FINANCIAL MANAGEMNT FOR IT
CPA KOBI MATIBA EDWARD
TOPIC 2 - RECORDING FINANCIAL TRANSACTION
DOUBLE ENTRY CONCEPT (DUALITY OF TRANSACTIONS)
In accounting every transaction has two effects (Debit entry and credit entry). We know that, since the
total of liabilities plus capital is always equal to total assets, any transaction has a dual effect – if it changes
the amount of total assets it also changes the total liabilities plus capital, and vice versa
Every financial transaction affects the entity in two ways and gives rise to two accounting entries, one a
debit and the other a credit. The total value of debit entries is therefore always equal at any time to the
total value of credit entries. Double entry takes place in ledgers accounts which resemble a capital ( T ).
The left hand side is the debit side while the right hand side is the credit side.
A Ledger account
Debit side Credit side
Consider a ledger account format for an Asset
This ledger accounts are named depending on the elements of the financial statements (Assets,
capital, liabilities, income and expenses). E.g if a company has several assets e,g. Furniture, Land,
Motor vehicles e.t.c, each of these assets will have their own ledger account
Dr Furniture a/c Cr
Date Particulars Amount (Sh) Date Particulars Amount (SH)
To know when to debit or credit which ledger account, depends on the nature of the transaction
and the type of elements being affected by the transaction.
At the end of the period each ledger account is balanced and closed off to find the closing balance
b/d- which is then extracted to the trial balance
The table below summarizes the rules of when to credit or debit a ledger account
ELEMENT EFFECT OF TRANSACTION ON THE ELEMENT
INCREASING DECREASING
ASSETS DEBIT CREDIT
Accounting is Fun – Enjoy It
, FINANCIAL MANAGEMNT FOR IT
CPA KOBI MATIBA EDWARD
LIABILITIES CREDIT DEBIT
CAPITAL CREDIT
INCOME CREDIT DEBIT
EXPENSES DEBIT CREDIT
DRAWINGS (when a DEBIT -
transaction is required to
Dr capital a/c we use the
Drawings a/c instead
Show the double journal entry for the following transactions, and draw the ledger
accounts to post the transactions.
➢ Owner introduces 60,000 cash into the business
➢ The business receives a bank loan of 50,000 from KCB bank
➢ The business pays 6,000 for rent expense
➢ The business sells goods for 12,000 cash.
➢ The business buys goods that are for resale worthy 8,000 cash.
➢ The owner withdraws cash of 4,000 from the business
➢ Purchase of motor vehicle for use in the business for 40,000
Balancing a ledger account
At the end of each period, individual ledger accounts are balanced and the remaining balances are
taken to the trial balance in preparation of the financial statements.
Steps in balancing a ledger account
1. Add the totals of each side (credit and debit) separately.
2. Record the higher total on both sides
3. Introduce a figure on the lower side,(the balance c/d, or c/f) to balance to the total)
4. Finish the double entry by entering a balance b/d on the opposite side below the equal
signs.
E.g. the cash ledger account has the following fiqures
Debit side------- 40, 60,90, 860, 340, Credit side ------
210, 75, 180.
Required: Draw the cash ledger account and balance it to find the balance c/d.
Comprehensive Illustration
The following transactions of a sole trader for the month of March are given post the transactions
to ledger accounts and extract a trial balance as at 31 March 2019
March
1 Started in business with Kshs.800,000 in the bank and Ksh. 500,00 in cash
2 Bought goods for sale Ksh. 145,000 paying by a cheque.
5 Cash sales Kshs.500,000
Accounting is Fun – Enjoy It
CPA KOBI MATIBA EDWARD
TOPIC 2 - RECORDING FINANCIAL TRANSACTION
DOUBLE ENTRY CONCEPT (DUALITY OF TRANSACTIONS)
In accounting every transaction has two effects (Debit entry and credit entry). We know that, since the
total of liabilities plus capital is always equal to total assets, any transaction has a dual effect – if it changes
the amount of total assets it also changes the total liabilities plus capital, and vice versa
Every financial transaction affects the entity in two ways and gives rise to two accounting entries, one a
debit and the other a credit. The total value of debit entries is therefore always equal at any time to the
total value of credit entries. Double entry takes place in ledgers accounts which resemble a capital ( T ).
The left hand side is the debit side while the right hand side is the credit side.
A Ledger account
Debit side Credit side
Consider a ledger account format for an Asset
This ledger accounts are named depending on the elements of the financial statements (Assets,
capital, liabilities, income and expenses). E.g if a company has several assets e,g. Furniture, Land,
Motor vehicles e.t.c, each of these assets will have their own ledger account
Dr Furniture a/c Cr
Date Particulars Amount (Sh) Date Particulars Amount (SH)
To know when to debit or credit which ledger account, depends on the nature of the transaction
and the type of elements being affected by the transaction.
At the end of the period each ledger account is balanced and closed off to find the closing balance
b/d- which is then extracted to the trial balance
The table below summarizes the rules of when to credit or debit a ledger account
ELEMENT EFFECT OF TRANSACTION ON THE ELEMENT
INCREASING DECREASING
ASSETS DEBIT CREDIT
Accounting is Fun – Enjoy It
, FINANCIAL MANAGEMNT FOR IT
CPA KOBI MATIBA EDWARD
LIABILITIES CREDIT DEBIT
CAPITAL CREDIT
INCOME CREDIT DEBIT
EXPENSES DEBIT CREDIT
DRAWINGS (when a DEBIT -
transaction is required to
Dr capital a/c we use the
Drawings a/c instead
Show the double journal entry for the following transactions, and draw the ledger
accounts to post the transactions.
➢ Owner introduces 60,000 cash into the business
➢ The business receives a bank loan of 50,000 from KCB bank
➢ The business pays 6,000 for rent expense
➢ The business sells goods for 12,000 cash.
➢ The business buys goods that are for resale worthy 8,000 cash.
➢ The owner withdraws cash of 4,000 from the business
➢ Purchase of motor vehicle for use in the business for 40,000
Balancing a ledger account
At the end of each period, individual ledger accounts are balanced and the remaining balances are
taken to the trial balance in preparation of the financial statements.
Steps in balancing a ledger account
1. Add the totals of each side (credit and debit) separately.
2. Record the higher total on both sides
3. Introduce a figure on the lower side,(the balance c/d, or c/f) to balance to the total)
4. Finish the double entry by entering a balance b/d on the opposite side below the equal
signs.
E.g. the cash ledger account has the following fiqures
Debit side------- 40, 60,90, 860, 340, Credit side ------
210, 75, 180.
Required: Draw the cash ledger account and balance it to find the balance c/d.
Comprehensive Illustration
The following transactions of a sole trader for the month of March are given post the transactions
to ledger accounts and extract a trial balance as at 31 March 2019
March
1 Started in business with Kshs.800,000 in the bank and Ksh. 500,00 in cash
2 Bought goods for sale Ksh. 145,000 paying by a cheque.
5 Cash sales Kshs.500,000
Accounting is Fun – Enjoy It
