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

Objective: Prepare Ledger Accounts

The double-entry system is the fundamental basis of modern accounting. It ensures that every financial transaction affects at least two accounts. This system provides a more accurate and reliable record of a business's financial position than single-entry bookkeeping.

Understanding the Double-Entry System

The core principle of double-entry bookkeeping is that for every transaction, there are two entries: a debit and a credit. The total debits must always equal the total credits.

The basic equation underlying the double-entry system is:

$$Assets = Liabilities + Equity$$

This equation must always remain in balance.

Debits and Credits

Debits and credits are not simply 'good' or 'bad'. Their effect depends on the type of account.

• Assets: Debits increase assets, credits decrease assets.
• Liabilities: Debits decrease liabilities, credits increase liabilities.
• Equity: Debits decrease equity, credits increase equity.
• Revenue: Debits increase revenue, credits decrease revenue.
• Expenses: Debits increase expenses, credits decrease expenses.

Ledger Accounts

A ledger account is a record of all the debits and credits relating to a specific account. It provides a detailed summary of the account's activity over a period.

A ledger account typically includes:

• The account name
• The opening balance
• A column for the ledger entries (date, description, foliation, debit, credit, and balance)

Preparing Ledger Accounts

To prepare a ledger account, you need the following information:

• The account name
• The opening balance of the account
• A list of all the transactions affecting the account, including the date, a brief description, the foliation (the page number in the general ledger), the debit amount, and the credit amount.

The steps to prepare a ledger account are:

1. Draw the ledger account with the account name and columns for date, description, foliation, debit, credit, and balance.
2. Enter the opening balance in the account.
3. For each transaction, record the date, a brief description, the foliation, the debit amount in the debit column, and the credit amount in the credit column.
4. Calculate the balance after each transaction. The balance is calculated as: Opening Balance + Debits – Credits.

Example: Preparing a Ledger Account for Cash

Let's consider a simple example of preparing a ledger account for the 'Cash' account.

Date	Description	Foliation	Debit (£)	Credit (£)	Balance (£)
2023-01-01	Opening Balance	1000			1000
2023-01-10	Received from customer	101	500		1500
2023-01-15	Payment for supplies	202		300	1200
2023-01-20	Payment to supplier	303		200	1000
2023-01-25	Received from customer	101	200		1200

Explanation:

• 2023-01-01: The account is opened with an opening balance of £1000 (debit).
• 2023-01-10: Cash is increased by £500 (debit) because a customer paid the business.
• 2023-01-15: Cash is decreased by £300 (credit) because the business paid for supplies.
• 2023-01-20: Cash is decreased by £200 (credit) because the business paid a supplier.
• 2023-01-25: Cash is increased by £200 (debit) because a customer paid the business.

The final balance of the Cash account is £1200.

Importance of Ledger Accounts

Ledger accounts are essential for:

• Preparing financial statements (e.g., Income Statement, Balance Sheet).
• Providing a detailed history of transactions for each account.
• Identifying errors and discrepancies in the accounting records.
• Assessing the financial performance and position of the business.