Double entry principle ledger accounts transactions
The double entry bookkeeping principle is profoundly important in the world of accounting. It is essential that students of accounting gain an understanding, from the outset, of this principle that is more than years old.
This best way to explain the double entry bookkeeping principle is to give an example of transactions from the books of the imaginary organisation called Lots of Fun Pty Ltd. Your job as an accountant or a bookkeeper is to correctly record these transactions in the financial ledgers of the organisation. You have to record one debit affect and one credit affect for each transaction. Of course, these days modern account software does the job for you but understanding the principle is important in understanding how accounting software works.
Would you like to try some double-entry bookkeeping exercises? Now let's introduce to you a diagram figure 1 that you must indelibly print into your brain! Your ability to remember this diagram might be the key to understanding the double entry bookkeeping principle and your success in book-keeping. The purpose of the diagram is to tell you when you should be debiting and when you should be crediting when you are identifying the two effects that result from every transaction.
In the examples given above, you will note the words in bold - AssetLiabilityExpense, Income. These are the four different types of account. In Figure 1, at the top, are the two abbreviations " Dr " double entry principle ledger accounts transactions " Cr " which stand for " Debit " and " Credit " respectively.
You double entry principle ledger accounts transactions also note that Assets and Expenses appear on the Debit side while Liabilities and Income appear on the Credit side. You should note in Figure 2, that each effect is true only when the account is increasing.
However, if the effect of the transaction is to decrease the an account, then the mirror image of Figure 2 will appear as in Figure 3. This is because the assets of Lots of Fun Pty Ltd are increasing. Simultaneously, the liabilities of Lots of Fun Pty Ltd are increasing as well, and so there will be a credit entry to the Bank Loan account.
Motor Vehicles an Asset Account is debited because it is increasing you have more asset that you did before. Bank Loan a Liability Account is credited because it is also increasing you have more double entry principle ledger accounts transactions than you did before. A bank loan is a liability because it is double entry principle ledger accounts transactions debt you owe the bank.
Bank an Asset Account is debited because it is increasing the money received will be deposited into the bank. For each of the two accounts you identify in Step 1, you must determine whether it is a Asset, Liability, Expense or Income. For each of the two accounts you identify in Step 1, you must determine whether the account is increasing or decreasing.
By following these three steps, and using the diagram given above, you will be able to determine whether each account is debited or credited. The double entry bookkeeping principle is really quite simple, but you must be sure to follow the above steps. Contact Us Privacy Policy Home. Double Entry Bookkeeping Principle The double entry bookkeeping principle is profoundly important in the world of accounting. This is the debit affect. This is the credit effect. Refer to the figure 1: Click Here Working out debits and credits Now let's introduce to you a diagram figure 1 that you must indelibly print into your brain!
The nature of accounts The purpose of the diagram is to tell you when you should be debiting and when you should be crediting when you are identifying the two effects that result from every transaction. Here is the first explanation! Determining whether to debit or credit when an account is increasing You should note in Figure 2, that each effect is true only when the account is increasing.
Determining whether to debit or credit when an account is decreasing. This is how you record the transaction in the ledger: Bank an Asset Account is credited because it is decreasing Note: Bank an Asset Account is credited because it is decreasing. Step 1 Determine which two accounts will be affected by the transaction? Step 2 For each of the two accounts you identify in Step 1, you must determine whether it is a Asset, Liability, Expense or Income.
Step 3 For each of the two accounts you identify in Step 1, you must determine whether the account is increasing or decreasing. Software for Club Treasurers. Bank an Asset Account is debited because it is double entry principle ledger accounts transactions the money received will be double entry principle ledger accounts transactions into the bank Court Hire Fees an Income Account is credited because it is increasing.
Wages an Expense Account is debited because it is increasing. Creditors a Liability Account is debited because it is decreasing.