Cambridge IGCSE Accounting · 0452
Chapter 2: Sources and Recording of Data — Part 1
Section 2.1 · The Double Entry System of Book-keeping
The Double Entry System (Duality)
The Duality principle is the foundation of the double-entry system. It states that every transaction has two aspects: a giving and a taking effect. Therefore, every transaction must be recorded twice—once as a Debit (Dr) and once as a Credit (Cr)—to keep the accounting equation in balance.
Core Definitions
- Ledger Account
- A double-sided record (often in a ‘T’ format) used to record increases and decreases in a specific item.
- Debit (Dr)
- The left-hand side of a ledger account.
- Credit (Cr)
- The right-hand side of a ledger account.
The Rules of Double Entry
To record transactions correctly, you must memorise which side represents an increase for each type of account.
| Account Type | To Increase | To Decrease |
|---|---|---|
| Assets (e.g., Machinery, Inventory) | Debit | Credit |
| Expenses (e.g., Rent, Wages) | Debit | Credit |
| Drawings (Owner taking resources) | Debit | Credit |
| Liabilities (e.g., Loans, Payables) | Credit | Debit |
| Income/Revenue (e.g., Sales, Rent Rec.) | Credit | Debit |
| Capital/Equity (Owner’s investment) | Credit | Debit |
The Process of Posting Transactions
Posting is the process of transferring information from books of prime entry to the ledger.
Worked Example: Starting a Business
Transaction: On August 1, the owner starts the business with $10,000 in cash.
Analysis: The asset ‘Cash’ increases (Debit), and the owner’s ‘Capital’ increases (Credit).
Cash Account
| Debit | Credit | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| Aug 1 | Capital | 10,000 | |||
Capital Account
| Debit | Credit | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| Aug 1 | Cash | 10,000 | |||
Three-Column Running Balance Format
The syllabus requires knowledge of ledger accounts presented in a three-column running balance format. Instead of waiting until the end of the period to calculate a balance, a running balance is updated after every entry.
Columns: Date | Details | Debit ($) | Credit ($) | Balance ($)
Worked Example: Cash Account (Running Balance)
| Date | Details | Debit $ | Credit $ | Balance $ |
|---|---|---|---|---|
| Jan 1 | Capital | 5,000 | 5,000 Dr | |
| Jan 5 | Rent | 800 | 4,200 Dr | |
| Jan 10 | Sales (cash) | 1,500 | 5,700 Dr |
Note: Candidates do not need to explain or use folio columns.
Digital Ledger Accounts and Transfer to Financial Statements
Ledger accounts can be kept digitally using accounting software. When a transaction is entered, the system automatically posts debits and credits, updates running balances, and can extract a Trial Balance and financial statements instantly.
Worked Example 2: Credit Purchase on Account
Transaction: Bought inventory $600 on credit from Supplier X.
- Debit: Purchases Account $600 (expense increases)
- Credit: Supplier X Account $600 (liability increases)
Transfer to financial statements: At year-end, the balance on the Purchases Account is transferred to the Income Statement (Cost of Sales section). The balance on Supplier X’s account appears under Trade Payables in the Statement of Financial Position.
Division of the Ledger
As a business grows, it is impractical to keep all accounts in one book. The ledger is divided into three sections to allow for a division of labour and to make it easier to find information.
- Sales Ledger: Contains the personal accounts of Trade Receivables (credit customers).
- Purchases Ledger: Contains the personal accounts of Trade Payables (credit suppliers).
- Nominal (General) Ledger: Contains all other accounts, including Assets (non-current and current), Liabilities, Capital, Drawings, Expenses, and Revenues.
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