How to do Double Entry Bookkeeping

For every business organization, it is crucial to account for monetary transactions that take place in day to day operations , in order to make important decisions at the end of the financial period. This helps to identify the total sales revenue, net profit generated within aspecific time period, to make comparisons with the previous years’ company performances and to make predictions on the future. Therefore, in this article it is expected to identify the ways in which the monetary business transactions need to be recorded in the accounting system i.e. double entry bookkeeping system.

What is Double Entry Bookkeeping?

There are two sides of every transaction. As for example, when a customer is buying a specific product or service from the vendor, he/she pays cash equivalent to the value of it. With this transaction, the vendor’s cash balance would increase, and the customer’s cash balance would decrease by the value of the product/service. The two effects of the transaction are indicated in accounting as debit and credit entry. Therefore, in the accounting system, there are always a debit entry and a corresponding credit entry for every transaction (duality concept). Both these entries are recorded in the financial statements andcan be identified as the way in which the double entry concept is applied.

How to do Double Entry Bookkeeping ?

Double entry should be recorded in a way to balance the Accounting equation as shown below:

Assets = Capital + Liabilities

According to the above accounting equation, assets can be identified as the resources of the business organization, and it is equivalent to the owner ‘s equity and the creditor’s contribution. Based on the above equation, debit entries are recorded as an impact of the following reasons:

• Increase in assets and expenses
• Decreases in the liability, income and capital

Similarly, credit entries are recorded due to the following effects:

• Decrease in assets and expenses
• Increase in liability. income and capital

Examples of Double Entry Bookkeeping:

Following indicates few examples of business transactions and the way it has been entered into accounts using the double entry principles.

• Purchase of furniture by cash           

Debit       Furniture Account (Increase in Assets)
Credit Cash (Decrease in Assets)

• Payments for the rent

Debit Rent Account (Increase in Expenses)
Credit Cash (Decrease in Assets)

• Interest received from the bank

Debit  Cash (Increase in Assets)
Credit Finance Income (Increase in Income)

• Cash reaved from the bank loan

Debit Cash (Increase in Assets)
Credit Bank Loan (Increase in Liability)

• Issue of ordinary shares

Debit Cash (Increase in Assets)
Credit Share Capital (Increase in Capital)

Double entry bookkeeping system creates many advantages for large complex business organizations. It can be identified as a easier method for detecting the errors and fraud. It also ensures accurate calculation of profits or losses in business organizations. Therefore it would be beneficial to learn the accounting principles for effective accounting practices. 

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