Principles of Double Entry and Trial Balance

Double Entry System

  • Every transaction has dual effects: a debit entry and a credit entry.
  • Summary of Double Entry:
    • Assets & Expenses: Increase (+): Debit; Decrease (-): Credit
    • Liabilities, Owner's Equity & Revenue: Increase (+): Credit; Decrease (-): Debit

Double Entry Rules for Inventories

  • Cash Purchases:
    • Effect: Increase in expense, decrease in asset
    • Journal Entry: Dr Purchase, Cr Cash/Bank
  • Credit Purchases:
    • Effect: Increase in expense, increase in liability
    • Journal Entry: Dr Purchase, Cr Account Payable
  • Cash Sales:
    • Effect: Increase in asset, increase in revenue
    • Journal Entry: Dr Cash/Bank, Cr Sales
  • Credit Sales:
    • Effect: Increase in asset, increase in revenue
    • Journal Entry: Dr Account Receivable, Cr Sales
  • Return Inwards (from cash sales):
    • Effect: Decrease in revenue, decrease in asset
    • Journal Entry: Dr Return Inwards, Cr Cash/Bank
  • Return Inwards (from credit sales):
    • Effect: Decrease in revenue, decrease in asset
    • Journal Entry: Dr Return Inwards, Cr Account Receivable
  • Return Outwards (from cash purchase):
    • Effect: Increase in asset, decrease in expense
    • Journal Entry: Dr Cash/Bank, Cr Return Outwards
  • Return Outwards (from credit purchase):
    • Effect: Decrease in liability, decrease in expense
    • Journal Entry: Dr Account Payable, Cr Return Outwards

Drawings

  • Drawings: Owner takes cash or assets for personal use, reducing owner’s equity.
  • Journal Entries:
    • Withdrawal of goods: Dr Drawings, Cr Purchase
    • Withdrawal of non-current assets: Dr Drawings, Cr Motor Van
    • Withdrawal of cash/cheque: Dr Drawings, Cr Cash/Bank

Carriage

  • Carriage Outwards: Transportation cost to deliver goods to buyer; an expense.
    • Effect: Increase in expense, decrease in asset
    • Journal Entry: Dr Carriage Outwards, Cr Cash/Bank
  • Carriage Inwards: Transportation cost to bring goods to the business; part of the cost of goods purchased.
    • Effect: Increase in expense, decrease in asset
    • Journal Entry: Dr Carriage Inwards, Cr Cash/Bank

Discount

  • Discount Received: Discount given by the seller, deducted from purchase account.
    • Effects: Decrease in Liability, Increase in Revenue, Decrease in Asset
    • Journal Entry example: Dr Account Payable, Cr Discount Received, Cr Bank
  • Discount Allowed: Discount given to the buyer, deducted from sales account.
    • Effects: Increase in Expenses, increase in asset , decrease in asset.
    • Journal Entry example: Dr Discount Allowed, Dr Bank, Cr Account Receivable