DOUBLE ENTRY SYSTEM & EXTRACTION OF TRIAL

BALANCE

We have already seen that every transaction affects two or more items in the balance sheet.
At least two items are changed as a result of every transaction. When owner introduces money
to the business, two items Capital and Cash at Bank will change.
Double Entry System
In order to maintain the accounting equation, we have to follow certain process, which is
called Double Entry Bookkeeping.
This double entry bookkeeping says:
 Account has to be kept for every item;
 Entries have to be made at least in two accounts for every transaction; and
 The total debit amounts should be equal to total credit amounts for every transaction.

Account Rules
In the books of account, the left-hand side is called debit and the assets are displayed left
hand of the “T” form of balance sheet. Therefore, asset accounts have a debit nature.
The liabilities and owner’s equity are displayed opposite to assets i.e., right hand side of the
balance sheet. The right hand side of the account is called credit. Therefore, liabilities and
owner’s equity accounts have a credit nature.
When we record the transactions, any increases to accounts are recorded on the same side as
the nature of account and any decreases to accounts are recorded on the opposite side to the
nature of the account.
Therefore, increases to asset accounts are recorded on the debit and decreases to asset
accounts are recorded on the credit side. Increases to liability and owner’s equity accounts are
recorded on the credit side and decreases to liability and owner’s equity are recorded on the debit
side.
When we record the transactions in the ledger based on double entry bookkeeping we should
complete the following steps. (e.g., Owner introduced money to the business).
 Determine what items or accounts are involved in a particular transaction?
(Cash at Bank and Capital)
 Determine what type of account for each of those?
(Cash at Bank – Asset, Capital – Owner’s Equity)
 The nature of account:
Cash at Bank - Asset - Debit nature
Capital - Owner’s Equity - Credit nature

 Whether the account is increasing or decreasing?

Cast at Bank - Increasing
Capital - Increasing
 Which side of the account is to be posted?
Cash at Bank - Asset - Debit nature - Dr (Debit) side
Capital - Owner’s Equity - Credit nature - Cr (Credit) side

Revenues and Expenses

We have examined the balance sheet items such as asset, liability and owner’s equity
accounts so far. Now we will examine the other two groups of accounts such as revenue and
expense accounts.
Prime objective of most business is to make profit. They make this profit either by
performing services or by selling goods or with the combination of both.
Sales, service fees are examples of revenue items. Sale of goods should be distinguished
from the sale of assets such as land, building and equipment which were originally purchased for
use in the business over a long period of time.
The nature of revenue accounts come from nature of owner’s equity accounts. When revenue
increases the profit of the business will increase. The profit which belongs to the owner increases
owner's equity. Hence, revenue items are credit in nature. Therefore, increases in revenues are
recorded in the credit side and decreases in revenues are recorded in the debit side of the revenue
accounts.
For a business to operate, certain expenses are incurred and must be met, e.g. purchases, rent,
electricity and wages. Purchase of goods for resale purpose should be distinguished from the
purchase of assets such as land, building and furniture, which will be kept by the business and
used over a long period of time.
The nature of expense accounts also comes from the nature of owner’s equity accounts.
When expense increases the profit of the business will decrease. This ultimately leads to
reduction in owner's equity. Hence, expenses and losses are debit in nature. Therefore, increases
in expenses are recorded in the debit side and decreases in expenses are recorded in the credit side
of the expense accounts.

Posting to Ledger Accounts

To post to a ledger account:
 Open the relevant accounts.
 Enter the amount on the correct side.
 Fill in the particular column with the name of the other accounts affected.
 Show the date of the transaction.

Posting to the Ledger from the Prime Entry Books

We have studied how entries are made to prime entry books. Based on double entry rules the
ledger accounts has to be posted. We will now work a simple example of posting to the ledger
accounts from prime entry books.

2001
January 1 Simon commenced a business named Simon Trading, by contributing
cash of $20,000 (receipt No 001) to the business bank account.
3 Borrowed $5,000 from Peter (receipt No 002).
4 Bought furniture $5,500 (Inclusive of GST 10%),cheque No 00301.
Motor vehicle $7,700 (Inclusive of GST 10%), cheque No 00302.
8 Bought cabinets from Suppliers Ltd. on credit for $1,100 (Inclusive of
GST 10%).
9 Purchased goods for resale for cash $550 (Inclusive of GST 10%),
cheque No 00303.
10 Purchased goods on credit from Steven for $3,300 (Inclusive of GST
10%), invoice No 60.
11 Sold goods for cash $660 (Inclusive of GST 10%).
Sold goods on credit to Bevan for $2,200 (Inclusive of GST 10%),
invoice No 1001.
14 Bevan returned $550 (Inclusive of GST 10%) worth of goods, credit note
No 10.
15 Returned goods to Steven for $440 (Inclusive of GST 10%), credit note
No 99
16 Simon withdrew goods worth $220 (Inclusive of GST 10%) for his
private use.
17 Sold goods to Charlie for $880 (Inclusive of GST 10%), invoice No.
1002.
18 Purchased goods from David $660 (Inclusive of GST 10%), invoice No.
58.
19 Paid $1,990 to Steven (cheque No. 00304) and received discount $110
20 Received $895 from Bevan (receipt No. 003) and allowed discount $55
25 Paid insurance premium $1,320 (Inclusive of GST 10%), cheque
No.00305.
30 Paid rent $550 (Inclusive of GST 10%) and wages $125, cheque No.
00306.
a) Record the above transactions in the journals of Simon.
b) Post to the ledger
b) Post to the Ledger
Simon Trading
Ledger Accounts
Cash at Bank Account L1
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Sundry Accounts CRJ 26,555 Jan 31 Sundry Accounts CPJ 17,735
Balance c/d 8,820
26,555 26,555

Feb 1 Balance b/d 8,820

Discount Expenses Account L2
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Accounts CRJ 50 Jan 31 Balance c/d 50
Receivable
50 50
Feb 1 Balance b/d 50

Sales Account L3
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 3,400 Jan 31 Cash at Bank CRJ 600
Accounts SJ 2,800
Receivable
3,400 3,400
Feb 1 Balance b/d 3,400

GST Output Account L4

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Sales Returns SRJ 50 Jan 31 Cash at Bank CRJ 55
GST Control L23 285 Sales SJ 280
335 335

Capital Account L5
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 20,000 Jan 1 Cash at Bank CRJ 20,000
20,000 20,000
Feb 1 Balance b/d 20,000

Loan from Peter Account L6

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 5,000 Jan 5 Cash at Bank CRJ 5,000
5,000 5,000
Feb 1 Balance b/d 5,000

Bevan Account L7
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 11 Sales SJ 2,200 Jan 21 Cash at Bank & CRJ 950
Discount
14 Sales Returns SRJ 550
31 Balance c/d 700
2,200 2,200
Feb 1 Balance b/d 700

Discount Revenue Account L8

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 100 Jan 31 Accounts Payable CRJ 100
100 100
Feb 1 Balance b/d 100
Purchases Account L9
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Cash at Bank CPJ 500 Jan 16 Drawings GJ 200
Accounts Payable PJ 3,600 31 Balance c/d 3,900
4,100 4,100
Feb 1 Balance b/d 3,900

GST Input Account L10

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Cash at Bank CPJ 1,410 Jan 31 Purchases Returns PRJ 40
31 Purchases PJ 360 16 Drawing GJ 20
8 Suppliers Ltd. GJ 100 31 GST Control L23 1,810
1,870 1,870

Furniture Account L11

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 6 Cash at Bank CPJ 5,000 Jan 31 Balance c/d 6,000
8 Supplies Ltd GJ 1,000
6,000 6,000
Feb 1 Balance b/d 6,000

Motor Vehicle Account L12

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 6 Cash at Bank CPJ 7,000 Jan 31 Balance c/d 7,000
7,000 7,000
Feb 1 Balance b/d 7,000
Steven Account L13
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 19 Cash at Bank & CPJ 2,100 Jan 10 Purchases PJ 3,300
Discount
15 Purchases Returns PRJ 440
31 Balance c/d 760
3,300 3,300
Feb 1 Balance b/d 760

Insurance Account L14

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 25 Cash at Bank CPJ 1,200 Jan 31 Balance c/d 1,200
1,200 1,200
Feb 1 Balance b/d 1,200

Rent Account L15

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 30 Cash at Bank CPJ 500 Jan 31 Balance c/d 500
500 500
Feb 1 Balance b/d 500

Wages Account L16

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 30 Cash at Bank CPJ 125 Jan 31 Balance c/d 125
125 125
Feb 1 Balance b/d 125

David Account L17

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 660 Jan 18 Purchases PJ 660
660 660
Feb 1 Balance b/d 660

Charlie Account L18

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 17 Sales SJ 880 Jan 31 Balance c/d 880
880 880
Feb 1 Balance b/d 880

Sales Returns Account L19

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Accounts SRJ 500 Jan 31 Balance c/d 500
Receivable
500 500
Feb 1 Balance b/d 500

Purchases Returns Account L20

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 400 Jan 15 Accounts Payable PRJ 400
400 400
Feb 1 Balance b/d 400

Supplies Ltd. Account L21

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 Balance c/d 1,100 Jan 8 Furniture GJ 1,000
8 GST Input L10 100
1,100 1,100
Feb 1 Balance b/d 1,100

Drawing Account L22

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 16 Purchases GJ 200 Jan 31 Balance c/d 220
GST Output L4 20
220 220
Feb 1 Balance b/d 220

GST Clearing Account L23

Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 GST Input L10 1,810 Jan 31 GST Out put L4 285
31 GST Recoverable L24 1,525
1,810 1,810
GST Recoverable Account L24
Date Particulars Folio Amount Date Particulars Folio Amount
20X1 20X1
Jan 31 GST Control L23 1,525 Jan 31 Balance c/d 1,525
1,525 1,525
Feb 1 Balance b/d 1,525

Preparation of a Trial Balance

The trial balance is a list of ledger account balances prepared on a particular date. It can be
done monthly, six monthly or yearly, depending on the requirements of the business organization.
The aims of preparation of trial balance are to check the arithmetic accuracy of the ledger,
and to ensure that double entry has taken place.
Simon Trading
Trial Balance as at 31 January 20X1
Account No Account Dr Cr
L1 Cash at Bank 8,820
L2 Discount Expense 50
L3 Sales 3,400
L5 Capital 20,000
L6 Loan from Peter 5,000
L7 Bevan Account 700
L8 Discount Revenue 100
L9 Purchases 3,900
L11 Furniture 6,000
L12 Motor Vehicle 7,000
L13 Stevan 760
L14 Insurance 1,200
L15 Rent 500
L16 Wages 125
L17 David 660
L18 Charlie 880
L19 Sales Returns 500
L20 Purchase Returns 400
L21 Suppliers Ltd. 1,100
L22 Drawings 220
L24 GST Recoverable 1,525
31,420 31,420