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Since there are several different types of errors that can occur which result
in equal sums for debits and credits, double-entry accounting is not a
guarantee that no errors exist. However, it is still useful.
Timeline
Significance
Accounts
Within these primary groups each distinctive asset, liability, income and
expense is represented by its respective "account". An account is simply
a record of financial inflows and outflows in relation to the respective
asset, liability, income or expense. Income and expense accounts are
considered temporary accounts, since they only represent the inflows
and outflows which are absorbed in the financial position elements on
completion of the time period.
Account types (nature)
Individuals, Partnership
Firms, Corporate entities, Non-Profit
Personal Business and Legal Entities Organizations, any local or statutory
bodies including governments at
country, state or local levels
Real
Assets
accounts
Personal
Assets Liability
accounts
Nominal
Incomes Expenses
accounts
Items in accounts are classified into five broad groups, also known as
the elements of the accounts:
[10]
Asset, Liability, Equity, Revenue, Expense.
As there are two entries for each transaction, hence the expression
Double-Entry is used. As the total of the debit entries equals the total of
the credit entries, when the nominal ledger accounts are listed in
columns, the left column for accounts with net Debit balances and the
right column for accounts with net Credit balances, then the total of all
the Debit balances will equal the total of all the Credit balances. If this
does not happen then an error has been made somewhere.
Double entry is only used within the nominal ledgers. It is not used in the
daybooks, which normally do not form part of the nominal ledger system.
The information from the daybooks themselves will be taken and used
within the nominal ledger and it is the nominal ledgers that will ensure
the integrity of the resulting financial information created from the
daybooks (provided that the information recorded in the daybooks is
correct).
(The reason for this is to limit the number of entries in the nominal
ledger: entries in the daybooks can be totalled before they are entered in
the nominal ledger. If there are only a relatively small number of
transactions it may be simpler instead to treat the daybooks as an
integral part of the nominal ledger and thus of the double entry system.)
The double entry system uses nominal ledger accounts. From these
nominal ledger accounts a Trial balance can be created. The trial balance
lists all the nominal ledger account balances. The list is split into two
columns, with debit balances placed in the left hand column and credit
balances placed in the right hand column. Another column will contain
the name of the nominal ledger account describing what each value is
for. The total of the debit column must equal the total of the credit
column.
From the Trial balance the Profit and Loss Statement and the Balance
Sheet can then be produced. The Profit and Loss statement will contain
nominal ledger accounts that are Income or Expense type nominal ledger
accounts. The Balance Sheet will contain nominal ledger accounts that
are Asset or Liability accounts.
Bookkeeping process
After a certain period, typically a month, the columns in each journal are
each totaled 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. For example the entries in
the Sales Journal are taken and a debit entry is made in each customer's
account (showing that the customer now owes us money) and a credit
entry might be made in the account for "Sale of Class 2 Widgets"
(showing that this activity has generated revenue for us). This 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.
As a partial 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 - 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, an error has been
made either in the journals or during the posting process. The error must
be located and rectified and the totals of debit column and credit column
recalculated to check for agreement before any further processing can
take place.
Finally financial statements are drawn from the trial balance, which may
include:
A/C - Account
A/R - Accounts Receivable
A/P - Accounts Payable
B/S - Balance Sheet
c/d - Carried down
b/d - Brought down
c/f - Carried forward
b/f - Brought forward
Dr - Debit
Cr - Credit
G/L - General Ledger; (or N/L - Nominal Ledger)
P&L - Profit & Loss; (or I/S - Income Statement)
PP&E - Property, Plant and Equipment
TB - Trial Balance
VAT - Value Added Tax
CST - Central Sale Tax
TDS - Tax Deducted at Source
MAT - Minimum Alternate Tax
EBIDTA - Earnings before Interest, Depreciation, Taxes and
Amortisation.
EBDTA - Earnings before Depreciation, Taxes and Amortisation.
EBT - Earnings before Taxes.
EAT - Earnings after Tax.
PAT - Profit after tax
PBT - Profit before tax
Dep - Depreciation
Ledger Cards
Referenc Widget
Date Supplier Name Amount Electricity
e s
10 July Electricity
PI1 1000 1000
2006 Company
12 July Widget
PI2 1600 1600
2006 Company
control
a/c a/c
a/c
Referenc
Date Supplier Name Amount Suppliers Wages
e
17 July Electricity
BP701 1000 1000
2006 Company
19 July Widget
BP702 900 900
2006 Company
28 July
Owner's Wages BP703 400 400
2006
control
Account Creditors
a/c
control a/c
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.
17 Bank
July Payment 10 July
BP701 1000 Invoice PI1 1000
200 s 2006
6 Daybook
31
July Balance
0
200 c/d
6
------- -------
1000 1000
==== ====
1
Balanc
Augus 0
e b/d
t 2006
19 Bank
July Payment 12 July
BP702 900 Invoice PI2 1600
200 s 2006
6 Daybook
31
July Balance
700
200 c/d
6
------- -------
1600 1600
==== ====
1
Balanc
Augus 700
e b/d
t 2006
Sales/customers
Sales daybook
Customer Referenc
Date Amount Parts Service
Name e
2 July
JJ Manufacturing SI1 2500 2500
2006
29 July
JJ Manufacturing SI2 3200 3200
2006
control
alabiebi a/c a/c
a/c
Sales 20 Bank
2 July
invoice SI1 2500 July receipts BR1 2500
2006
daybook 2006 daybook
Sales 31
29 July balance
invoice SI2 3200 July 3200
2006 c/d
daybook 2006
------- -------
5700 5700
==== ====
1 Balanc 3200
Augus e b/d
t
2006
Sales parts
31 Sales
2 July
July Balance c/d 2500 invoice SDB 2500
2006
2006 daybook
------- -------
2500 2500
==== ====
1
Augus
Balance b/d 2500
t
2006
Sales service
31 Sales
29 July
July Balance c/d 3200 invoice SDB 3200
2006
2006 daybook
------- -------
3200 3200
==== ====
1
Augus
Balance b/d 3200
t
2006
Electricity
10 31
Electricit
July PDB 1000 July Balance c/d 1000
y Co.
2006 2006
------- -------
1000 1000
==== ====
1
Augu
Balance b/d 1000
st
2006
Widgets
12 31
Widget
July Pdb 1600 July Balance c/d 1600
Co.
2006 2006
------- -------
1600 1600
==== ====
Other a/c
28 31
Owner's
July BPDB 400 July Balance c/d 400
Wages
2006 2006
------- -------
400 400
==== ====
1
Augu
Balance b/d 400
st
2006
31 July
Balance c/d 200
2006
------- -------
2500 2500
==== ====
1
Augu
Balance b/d 200
st
2006
Bank
1 July 31 July
Balance b/d 0 receipts BRDB 2500
2006 2006
daybook
31 Sales 31
July Invoice SDB 5700 July Balance c/d 3200
2006 Daybook 2006
------- -------
5700 5700
==== ====
1
Augu
Balance b/d 3200
st
2006
Bank
31
Payment 1 July
July BPDB 1900 Balance b/d 0
s 2006
2006
Daybook
31
31 July Purchase
July Balance c/d 700 PDB 2600
2006 Daybook
2006
------- -------
2600 2600
==== ====
1
Augus
Balance b/d 700
t
2006
The customers ledger cards shows the breakdown of how the trade
debtors control a/c is made up. The trade debtors control a/c is the
total of outstanding debtors and the customer ledger cards shows
the amount due for each individual customer. The total of each
individual customer account added together should equal the total in
the trade debtors control a/c.
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.
Bank account
Bank A/c
Referenc Amoun Referenc Amoun
Date Details Date Details
e t e t
Bank
17
1 July Balanc Payment
b/d 0 July BP701 1000
2006 e s
2006
Daybook
Bank Bank
19
20 July Receipts Payment
BR1 2500 July BP702 900
2006 Dayboo s
2006
k Daybook
Bank
28
Payment
July BP703 400
s
2006
Daybook
31
July
Balance c/d 200
200
6
------- -------
2500 2500
==== ====
1
Augu Balanc
b/d 200
st e
2006
Sales-parts 2500
Sales-service 3200
Widgets 1600
Electricity 1000
Other 400
Bank 200
------- -------
6400 6400
==== ====
= =
Debits = Credits.
x Sales
x Sales-parts 2500
x Sales-service 3200
x -------
x 5700
x Widgets 1600
x -------
x Less expenses
x Electricity 1000
x Other 400
x -------
x 1400
x -------
x ====
Balance sheet
as at 31 July 2006
Dr
x Current Assets
x -------
x 3400
x Current Liabilities
x -------
x 700
x -------
===
x
=
Revenue Reserves
x 2700
a/c
x -------
x 2700
===
x
=
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:
To close the books for the month, we will adjust expenses and
revenue to zero by appropriately crediting and debiting the income
summary and then closing the income summary toretained
earnings (part of equity).
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
Balanc
Transaction Debit Credit
e
Expenses
Balance forward -
Revenue
Balance forward -
4 Revenue from
$ 3500 $ 3500
sales
Cash
4 Revenue from
$ 3500 $12000
sales
Accounts Payable
Balance forward $ 1000
Total - $ 500
Income summary
Balance forward -
Retained earnings
Total - $ 500