TOPIC 8: ACCOUNTS
Double Entry
The Meaning of Double Entry
Explain the meaning of double entry
Businesses need to keep records of their transactions. The process of keeping record is called bookkeeping. The simplest form of bookkeeping is single entry. Every transaction is recorded once. This is unreliable because:
- If an arithmetic mistake is made, it is very difficult to find and correct it
- If a transaction is omitted, it is difficult to find it
Now, a more reliable method of bookkeeping is double entry.
Different Types of Ledger
Explain different types of ledger
Businesses record their accounts in books called ledgers. A ledger is a main book that contains various accounts.
There are three main ledgers:
- The sales ledger
- The purchases ledger
- The general ledger
-The sales ledger: Is the ledger that records the accounts of debtors. The ledger is also known as the debtors’ ledger. A debtor is a person who owes money to the business, that is a person to whom the business sold goods on credit. So when the business has a new customer, it will open an account in the sales ledger for that customer.
-The purchases ledger: Is the ledger that records the accounts of creditors. This ledger is also known as the creditors’ ledger. A creditor is a person whom the business owes money, that is a person from whom the business bought goods on credit. When the business has a new supplier, it will open an account in the purchases ledger for that supplier.
-The general ledger: Is a ledger that records all accounts other than debtors’ and creditors’ accountants. Examples of accounts recorded all accounts other than debtors’ and creditors’ accounts are fixed assets and expense.
-Double entry: Is a bookkeeping system whereby every transaction is recorded twice in the ledger. It is recorded on the left as debit (DR), and on the right as credit (CR). Every transaction involves the giving and receiving of a benefit.
A Ledger
Construct a ledger
Suppose that a company takes 50,000/- from the bank to pay wages.
- The bank account gives the benefit, and so is credited 50,000/-
- The wages account receives the benefit, and so is debited 50,000/-
Suppose the company buys assets worth 100,000/- from ABC Limited.
- ABC Limited has given the benefit, and so is credited 100,000/-
- The fixed assets account has received the benefit, and so is debited 100,000/-
When transactions are written in a ledger, they are said to be posted to the ledger.
Posting Entries in the Ledger
Post entries in the ledger
Example 1
The transactions shown in the table below belong to XYZ Traders; Post them to the relevant ledgers.
Solution
In the first transaction, money is taken from the capital account and placed cash account. Hence the capital account is credited and he cash account is debited. In the’ Particular’ column, write the other account involved in the transaction.
In the second transaction, furniture is bought for cash. So the cash account is credited and the furniture account is debited.
Pwagu and Aloyce are customers, so they each have accounts in the sales ledger, John and Masatu are suppliers, so they each have accounts in the purchases ledger.
Other items are capital, cash, furniture, purchases, sales, rent, electricity and drawing. They all have accounts in the general ledger.
GENERAL LEDGER
Capital account
Cash account
Furniture account
Purchases account
Electricity account
PURCHASES LEDGER
Sales ledger
Note: Check that for each transaction there are two equal entries, one for debit and one for credit, for instance:
June 11: Received cash from Pwagu, 2,000
-Pwagu’s account is credited 2,000
-The cash account is debited 2,000
This is what is meant by double entry.
Closing the Simple Accounts
Close the simple accounts
Closing the accounts is the process of balancing the accounts. This involves determining the totals of the debits and credits, and finding the difference between the two sides. The difference is the balancing figure, which is placed in the side that is less. This makes the two sides equal.
Example 2
Consider the following account from Example 1. Close this account.
Cash account
Cash account:
The balance c/d shows the amount that stands on the account on the closing date. It appears as balance b/d (b/d means brought down) on the opening date of the next trading period, on the other side of the ledger.
Exercise 1
1. What is a ledger? Give an explanation of three ledgers you know, with an example of accounts kept in each ledger.
2. For each of the following transactions, name the ledger it would be posted to, and whether this would be as credit or debit.
- a lorry bought for cash
- goods sold to Mr. Sabaya for cash
Post the following transactions for MLN Traders in the ledger, closing them there
Trial Balance
Trading Profit and Loss
Balance Sheet
