Double entry method

In previous sections we touched on the trial balance. It is important that this report balances after every transaction. By balance we mean that, in the case of the trial balance, the sum of all the debits equal that of the credits. This is one way we know that the accounting has been done correctly.

In this section and the next we will consider the double entry method and we will explain how this happens.

All transactions in accounting must affect at least two accounts. This is the golden rule of double entry accounting and what keeps the system balanced.

This is not the whole rule. There is another part to this that speaks about debits and credits. For now though, lets forget debits and credits. Only think about accounts.

To understand the double entry method and how it works lets look at a few examples.

 

Example 1

The owner of a new startup transfers R10mil to the business account for XYZ Printers (Pty)Ltd.

If all transactions affect at least two accounts, what effect would the above mentioned transaction have on the accounts of XYZ Printers?

These exercises might be difficult initially but with some practise the answers will come fairly easily. Usually the answer reveals itself by carefully thinking through the details of a transaction. Another way of thinking about it is to ask: What is different in the accounts of the business after the transaction.

In our example the owner himself had put money into the business bank account. That means that the business has R10mil more in its bank account than before. Also, the business owes the owner R10mil more than it did before the transaction.

So the answer to the question of which accounts are affected is 1. Bank Account and 2. Shareholders Loan (Equity)

Let’s look at another example to help us understand the double entry method.

 

Example 2

Sold printed goods to BBM Phones to the value of R4,500. BBM will pay this in 30 days.

Again we have to answer the question of which two accounts are affected. And to do so we can ask ourselves how the transaction has changed the accounts of the business.

Since we ‘sold goods’ the one account that is affected is Sales. That’s pretty straightforward.

The other account involved can be seen from the bit about ‘BBM will pay this in 30 days’. This means we give them the goods and instead of them giving us money in exchange, they give us a promise to pay us in 30 days. That’s what debtors or accounts receivable are. Customers who give us a promise of payment.

 

What follows is a series of transactions that can be used to get some exercise in spotting the two or more accounts affected in an accounting transaction.

Name the two accounts involved in the following transactions.

  • Bought stationery from a supplier. This was bought on account. You will only pay in 30 days.
  • Paid R5000 towards a company car. This was a debit order.
  • Bought food for a office function. This was paid by EFT
  • Owner bought some paper for a job and paid for it from his personal bank account
  • Bank debited the bank account with the monthly service fee of R200.
  • Paid salaries into staff bank accounts. Payment made via EFT.
  • Customer paid for a job that was printed. Paid by EFT. A 10% discount was given. (tip: there are more than two accounts involved here.)
  • An EFT was received from a customer as payment on his outstanding account.

 

It is important to have a good grasp of these concepts before moving on.

Answers

  • Bought stationery from a supplier. This was bought on account. You will only pay in 30 days - Answer: Stationery and Creditors/Accounts Payable
  • Paid R5000 towards a company car loan. This was a debit order - Answer: Bank and Car Loan
  • Bought food for a office function. This was paid by EFT - Answer. Entertainment and Bank
  • Owner bought some paper for a job and paid for it from his personal bank account - Answer: Cost of Sales and Members Loans
  • Bank debited the bank account with the monthly service fee of R200. - Answer: Bank Charges and Bank
  • Paid salaries into staff bank accounts. Payment made via EFT. - Answer: Salaries and Bank
  • Customer paid for a job that was printed. Paid by EFT. A 10% discount was given. (tip: there are more than two accounts involved here.) - Answer: Sales, Bank and Discount Allowed.
  • An EFT was received from a customer as payment on his outstanding account. - Answer: Bank and Debtors/Accounts Receivable