Double Entry (Presentation)

Accounts and the accounting system

• Accounting is based on the recording of financial transactions such as sales or paying expenses
  
• Transactions are recorded in accounts in the accounting system of an organisation
  
• The accounts are normally grouped together in books known as ‘ledgers’
  
• Accounting records can be paper-based or computer-based or a combination of both

The purpose of accounts

• Accounts tell an organisation such as a business what has happened over a period of time, for example:
  - income earned
  - expenses incurred
  - items it has bought
  - money it has borrowed
• Accounts enable the owners and managers:
  - to check out what has happened in the recent past
  - to carry out financial planning for the future

Double-entry system

• This is a system by which transactions are recorded
  
• Double-entry involves two entries for each transaction – a debit entry and a credit entry
  
• The two entries are for the same amount but are made in separate accounts

Payment of insurance through the bank involves entries in two accounts – Insurance Account and Bank Account
Receipt of rent paid by a tenant involves entries in two accounts – Rent Received Account and Bank Account

The format of a double-entry account

• A double-entry account has two sides – a debit side and a credit side
  
• The debit side is on the left of the double-entry account and the credit side is on the right
  
• You can remember the sides by thinking “DRive on the left and CRash on the right!”
  
• The account is headed up with its name, for example Insurance Account, Bank Account

Note that the format of a double-entry account is similar to the letter ‘T’ and is often called a ‘T’ account

Debits and Credits in double-entry

The two equal entries in the accounts for every transaction involve a DEBIT entry and a CREDIT entry

• The DEBIT entry is always recorded on the left-hand side of one account
  
• The CREDIT entry is always recorded on the right-hand side of the other account

Using bank accounts

• An organisation such as a business will need to use a bank account set up at a bank
  
• Bank Account in the accounting system of a business is a separate record of the money paid into and out of the bank
  
• Bank Account in the accounting system of a business can be thought of as a ‘mirror image’ of the bank account held at the bank
  
• As a result of this, the terms ‘debit’ and ‘credit’ are often used differently by the bank and a business
  
• When using double-entry accounting you must keep to the rules set out on the next screen and ignore the way banks refer to ‘debits’ and ‘credits’

Bank Account – the rules for debits and credits

• Bank Account in a business records:
  - payments into the bank, sales for example
  - payments out of the bank, such as insurance and expenses
  
• Money paid into the bank is ALWAYS a DEBIT entry for the business
  
• Money paid out of the bank is ALWAYS a CREDIT entry for the business

The rule for Bank Account that ‘money in = debit’ and ‘money out = credit’ NEVER changes and must not be confused with the way banks talk about debits and credits

Sample transaction – paying the insurance through the bank

• Paying the insurance involves entries to two accounts: Bank Account and Insurance Account
  
• The question is – which account has the debit and which account has the credit?
  
• Insurance paid is MONEY OUT of the bank and is ALWAYS a CREDIT in Bank Account and is entered on the right-hand side
  
• It follows that the entry in Insurance Account must be a DEBIT and is entered on the left-hand side

How to write up the double-entry accounts

• So far the double-entry accounts have been shown as a simple ‘T’
  
• The ‘T’ shows the structure of the account, but you will need to know how to enter all the transaction details
  
• The details are entered in sets of columns which are headed up:
  - ‘date’ – the date of the transaction
  - ‘details’ – the name of the other account involved
  - ‘£’ – the amount of the transaction, shown as ‘£’

Paying the insurance – the entry in Bank account

• The details of the transaction are:
  
• 10 January, insurance of £300 paid through the bank
  
• This involves two accounts: Bank Account and Insurance Account
  
• Starting with Bank Account, insurance is money paid out, so it will be a credit entry:
  - date – this is 10 January, abbreviated to ‘10 Jan’
  - details – the other account involved is the Insurance Account
  - amount – this is £300

Paying the insurance – the entry in Insurance Account

• The details of the transaction are:
  
• 10 January, insurance of £300 paid through the bank
  
• A credit entry has been made in Bank Account and so a debit will need to be
• entered in Insurance Account to complete the double entry:
  - date – this is 10 January, abbreviated here to ‘10 Jan’
  - details – this is the other account involved ie Bank Account
  - amount – this is £300, the amount that was entered in Bank Account

Debits and Credits – which side of the account?

Another way of working out which side the debit or credit should go – is to use the acronyms DEAD and CLIC:

Debit
Expenses
Assets
Drawings

Credit
Liability
Income
Capital

• Make Debit (Dr) entries for increases in Expenses, Assets and Drawings;
  
• Make Credit (Cr) entries for increases in Liability, Income and Capital

The Accounting Equation

• Assets – Liability = Capital
  
• Assets – Liability = Capital + Profit
  
• Assets – Liability = Capital – Drawings + Income – Expenditure
  
• Assets + Expenditure + Drawings = Capital + Income + Liability
  
• Expenditure + Assets + Drawings = Liability + Income + Capital

To increase:
Expense + Assets + Drawings = Liability + Income + Capital

To decrease:
Expense + Assets + Drawings = Liability + Income + Capital

Summary

• Transactions are recorded in accounts in the accounting system
  
• The double-entry system requires two equal entries – a debit and a credit – for each transaction in two separate accounts
  
• Debit entries are recorded on the left-hand side of an account and credits on the right
  
• It is important to work out which account should have the debit and which account should have the credit
  
• Remember to use the acronyms DrEAD and CrLIC
  
• The Bank Account is easy to remember because debits (on the left) are always ‘money in’ and the credits (on the right) are always ‘money out’
  
• If a transaction involves the Bank Account, work out the bank entry first (debit or credit) and the other entry will always be on the opposite side