Since every transaction affects two items, these effects need to be shown. Showing this dual effect is known as “double entry” or “double entry bookkeeping”. Both of these terms are used interrchangeably and both are correct.This means that for each transaction, a bookkeeping entry will have to be made to show increase or decrease of one item, and another entry to show the increase or decrease of the other item, hence the term 'double entry bookkeeping'. You may be wondering why you can’t just draw up a new balance sheet every time a transaction is made. There are several reasons for this, the most important being time. If you keep drawing a new balance sheet each time a transaction takes place it will cost you valuable time. Another good reason for making entries in accounting books is the fact that a balance alone will not convey sufficient information. It may, for instance tell you the total amounts owed by debtors, but not their break-up which is essential to follow up with debtor payments. It is also important to have bookkeeping records to trace back certain transactions from balance sheet to ascertain their details later on. An account will be opened and maintained for each for each item that is affected by a transaction. Thus, for a transaction that involves purchase of building for cash, the cash and building account will be affected. Each account should be shown on a separate page in the accounting books. The double entry system divides each page into two halves. The left half of each page is called the “debit” side and the right half is called the “credit” side. The title of each account is written across the top of the account. This is how a page of an accounting book looks like:
Did you notice the resemblance of the shape with a T? Not surprisingly, these are referred to as “T accounts”
To increase an asset we make a debit entry, to decrease an asset we make a CREDIT entry. To increase a liability/capital account we make a CREDIT entry, to decrease a liability/capital accounts we make a debit entry.
Example
Let’s try to attempt the example in chapter 1 again using T accounts this time.
Day 1 Joseph commences computer spare part business by the name Joseph Trading and introduces $10,000 cash.
Day 2 Buys stock (computer parts) for $200 paying by cash.
Day 3 Buys motor bike for $300, the money to be paid later.
Day 4 Sells all the goods bought on Day 2 for $200, money to be received later.
Day 5 Deposits $100 of the cash into a bank account opened in the name of the business.
Day 1: Joseph commences business introducing $10,000 cash
(Let’s assume the date on day 1 is 1st January)
The effects of this transaction are entered as follows:
The date of the transaction has to be entered with each transaction. Now there remains the description which is often referred to as narrative (or remarks in some cases). This is to be entered alongside the amount. This is completed by a cross-reference to the title of the other account. After completing the cross-reference, the T accounts will appear as follows:
Day 2: Buys stock (computer parts) for $200 cash.
The effects of this transaction are entered as follows:
Note how once you open an account (e.g. Cash), you continue to make entries in it rather than opening a new account each time you make an entry.
Day 3: Buys motor bike for $300, money to be paid later.
Let’s assume the motor bike was bought from Mr. Brown.
The effects of this transaction are entered as follows:
Note how a separate account is maintained for each creditor
Day 4: Sells all the goods bought on Day 2 for $200, money to be received later
Let’s assume the goods were sold to Mr. John
The effects of this transaction are entered as follows:
Note how a separate account is maintained for each debtor
Day 5: Withdraws $200 of the cash from the cash box and deposits it into a bank account opened in the name of the business.
The effects of this transaction are entered as follows:
Note that each column of figure is headed by a “$” sign. Always remember to indicate what the figures represent. In this, case, it is $. In cases where all the figures are in thousands of dollars, they may be represented by '$000'.