase Credit

A decrease Debit
 Summary

Each transaction is entered twice. In an accounting transaction,

something always ‘gives’ and something ‘receives’ and both
aspects of the transaction must be recorded. In other words,
there is a double entry in the accounting books – each
transaction is entered twice.
 A balance sheet is a financial statement that summarizes the
financial position of an organization at a point in time. It does
not present enough information about the organization to make
it appropriate to enter each transaction directly on to the balance
sheet. It does not, for instance, tell who the debtors are and how
much each one of them owes the organization, nor who the
creditors are and the details of the amounts owing to each of
them.
We need to maintain a record of each individual transaction so
that (a) we know what occurred and (b) we can check to see
that it was correctly recorded