Double Entry Book Keeping

Day to day transactions are recorded using Ledger Accounts.  Certain rules are followed in this process.

The Main Rule for every Transaction is that there will be two effects.
  1. One account will be Debited (left-hand side of Ledger Account)
  2. Other account will be Credited (right-hand side of Ledger Account)

Rules of Double Entry

Assets
  1. Increase of Asset (Debit)
  2. Decrease of Asset (Credit)
Liabilities
  1. Increase of Liability (Credit)
  2. Decrease of Liability (Debit)
Capital
  1. Increase of Capital (Credit)
  2. Decrease of Capital (Debit)

Example:

Transactions
  • 1st January: Owner started business by investing £16,000 Cash
    1. Increase Asset - Debit Cash at Hand
    2. Increase Capital - Credit Capital
  • 5th January: Transferred £15,000 Cash into a Bank account
    1. Increase Asset - Debit Cash at Bank
    2. Decrease Asset - Credit Cash at Hand
  • 10th January: Bought a Motor Vehicle for £5,000 paying by Cheque
    1. Increase Asset - Debit Motor Vehicle
    2. Decrease Asset -  Credit Cash at Bank
  • 12th January: Bought Equipment for £1,500 on Credit from K.M. Traders
    1. Increase Asset - Debit Equipment
    2. Increase Liability -  Credit K.M. Traders
  • 20th January: Borrowed £500 Cash from Alan
    1. Increase Asset - Debit Cash at Hand
    2. Increase Liability - Credit Alan



Example: Balance Sheet after Above Transactions