📚 The Double Entry System of Book-keeping 📚
👋 Welcome to the Core of Accounting!
Hello! This chapter is the absolute foundation of everything you will do in IGCSE Accounting. Don't worry if the terms sound complicated right now—the double entry system is actually a simple, logical structure designed to keep records accurate.
Think of it like learning to walk before you can run. Master double entry, and the rest of the course (like preparing financial statements) will become much easier!
What you will learn:
- What the principle of duality is.
- How to use T-accounts (ledger accounts).
- The golden rules for Debits and Credits.
- How to post transactions correctly.
- How to balance off ledger accounts.
1. The Principle of Duality: Two Sides to Every Story
What is the Double Entry System?
The double entry system is a fundamental rule stating that every single business transaction affects at least two accounts.
It ensures that the entire accounting system remains balanced. If you put money into one place, it must have come out of another.
The Golden Rule: For every transaction, the total value debited must equal the total value credited.
Analogy Time: The Accounting Seesaw
Imagine a seesaw. One side is the Debit side, and the other is the Credit side. When a transaction happens, you must put an equal weight (value) on both sides to keep the seesaw perfectly level. If you only put $100 on one side, the system falls over (and your Trial Balance won't balance!).
Key Takeaway: Accounting works on duality. Every transaction requires one Debit (Dr) entry and one Credit (Cr) entry of equal value.
2. Ledger Accounts: The Building Blocks
A Ledger is simply a collection of all the individual accounts (like Cash, Sales, Rent Expense, Capital) used by the business.
The T-Account Format
In Accounting, we use a simple format called the T-Account to represent any ledger account.
| Debit (Dr) Side | Credit (Cr) Side |
- Debit (Dr): Always the left-hand side (LHS).
- Credit (Cr): Always the right-hand side (RHS).
Did you know? The terms 'Debit' and 'Credit' come from the Latin words debere (to owe) and credere (to trust). Don't try to attach everyday meaning to them; in accounting, they are just directions (Left and Right).
3. The Golden Rules of Debit and Credit
This is the most critical part! To correctly apply double entry, you must know whether to Debit or Credit a specific type of account when it increases or decreases.
🚨 Memory Aid: DEAD CLIC 🚨
Use this easy mnemonic to remember which accounts increase with a Debit and which increase with a Credit.
D E A D (Increase with a Debit)
- Drawings
- Expenses
- Assets
- Debtors (Trade Receivables)
C L I C (Increase with a Credit)
- Creditors (Trade Payables)
- Liabilities
- Income (Revenue)
- Capital (Owner's Equity)
If an account increases, you apply the rule above. If the account decreases, you do the opposite!
Quick Summary Table of Effects
| Account Type | When it Increases | When it Decreases |
|---|---|---|
| Assets (e.g., Cash, Equipment) | DEBIT (Dr) | CREDIT (Cr) |
| Expenses (e.g., Rent, Wages) | DEBIT (Dr) | CREDIT (Cr) |
| Liabilities (e.g., Loan, Payables) | CREDIT (Cr) | DEBIT (Dr) |
| Income/Revenue (e.g., Sales) | CREDIT (Cr) | DEBIT (Dr) |
| Capital/Owner's Equity | CREDIT (Cr) | DEBIT (Dr) |
Key Takeaway: Memorise DEAD CLIC. Knowing these rules is the difference between passing and failing accounting questions.
4. Processing Transactions (Posting)
Posting means entering the transaction details into the appropriate ledger accounts.
Step-by-Step Guide to Double Entry
When you receive a business document (like a receipt or invoice—covered in the next section), you must process the transaction:
Example: The business buys new office equipment for $500 cash.
-
Identify the two accounts affected:
- Account 1: Equipment (This is an Asset).
- Account 2: Cash (This is also an Asset).
-
Determine what happened to each account:
- Equipment increased (We now have more equipment).
- Cash decreased (We paid money out).
-
Apply the DEAD CLIC rules:
- Asset (Equipment) increased ➜ DEBIT the Equipment account.
- Asset (Cash) decreased ➜ CREDIT the Cash account.
-
Post the entry:
- In the Equipment A/C (Dr side), write $500, referencing the Cash account.
- In the Cash A/C (Cr side), write $500, referencing the Equipment account.
Resulting Ledger Accounts (Interpretation)
| Date | Details | Amount ($) | Date | Details | Amount ($) |
| Cash | 500 |
| Date | Details | Amount ($) | Date | Details | Amount ($) |
| Equipment | 500 |
Interpretation: The Equipment account shows that $500 was received (an increase), while the Cash account shows that $500 was paid out (a decrease).
Common Mistake to Avoid: Don't debit "Cash" and credit "Equipment" in the example above! That would mean you sold equipment for cash, the opposite of what happened.
5. Balancing Ledger Accounts
At the end of an accounting period (e.g., a month or year), we need to find out the final position of each account. This is called balancing off the account.
Step-by-Step: Balancing Off
Let's assume the Cash Account started with $1,000 (Debit) and then had the $500 payment (Credit) we discussed earlier.
| Debit (Receipts/Inflows) | Credit (Payments/Outflows) | ||||
| Date | Details | Amount ($) | Date | Details | Amount ($) |
| Start | Balance b/d | 1,000 | Equipment | 500 | |
| End | Balance c/d | 500 | |||
| TOTAL: 1,000 | TOTAL: 1,000 | ||||
| Next Start | Balance b/d | 500 | |||
The Process:
- Total the columns: The Debit column is $1,000. The Credit column is $500.
- Find the larger side: $1,000 is larger. Write this total on the bottom of both columns.
- Calculate the difference: $1,000 (Total Dr) - $500 (Total Cr) = $500.
- Insert Balance c/d: Write the difference ($500) on the smaller side (the Credit side) and label it Balance carried down (c/d). This brings the totals equal.
- Bring down the balance: On the first day of the next period, write the same difference ($500) on the opposite side (the Debit side) and label it Balance brought down (b/d).
The Balance b/d represents the amount remaining in that account and is the figure that will be taken to the Trial Balance to verify the accuracy of the records.
Key Takeaway: The Balance c/d forces the T-account to balance. The Balance b/d shows the true closing position for the next period. Assets and Expenses should usually have a Debit balance b/d.
6. Division of the Ledger
For efficiency, businesses divide their massive collection of ledger accounts (the Ledger) into three smaller, more manageable books.
The Three Ledgers
1. The Sales Ledger (or Debtors Ledger)
This ledger contains the individual accounts of all the business’s Trade Receivables (also known as Debtors).
- These are people who owe money to the business because they bought goods or services on credit.
- Example Account: J. Smith Account, A. Khan Account.
2. The Purchases Ledger (or Creditors Ledger)
This ledger contains the individual accounts of all the business’s Trade Payables (also known as Creditors).
- These are suppliers whom the business owes money to because they bought goods or services on credit.
- Example Account: Super Suppliers Account, Fast Freight Co. Account.
3. The Nominal Ledger (or General Ledger)
This is the main book containing all other accounts. If an account isn't about a specific Trade Receivable or Trade Payable, it goes here.
- Examples: Capital Account, Cash Account, Sales Account, Purchases Account, Rent Expense Account, Bank Loan Account.
- The accounts used to prepare the final financial statements are found primarily in the Nominal Ledger.
✅ Quick Review: Division of the Ledger
Sales Ledger: Who owes us?
Purchases Ledger: Who do we owe?
Nominal Ledger: Everything else (Expenses, Income, Capital, Assets, Liabilities).