Chapter 4 Double Entries Principles

 

THE DOUBLE-ENTRY RULES

 

· Since every transaction affects two items, a bookkeeping entry will have to be made to show an increase or decrease of one item, and another entry to show the increase or decrease of another item.

· As each transaction is being recorded twice, this is known as the double entry principle of bookkeeping.

· There is no limit on the number of accounts that may be used in a transaction, but the minimum is two accounts.

· The sum of all debits of the transaction must be equalled to the sum of credit of transactions

· Debit entries will not necessary means an increase in the value of an account, and the credit will not necessary means a decrease value of account.

·  The normal balance according to the type of accounts is shown in table below.

 

ACCOUNT TYPES	NORMAL BALANCE
	DEBIT	CREDIT
Assets	√
Expenses	√
Drawings	√
Liabilities		√
Owner’s equity		√
Revenue		√

· Based on the accounting equation Assets = Liabilities + Capital, the double entry rules for liabilities and capital are the same, but they are the opposite for assets.

·   The double entry principles for assets, liabilities and capital are as follows:

 

 

Account
DEBIT	CREDIT
To record increase in assets To record decrease in liabilities To record decrease in capital	To record decrease in assets To record increase in liabilities To record increase in capital

 

v  ASSETS

The double entry rule for assets:

Assets a/c
DEBIT	CREDIT
To record increase in assets	To record decrease in assets

 

Example

 

Jan 1              Bought computer worth RM2,500 by cheque

 

Journal Entries:

Dr  Computer a/c                               RM2,500

Cr  Bank a/c                                        RM2,500

 

 

Computer a/c
Jan 1 Bank	RM 2,500		RM

 

Bank a/c
	RM	Jan 1      Computer	RM 2,500

Explain the double entries principles for expenses and revenues

 

· Revenue are the sale value of goods and services that have been provided to customers, whereas expenses are the value of all assets that have been used to get those revenues.

·   The double entry rules for expenses is the same as assets, whereas the double entry rule for revenues is the same as capital and liabilities.

·    The double entry rules for expenses and revenues are as follows:

 

Account
DEBIT	CREDIT
To record increase in expenses To record decrease in revenue	To record decrease in expenses To record increase in revenue

 

v  EXPENSES

The double entry rule for expenses:

Liabilities a/c
DEBIT	CREDIT
To record increase in expenses	To record decrease in expenses

·         Trade Discount

o   A trade discount is a term used to address a reduction in the prices of inventories purchased or sold.

o   It is usually given by businesses to their customers to encourage bulk purchases of inventories.

o   Trade discount given to a customer result in businesses receiving less, whereas the trade discount received from suppliers result in the business paying less.

o   The amount of the discount does not appear anywhere in  the accounting books, and thus, may also not appear anywhere in the  financial statement.

 

·         Cash Discount

o   A cash discount is a term used to address a reduction in debts received from account receivable (customers) or paid to account payable (suppliers).

o   It is usually given by businesses to encourage customers to settle their debts earlier or within a specified period.

o   Discount terms are usually stated in the invoice.

o   There are two types of cash discounts:

a)  Discount received (revenue) – a discount received by the business from its suppliers. This will mean that the business pays less than the amount it owes to its suppliers.

b)     Discount allowed (expenses) – a discount given by the business to its customers. This will mean that the business receives less than the amount owed by its customers.

o   The amount of the discount will be recorded in every accounting entry, thus will also be recorded in the financial statements.