Double Entry Accounting System

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A double entry system of accounting has both the debit and credit sides of entries. The device of accounting works on two regulations and the policies suggest that for all the operations of a business, there is creation of the T side of the account and at the identical growing the debits on the other T aspect of the accounting system. In this case, the cash stability is reduced for the things bought via the quantity for buying the new items. Conversely, the vendor will increase the cash stability with the aid of the quantity obtained from the income and at the same time, the amount of the gadgets also reduced. In accounting, there are two components of transactions and these include crediting and debiting and both must be equal to each other (Needles, Marian and Susan 68). Such accounting transactions are necessary for any company engaging in business activities. The components of the double entry accounting include the cash book, journal, income and expenditure accounts, trial balance, balance sheet and the ledger. The cash book is used in recording the transactions for the cash transfers. For the journal, there is chronological order followed while recording the transactions. In short, the double entry accounting is useful for providing useful accounting information of the business.

Introduction

A double entry system of accounting has both the debit and credit sides of entries. A debit entry is recorded one side of the T account and that is the left side and it increases account and reduces the equity account (Needles, Marian and Susan 68). The T account is used for business because it aids in the assessment and analysis of business transactions (Needles, Marian and Susan 68). It showcases the records in increase or decrease in the owner’s equity, assets and liabilities. On the other hand, the credit account has to be on the other side of the T account and that is the right side and it increases the equity or liabilities and decreases assets. Therefore, this paper affirms that two rules guide the double entry accounting and that is, every transaction must affect the debt and the credit of the account. In other terms, these rules apply that in all the operations, there is crediting the T side of the account and at the same debiting the other T side of the account.

Elements of double entry

Cash book

Cash book is used in recording all the transactions which involve cash transfers and they are used to generate the ledger accounts. Therefore, cash book is reflected in a book for the subsidiary business activities. The cash books are just cash accounts since they give accounting information required in creating a trial balance and a ledger. Besides, the cash books have a credit and debit sides. The receipts are debited whereas payments are credited.

Journal

The general journal is a record of transaction arranged chronologically, that is, all the transactions are recorded in such a way that account names, amounts and whether the account has been debited or credited is shown (Needles, Marian and Susan 68). In a journal, the debit side should balance with the credit side. It also shows the explanation for the transactions. The journals can be categorized into the particular purpose and the sales journal. According to Needles, Marian and Susan, the specific purpose type of journal enhanced efficiency and used to control the business activities of a company (p.249). On the other hand, the sales journal records the credit sales while the cash sales are handled in the cash receipts journals. Finally, the components of credit column of the sales journal include cash, sales discounts and other accounts like the banks’ accounts while the debit column contains the accounts receivable and the sales among others.

Ledger

A general ledger gives a complete set of counts for a business entry. The ledger serves as a reference book in the accounting system that is used in summarizing various transactions and therefore, it is a useful document used to withdraw data when preparing financial statements. Managers also use information from the ledger in determining the number of sales at a certain period and they also use it in the final phase of a transaction in identifying the cash balance. There are two types of ledgers and these include the general and the subsidiary ledgers (Needles, Marian and Susan 249). The general ledger contains additional accounts for recording customers’ lists of purchase and the general ledger records and further includes control account.

Trial balance

The trial balance is used to check whether there is balance in the credit and the debt (Needles, Marian and Susan 68). It is prepared at the end of the month for the transactions of a business and it consists of the date, title, debits and the credits and the explanation for the entries (Needles, Marian and Susan 68). Every transaction must be equal to some debits and credits and this is indicated in the trial balance at the end of a transaction.

Balance sheet

The balance sheet is prepared at the final period of accounting to show the financial condition of a business at a specific time and comprises of stockholders’ equity, liabilities and assets (Needles, Marian and Susan 175). At any given point of transactions, the sum totals of assets must equal the sum totals of stockholders’ equity and liabilities. The business owners use a balance sheet to know its capabilities and strengths hence a useful document for the business owner in decision making.

Balance sheets are used to find and investigate the receivables and payables trends of the business. It is useful for the potential lenders like the vendors, banks and investors to receive final financial reports and decide how much credit to give to a firm. The assets in the balance sheets consist of current assets, investments, property, intangible assets and equipment while the liabilities include the long-term and current liabilities (Needles, Marian and Susan 175). The assets are the resources that a company owns that benefits its operations (Needles, Marian and Susan 6). Some of the examples of the assets include the accounts receivable, capital, land, equipment, inventories and the buildings among others. The liabilities are the obligations of the business such as paying cash, transferring assets, accounts payable and proving services to the entities of business. Finally, an owner’s equity refers to the claims of a business owner to the business’s assets and in most cases, it would be abandoned after payment of all the liabilities and equals to the net assets (Needles, Marian and Susan 7). Overall, owner’s equity is the assets minus the liabilities.

Income and expenditure accounts

These show the revenues benefits from business operations, as well as expenses for the operating of a business and finally the resulting net profits as well as the losses of a company for the duration of operations. Just like other accounts, the expenditure account usually is compiled at the final period of accounting give the excess of income over the amount spent or excess expenditure over the income.

The primary approach to communicating the progress of a business is through the financial statements. There are four major components of the financial statements which inform the accounting information (Needles, Marian and Susan 8). These include the income and Owner’s equity statements and the balance sheet.

Examples of double entries

Example of a balance sheet

Balance sheet

Assets Liabilities

Cash $7,130.00 Accounts payable $13,450.00

Accounts receivable 895.00 Owner’s Equity

Suppliers 750.00 Owner’s Equity 46,105.00

Land 20, 750.00

Building 20, 525.00

Equipment 9,475.00

Total $59,555.00 Total $59,555.00

Subsidiary Ledger

Peter Clerk

Date

Post. Ref

Debit

Credit

Balance

July 1

16

18

28

51

CR1

51

CR1

750.00

1,225.00

750.00

600.00

750.00

1,225

625.00

T Account

Cash

Dr. Cr

$100,000.00 $70,000.00

$ 3,000.00 400.00

1200.00

$ 103,000.00 71,600.00

Bal. $31,400.00

Conclusion

Double entry in accounting is a very vital system as it provides a platform for identification of errors and immediately correcting the same. With double entry accounting, business owners easily notice whether their companies are making profits or losses. Data from the double entry documents such as trial balance shows the financial status of the organization. Hence in the modern accounting, double entry system of accounting has played a significant role of easing communicating the financial information.

Work Cited

Needles, Belverd E., Marian Powers, and Susan V. Crosson. Principles of accounting. Cengage Learning, 2013.

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