Double Entry Bookkeeping

Introduction

At the end of each trading period, usually a day, the total of the transactions recorded in the books of prime entry are transferred into the ledger accounts. The totals are recorded using a double entry format, which reflect the duality concept, i.e. each transaction has two effects on the entity.

The ledger accounts

Each class of transaction and event is recorded in its own account, called a ledger. These were traditionally drawn up manually as an enlarged 'T;' hence they are popularly referred to as T accounts.

The two sides of the T account were created to reflect the dual nature of transactions, with one side (the left) representing a debit entry and the other side (the right) representing a credit entry.

Ledger accounts are traditionally drawn up as illustrated below:

Debits and credits

Debits typically reflect an increase in business assets or the incurring of expenses. Credits typically reflect an increase in business liabilities or the earning of income. Many mnemonics exist to aid learning this. One such example is 'PEARLS:'

It is important to note that the opposite is also true, for example; a reduction in assets would constitute a credit entry into the ledgers.

Steps to record a transaction

(1)Identify the items that are affected.

(2)Consider whether they are being increased or decreased.

(3)Decide whether each account should be debited or credited.

(4)Check that a debit entry and a credit entry have been made and they are both for the same amount.

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Tags:	ledger accounts;debits;credits;PEARLS;double entry