IGCSE Accounting 0452 - 2.1 The Double Entry System of Book-keeping

This section explains the double-entry bookkeeping system and how to prepare ledger accounts. The double-entry system is the fundamental principle of accounting, ensuring that every financial transaction affects at least two accounts.

The Double-Entry System

The double-entry system works on the principle that every transaction has a corresponding debit and a corresponding credit. This ensures the accounting equation (Assets = Liabilities + Equity) always remains in balance.

Key Concepts:

• Debit (Dr): The left-hand side of an account. Increases the balance of Assets, Expenses, and Drawings. Decreases the balance of Liabilities, Equity, and Revenue.
• Credit (Cr): The right-hand side of an account. Increases the balance of Liabilities, Equity, and Revenue. Decreases the balance of Assets, Expenses, and Drawings.

The Accounting Equation: $Assets = Liabilities + Equity$

This equation must always remain balanced. Debits and Credits are used to maintain this balance.

Example Transaction: A business purchases equipment for $2,000 in cash.

• Asset (Equipment) increases: This is recorded as a Debit.
• Cash (an Asset) decreases: This is recorded as a Credit.

Ledger Accounts

A ledger account is a record of all the debits and credits affecting a specific account. It provides a summary of the account's balance.

Types of Accounts:

• Asset Accounts: e.g., Cash, Inventory, Fixtures & Fittings
• Liability Accounts: e.g., Loan from Bank, Accounts Payable
• Equity Accounts: e.g., Capital, Drawings
• Revenue Accounts: e.g., Sales Revenue, Service Revenue
• Expense Accounts: e.g., Rent Expense, Salaries Expense, Utilities Expense

Structure of a Ledger Account:

Account Name	Date	Particulars	Debit (£)	Credit (£)	Balance (£)

How to prepare a Ledger Account:

1. Title: The name of the account is written at the top.
2. Date: The date of the transaction is recorded.
3. Particulars: A brief description of the transaction is written.
4. Debit/Credit Column: The appropriate debit or credit amount is entered.
5. Balance: The running balance of the account is calculated after each transaction. The balance is calculated as: Beginning Balance + Debits - Credits (for debit balances) or Beginning Balance + Credits - Debits (for credit balances).

Example: Preparing a Ledger Account for Cash

Let's prepare a ledger account for the Cash account.

Date	Particulars	Debit (£)	Credit (£)	Balance (£)
2024-01-05	Opening Balance	1,000		1,000
2024-01-10	Sales Revenue	500	500	1,500
2024-01-15	Payment to Supplier		300	1,200
2024-01-20	Purchase of Office Supplies		100	1,100

Explanation of the Example:

• 2024-01-05: The Cash account starts with an opening balance of $1,000.
• 2024-01-10: Sales revenue of $500 is recorded as a credit, increasing the balance to $1,500.
• 2024-01-15: A payment of $300 to a supplier is recorded as a debit, decreasing the balance to $1,200.
• 2024-01-20: The purchase of office supplies for $100 is recorded as a debit, decreasing the balance to $1,100.

Practice

To solidify your understanding, practice preparing ledger accounts for various transactions. Focus on correctly identifying whether an account should be debited or credited.