2.1 The Double Entry System of Book-keeping

The double-entry system is the fundamental principle of accounting. It requires that every financial transaction affects at least two accounts. This ensures the accounting equation (Assets = Liabilities + Equity) always remains in balance.

Key Concepts

• Debits and Credits: Transactions are recorded with both a debit and a credit entry.
• T-Account: A visual representation of an account, showing the debit and credit sides.
• The Accounting Equation: The core principle underpinning the double-entry system.

Debits and Credits: The Basics

Understanding debits and credits is crucial. They don't inherently mean 'good' or 'bad'. Their effect depends on the type of account.

Account Type	Debit	Credit
Assets	Increase	Decrease
Liabilities	Decrease	Increase
Equity	Decrease	Increase
Revenue	Decrease	Increase
Expenses	Increase	Decrease
Drawings	Increase	Decrease

Important Note: For every transaction, the total debits must equal the total credits. This is the foundation of the double-entry system.

The T-Account

A T-account is a simple way to visualize how debits and credits affect an account.

Example: Consider the 'Cash' account.

If cash is received (an increase), a debit is recorded on the left side of the T-account. If cash is paid out (a decrease), a credit is recorded on the right side.

Posting Transactions to the Ledger

The ledger is a collection of all the T-accounts for a business. When a transaction occurs, it is recorded in the journal first, and then 'posted' to the relevant ledger accounts.

Journal Entry: The initial record of a transaction, showing the date, accounts affected, and the debit and credit amounts.

Posting: Transferring the information from the journal to the appropriate T-accounts in the ledger.

Example Transaction: A business receives £500 cash from a customer for services provided.

1. Journal Entry:

   Date	Account	Debit (£)	Credit (£)
   [Date]	Cash	500
   [Date]	Revenue		500

2. Posting to the Ledger: The £500 debit is posted to the 'Cash' account in the ledger, and the £500 credit is posted to the 'Revenue' account.

The Accounting Equation in Action:

The transaction above increases both assets (cash) and equity (revenue). The accounting equation remains balanced because the increase in assets is matched by an increase in equity.

Practice: Consider a transaction where a business purchases office supplies for £200 in cash.

What accounts are affected? What is the debit and credit entry?