DOUBLE ENTRY CONCEPT
We know that every transaction has two aspects; the gain aspect and the loss aspect. The famous saying “Nothing comes free of cost” is the true gist of double entry system. For example, Mr.Daniyal buys a car for cheque $5000. The gain aspect would be the motor vehicle and the loss aspect would be the loss of $5000 from his bank account account. The double entry concept is to record each transaction in two parts, with respect to the “Gain” and “Loss” aspects of each transaction. The loss expects are always credited and gain aspects debited.
You cannot record the accounting data haphazardly, so what the accountants use is a “Daily journal “, which has the following format (In accordance with the O level syllabus) Daily journals are based on double entry concept.
For instance consider the following examples
- Daniyal starts a business X on 01-11-2011. He invests $50,000 cash into the business. On the same day Mr.asif lends him $1000 which is also invested into the business.
- Business X bought a van worth $5600 by cheque, for distributing the items, on 11th november 2011.
- Business x purchases items from admiral traders worth $2000 on cash on 16-11-2011.
- Bought goods from f.k traders on credit on 17.11.2011 worth $400
- Sold goods of $550 to Mr waleed on cash on 17.11.2011
- Sold goods of $600 to M.aun on credit on 18.11.2011
- Mr Aun returned sold goods worth $500 due to fault on 19.11.2011.
- Deposited money earned by sales into the bank on 20.11.2011
|11.11.2011||Motor vehicle account||$5600|
|Purchased from admiral traders|
|Bought goods from FK traders on credit|
|Sold goods on cash|
|Sold goods to MrAun on credit|
|19.11.2011||Sales return account||$500|
|Mr. Aun returned goods due to a fault|
|Deposited into the bank|
You may come across a term “bad debts”. These are the debts or the money owed to a business by other firms/people which can not be recovered. Writing off bad debts means to close the account. Bad debts are basically expenses and so are debited.
Like wise, when a business gives cash discount on the items sold, discount is an expense to that business and so is debited. On the other hand, when a business purchases items and receives a cash discount on the purchase, that discount is basically an income and thus is credited.