PRINCIPLE OF DOUBLE ENTRY & TRIAL BALANCE

Chapter's Outline

  • Double entry system
  • Ledger entries
  • Balancing off ledgers accounts
  • Trial balance

DOUBLE ENTRY SYSTEM

Consist of duality concept

  • each transaction has two sided / dual effect on each parties involved in it double entry
  • known as DEBIT and CREDIT

A + E = L + O + R

(+) DEBIT

(-) CREDIT

(-) CREDIT

(+) DEBIT

  • If assets and expenses increase, we debit it
  • If liabilities, owner's equity and revenue increase, we credit it

Double entry means that every transaction is recorded twice. In accounting, all transaction have dual effect. Once to the debit side of ledger account and once to the credit side of another ledger account.

Ledger Account

  • Account (individual accounting records of increase and decrease in specific assets, liability, capital, revenue, and expenses)

Consists of 3 parts:

  • Title of account
  • Left side (Debit side)
  • Right side (Credit side)
  • Referred as T- account/ ledger account

Rules to identify whether debited / credited

  • to record an increase in assets
  • to record a decrease in liabilities
  • DEBIT
  • to record a decrease in capital
  • CREDIT
  • to record a decrease in assets
  • to record an increase in liabilities
  • to record an increase in capital

Analysis of transactions

  • Determine the impact of the transaction on the two items involved.
  • Determine whether an asset, a liability, owner's equity, revenue, or expenses account is effected by the transaction.

BALANCING OFF LEDGERS ACCOUNTS

Purpose:

  • To determine how much balance left in each account / balance at the end of month

Debit balance = Total Debit > Total Credit

Credit balance = Total Credit > Total Debit

Zero balance = Total Debit = Total Credit

TRIAL BALANCE

  • A list of all ledgers accounts with balance at a particular date.
  • It is important document in that it checks the accuracy of the entries in the recording process
  • Rules: Total Debit Balances = Total Credit Balances
  • Trial balance then serves as a basic of preparing the FINANCIAL STATEMENTS

Purpose of a trial balance

  • To prove/check whether the debits equal to the credits balance or not
  • To identify/uncover error in journalizing and posting
  • To assist the preparation of the financial statement

ERRORS IN TRIAL BALANCE

errors effecting

errors not effecting

  • trial balance not balance (Total Debit not same with Total Credit)
  • trial balance balanced (Total Debit = Total Credit)
  • Single entry
  • Errors of transportation
  • Errors in addition
  • Posting to incorrect side of accounts
  • Errors in trial balance itself
  • Error of omission
  • Error of commission
  • Error of principle
  • Complete reversal of entries
  • Error of original entry