Double Entry System: Definition, Example etc.

Double Entry Accounting system also known as Dual Aspect Concept or, Duality Concept. The concept states that every transactions must have two accounts one is debit and another is credit. The Debit Accounts increases the assets and expenses and decreases the liabilities, income and capital account. The Credit Accounts decreases the assets and expenses and increases the liabilities, income and capital account.

Summary of Topic

  • In a double accounting system each transaction has two equal but opposite effects in the ledger of the company. Simply, it has dual effect, one is Debit and one is Credit
  • Every “Debit’ has a equal Credit entry
  • The debit entry increases the assets and expenses of the company, and decreases the the liabilities, capital and revenue
  • The Credit entry increases the liabilities, capital and revenue, and at the same time decreases the assets and expenses of the company
  • Cash receipt debited in the Cash Ledger Account
  • Cash Payment credited in the Cash Ledger Account
  • Credit Sales increases the receivable account (Asset A/c) as well as increases the the revenue A/c. The Accounting entry is:
Account Receivable Debit
Credit Sales AccountCredit
  • Credit Purchase increase the Payable A/c (increase liabilities) and increase the purchase a/c (increase the expenses). The accounting entry of credit purchase is :
Purchases A/cDebit
Accounts PayableCredit
  • Discount allowed to customer reduces the receivable account (credited receivables account along with payments received), and debited to a discount allowed ledger account. The accounting entry is:
Discount Allowed A/c (administrative expenses)Debit
Trade Receivables A/cCredit
  • Discounts received from suppliers are debited to payable along with payments made, and credited to a discount received ledger account.The accounting entry is:
Trade Payable A/cDebit
Discount Received (other income account)Credit

Definition

Double Entry Book-keeping system is the system where every transaction must have minimum two business accounts. One is Debit and One is Credit. The principle of double entry book keeping is that each transaction has two equal but opposite effects in the ledger of the company. Every transaction must be recorded in the ledger accounts both as debit and credit account.

Say for example, A company borrows $ 50,000 from HSBC Bank. The double entry will be as follows:

Cash AccountDebit$50,000Increased Assets (Cash increase)
HSBC A/c (Loan A/c)Credit$50,000Increased Liability

The Rules of Double Entry Bookkeeping

Sometimes, the accountants may struggle to identify the debit and credit accounts from the transactions. You may apply following techniques to identify the debit and credit accounts from the transactions:

A) An accounts will debit, when following situations exists:

  • When the assets is increased
  • When the expenses is increased
  • When the liability is decreased
  • When the capital is decreased
  • When the income is decreased

B) An accounts will credit, when following situations exists:

  • When the assets is decreased
  • When the expenses is decreased
  • When the liability is increased
  • When the capital is increased
  • When the income is increased

Double Entry for Cash Transactions

A company receives cash from its customers and pays cash to its suppliers, employees against salary, wages paid etc. Cash received and Cash payments are recorded in the cash books of the company. However, following situation will happen in case of cash received and cash payments:

  • When Cash Payment is made, the cash a/c will be credited i.e the cash payments reduces the cash balance. Here, Asset will be decreased (Cash decreased) by paying the cash and expenses / assets will be increased at the same time.
  • When the Cash is Received, the Cash A/c will be debited i.e. the cash receives increases the cash balance. Hence, the assets will be increased (Cash Received) and the Customer A/c, or Revenue A/c will be credited.

Double Entry for Credit Transactions

A business can purchase goods or non current on credit as well as cash. When the goods or materials are purchased on credit, a trade payable account was credited. In this respect , no entries can be made in the cash book when a credit transactions occurs because no cash has been received or paid.

The following accounting entries to be passed for credit transactions:

  • When goods purchased on credit:
Purchases AccountDebitExpenses Increased
Trade Payable AccountCreditLiabilities increased
  • When the Payment is made for the above purchase:
Trade Payable AccountDebitLiabilities Decreased
Cash A/CCreditAssets Decreased (Cash Decrease)

Double Entry for Discounts

Business allows discounts to its customers when goods are sold and discounts receives from the suppliers when the purchase is made. For discounts (Receives & Allows) following accounting entries to be made:

  • When discounts allowed to the customers:
Discounts Allowed DebitIncreased Expenses (Administrative Expenses)
Trade ReceivablesCreditDecreased Assets (Trade Receivable A/c)
  • When discounts received from the suppliers:
Trade Payable A/cDebitDecreased Liabilities
Discounts Received A/c CreditIncome Increased (Other Income)

Conclusion

Dual Aspect concept is the fundamental concept for the accountants. Every accountants have to clear understanding about dual aspect concept to maintain their daily books of balance. Errors in duality an accountant can not prepare his financial statement and Trial balance will show difference result in debit and credit side.