4.1 Introduction to Double-Entry Bookkeeping
Financial transactions are entered into the general ledger accounts using double-entry
bookkeeping.
Every financial transaction gives rise to two accounting entries, a debit and a credit
entry, in different ledger accounts. The total debit value always equals the total credit
value in the ledger accounts at any time.
For example, a business buys a delivery vehicle with cash. The business
gains a new asset but loses cash. 2 ledger accounts are affected, namely, the
cash and asset accounts.
4.2 The Expanded Accounting Equation
The simple accounting equation: Capital = Assets – Liabilities
Capital belongs to the business owner. Capital can also be calculated by the amount
the owner invested minus any money that owners have taken out of the business
(drawings) plus profit made.
Owner’s Capital = Capital Invested – Drawings + Profits
Profits made by the business are the outcome of Income after deducting all business
Expenses/ Expenditure:
Profits = Income – Expenditure
The Expanded Accounting Equation once the above elements are included:
Key Point
Assets – Liabilities = Capital Invested – Drawings + Income – Expenditure
The equation can be rearranged to show only positive signs:
Assets + Drawings + Expenses = Capital + Liabilities + Income
, 4.3 Rules of Double Entry to Account Group
There are 5 types of accounts in the Double-Entry system which are: Assets, Liabilities,
Capital, Income and Expenses
The accounting equation is used to understand which Accounts to Debit and Credit. The
expanded accounting equation is:
ASSETS + DRAWINGS + EXPENSES = CAPITAL + LIABILITIES + INCOME
The items on the left-hand side of the equation are increased by posting
a Debit entry. (Assets, Drawings, Expenditure)
The items on the right-hand side of the equation are increased by posting
a Credit entry. (Capital, Liabilities, Income)
This can be easily remembered with the mnemonic DEAD CLIC:
Debit or credit balances will be determined from the category of each ledger account
(DEAD CLIC mnemonic).
DEBIT Examples: CREDIT Examples:
Telephone Bill Loans
Rental Trade Payables
Sales Returns Output Sales Tax
Expense Purchases Liabilities Bank overdraft
Motor Vehicles
Bank balance Sales
Inventories Purchase Returns
Trade Receivables Bank Interest received
Assets Input Sales Tax Income Discounts received
Drawings Drawings Capital Capital investment
Financial transactions are entered into the general ledger accounts using double-entry
bookkeeping.
Every financial transaction gives rise to two accounting entries, a debit and a credit
entry, in different ledger accounts. The total debit value always equals the total credit
value in the ledger accounts at any time.
For example, a business buys a delivery vehicle with cash. The business
gains a new asset but loses cash. 2 ledger accounts are affected, namely, the
cash and asset accounts.
4.2 The Expanded Accounting Equation
The simple accounting equation: Capital = Assets – Liabilities
Capital belongs to the business owner. Capital can also be calculated by the amount
the owner invested minus any money that owners have taken out of the business
(drawings) plus profit made.
Owner’s Capital = Capital Invested – Drawings + Profits
Profits made by the business are the outcome of Income after deducting all business
Expenses/ Expenditure:
Profits = Income – Expenditure
The Expanded Accounting Equation once the above elements are included:
Key Point
Assets – Liabilities = Capital Invested – Drawings + Income – Expenditure
The equation can be rearranged to show only positive signs:
Assets + Drawings + Expenses = Capital + Liabilities + Income
, 4.3 Rules of Double Entry to Account Group
There are 5 types of accounts in the Double-Entry system which are: Assets, Liabilities,
Capital, Income and Expenses
The accounting equation is used to understand which Accounts to Debit and Credit. The
expanded accounting equation is:
ASSETS + DRAWINGS + EXPENSES = CAPITAL + LIABILITIES + INCOME
The items on the left-hand side of the equation are increased by posting
a Debit entry. (Assets, Drawings, Expenditure)
The items on the right-hand side of the equation are increased by posting
a Credit entry. (Capital, Liabilities, Income)
This can be easily remembered with the mnemonic DEAD CLIC:
Debit or credit balances will be determined from the category of each ledger account
(DEAD CLIC mnemonic).
DEBIT Examples: CREDIT Examples:
Telephone Bill Loans
Rental Trade Payables
Sales Returns Output Sales Tax
Expense Purchases Liabilities Bank overdraft
Motor Vehicles
Bank balance Sales
Inventories Purchase Returns
Trade Receivables Bank Interest received
Assets Input Sales Tax Income Discounts received
Drawings Drawings Capital Capital investment
