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Double-Entry System

CHAPTER 5CHAPTER 5

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Double-Entry System

The double-entry system is considered as the heart of modern accounting.

All accounting systems operate on the basis of the double-entry system.

Manual accounting system

Computerized accounting system

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Double-Entry System

The double-entry system provides checks and balances to ensure that your books are always in balance.

In double-entry accounting, each transaction has two journal entries: a debit and a credit.

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Double-Entry System

Credits Debits＝

Because debits equal credits, double-entry accounting prevents some common bookkeeping errors.

The sum of all debits should always equal the sum of all credits.

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T Account

The T account is the basic form of the double-entry system.

Title of Account

Left orDebit Side

Right orCredit Side

The rules of the double-entry system are that one transaction affects at least two accounts --- debit accounts and credit accounts.

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Double-Entry System

Assets = Liabilities + Owner’s Equity

Accounting equation

Account Type Debit Credit

Assets Increase Decrease

Liabilities Decrease Increase

Owner’s equity Decrease Increase

Income Decrease Increase

Expenses Increase Decrease

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Transaction Analysis

Now, let’s analyze the transaction of

George Ross Photocopy Company

…

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Transaction Analysis

Transaction 1

March 3: Mr. George starts his photocopy company on March 1 with 20,000 us dollars that was immediately deposited into the bank.

Assets

Owner’s equity ? Increase or decrease

Debited or Credited

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Transaction Analysis

Transaction 1

Account Type Debit Credit

Cash at Bank Increase

George Ross, Capital Increase

Cash at Bank $10,000

George Ross, Capital $10,000

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Transaction Analysis

Transaction 2

March 6: Rented another office, paying a year’s rent in advance, $4,800 by check.

Assets 1 ? Increase or decrease

Debited or CreditedAssets 2

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Transaction Analysis

Transaction 2

Account Type Debit Credit

Prepaid Rent Increase

Cash at Bank Decrease

Prepaid Rent $4,800

Cash at Bank $4,800

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Transaction Analysis

Transaction 3

March 7: Purchased photocopy equipment for $2,000 with cash.

Assets 1

Assets 2?

Increase or decrease

Debited or Credited

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Transaction Analysis

Transaction 3

Account Type Debit Credit

Photocopy Equipment Increase

Cash Decrease

Photocopy Equipment $2,000

Cash $2,000

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Transaction Analysis

Transaction 4

March 7: Purchased office equipment from Hougas Equipment Co. for $5,300, paying $2,300 in cash and agreeing to pay the rest next month.

Assets 1

Assets 2 ? Increase or decrease

Debited or CreditedLiability

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Transaction 4

Transaction Analysis

Account Type Debit Credit

Office Equipment Increase

Cash Decrease

Accounts Payable Increase

Office Equipment $5,300

Cash $2,300

Accounts Payable 3,000

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Transaction Analysis

Transaction 5

March 8: Purchased on credit photocopy supplies for $2,300 an office supplies for $800 from Tim Supply Co.

Assets

Liability?

Increase or decrease

Debited or Credited

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Transaction Analysis

Transaction 5

Account Type Debit Credit

Photocopy Supplies Increase

Office Supplies Increase

Accounts Payable Increase

Photocopy Supplies $2,300

Office Supplies 800

Accounts Payable $3,100

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Transaction Analysis

Transaction 6

March 8: Paid $600 in cash for a one-year insurance policy with coverage effective March 1.

Assets 1

Assets 2?

Increase or decrease

Debited or Credited

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Transaction 6

Transaction Analysis

Account Type Debit Credit

Prepaid Insurance Increase

Cash Decrease

Prepaid Insurance $600

Cash $600

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Transaction Analysis

Transaction 7

March 9: Paid Tim Supply Co. $3,100 of the amount owed by check.

Assets ? Increase or decrease

Debited or CreditedLiability

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Transaction 7

Transaction Analysis

Account Type Debit Credit

Accounts Payable Decrease

Cash at Bank Decrease

Accounts Payable $3,100

Cash at Bank $3,100

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Transaction Analysis

Transaction 8

March 10: Performed a service by printing throwaways for a garment dealer and agreed to collect the fee at the beginning of the next month, $6,000.

Assets ? Increase or decrease

Debited or CreditedOwner’s equity

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Transaction 8

Transaction Analysis

Account Type Debit Credit

Accounts Receivable Increase

Photocopy Fees Earned Increase

Accounts Receivable $6,000

Photocopy Fees Earned $6,000

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Transaction Analysis

Transaction 9

March 14: Accept $1,300 as an advance fee for copying works to be done for an advertising agency.

Assets

Liability?

Increase or decrease

Debited or Credited

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Transaction 9

Transaction Analysis

Account Type Debit Credit

Cash Increase

Unearned Photocopy Fees Increase

Cash $1,300

Unearned Photocopy Fees $1,300

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Transaction Analysis

Transaction 10

March 19: Performed a service by printing price lists for Ward Fashion Company and collect a check of $3,400.

Assets

?Increase or decrease

Debited or CreditedOwner’s equity

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Transaction 10

Transaction Analysis

Account Type Debit Credit

Cash Increase

Photocopy Fees Earned Increase

Cash at Bank $3,400

Photocopy fees Earned $3,400

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Transaction 11

Transaction Analysis

Account Type Debit Credit

George Ross, Withdrawals Decrease

Cash Decrease

George Ross, Withdrawals $980

Cash $980

March 24: George Ross withdrew $980 from the business for personal living expenses.

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Transaction Analysis

Transaction 12

March 25: Paid the secretary salary, $1,100.

Account Type Debit Credit

Office Salary Expense Decrease

Cash Decrease

Office Salary Expense $1,100

Cash $1,100

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Transaction 13

Transaction Analysis

Account Type Debit Credit

Utility Expense Decrease

Cash Decrease

Utility Expense $230

Cash $230

March 29: Received and not paid the utility bill of $700.

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Transaction 14

Transaction Analysis

Account Type Debit Credit

Telephone Expense Decrease

Accounts Payable Increase

Telephone Expense $120

Accounts Payable $120

March 31: Received a telephone bill, $120.

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T account

Cash(at Bank)

Bal. $410

3. $10,00014. 1,30019. 3,400

6. $4,8007. 2,0007. 2,3008. 6009. 3,10024. 98025. 1,10029. 230

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T account

Accounts Receivable

10. $6,000

Bal. $6,000

Photocopy Supplies

8. $2,300

Bal. $2,300

Office Supplies

8. $800

Bal. $800

Prepaid Insurance

8. $600

Bal. $600

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T account

Prepaid Rent

6. $4,800

Bal. $4,800

Photocopy Equipment

7. $2,000

Bal. $2,000

Office Equipment

7. $5,300

Bal. $5,300

Accounts Payable

9. $3,1008. 3,100

Bal. $600

7. $3,000

31. 120

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T account

Unearned Photocopy Fees

14. $1,300

Bal. $1,300

George Ross, Capital

3. $10,000

Bal. $10,000

George Ross, Withdrawal

24. $980

Bal. $980

Photocopy Fees Earned

Bal. $9,400

10. $6,00019. 3,400

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T account

Office Salary Expense

25. $1,100

Bal. $1,100

Utility Expense

29. $230

Bal. $230

Telephone Expense

31. $120

Bal. $120

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T account

On the basis of the T account calculation, we get the result as follows:

Assets = Liabilities + Owner’s Equity

$21,390 = $4420 + $16,970

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WE ARE SAILING RIGHT ALONG!!