Accounts

Examples on the Principle of Double Entry System

len Alfred Ajibola - Fri, 03rd April, 2020 @ 09:40: AM

Topics in Accounts

Characteristics of Double Entry System Examples on the Principle of Double Entry System Advantages and Limitations of the Double System in Accounting Scheme of work, Financial Accounting, SS1, Third Term Scheme of work, Financial Accounting, SS1, Second Term Scheme of work, Financial Accounting, SS1, First Term Differences between Bookkeeping and Accounting Journal - Contents, Format, Characteristics and Advantages of Journal Bank Wire and Wire Transfer Chart of Accounts Meaning, Importance, Processes, Examples and Steps in Balance Sheet Reconciliations


Academic Questions in Accounts

Please check out our Test Your Knowledge page to see all Questions and Answers

Which of the following statement is true concerning bank wire?

  • A. Another name for bank wire is cash transfer

  • B. The term 'wire' in bank wire signifies a computer based programmed message sent to a bank customer in regards to their account information, transaction and other important financial notifications

  • C. The International Bank Account Number (IBAN) must always be involved when carrying out a bank wire process

  • D. The term bank wire has no significant relationship with wire transfer

  • E. Cyber criminals cannot utilize bank wire threats like CSRS, phishing and whaling to achieve their fradulent act

  • F. All the above statements are true

The following are recommendations to follow during the process of balance sheet reconciliation EXCEPT _____.

  • A. All balance sheet accounts should be reconciled periodically, quarterly or annually

  • B. Comparing the trial balance of both the payables and receivables with the respective aging schedule

  • C. Analysis of enteries and relocating them to a sub-ledger if need be

  • D. Comparing the general ledger trial balance of the account to another source; for instance, a bank statement

  • E. Analysis of the differences in both accounts and making appropriate correction to ensure the correctness of entered information

  • F. None of the above

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What is Double Entry?

Every accounting system is based on the principle of double entry. Before we further on the examples that reflects this principle (double entry system of accounting), it will be a great idea if we comprehend the concept of principle of double entry. Below is a brief introduction:

Double Entry system may simply be defined as the process of keeping an account with a balanced (or an equal) debit (Dr) and credit (Cr) side.
Double Entry System - Len Academy

Please read an Introduction to the Principle of Double Entry here.

An understanding of both sides (Debit and Credit) of the double entry is crucial; but for now, think of the debit side as a recording point for 'one that receives' while the credit side accounts for 'one that gives out'.

Just before we look into the examples of the double entry system, a transactional knowledge of what's recorded in the Debit and Credit sides of the account book is very important. The link below will prove useful.

Please read more on the Debit and Credit sides of a Double Entry System here.


Examples of Double Entry

The instances below will be used to explain the double entry system:


1. Purchase of Phone

When a buyer purchases a phone, he or she automatically has a new asset; and that's the phone. An increase in asset is recorded on the debit side of the entry.

Conversely, the buyer pays out some sum of money to purchase the new phone. The money payed out represents a decrease in asset (according to the buyer) and it's recorded on the credit side of the dual entry system.

You can read on Scale of Preference and Opportunity Cost here.

If this buyer were to record both entries into an accounting system, the newly owned phone will be recorded on the debit side while reflecting the money payed out on the the credit side.

Debit      New Phone owned -> Increase in Asset 

Credit     Money Paid Out -> Decrease in Asset

You can read on Balance Sheet Reconciliation here.

 

2. Receipt of Bank Loan

When an individual receives a loan from a bank, such will reflect as an increase in the person's asset. This is true because the money can be utilized (or invested) for its intended purpose(s). Recall that an increase in asset is recorded on the debit side of the dual or double accounting system.

Please read on the Concept and Types of Cost here.

Conversely, the individual who received the loan will have to repay it alongside some interest. The interest paid is considered as an increase in liability; and thus, it is recorded on the credit side of the dual accounting system.

Debit     Cash received -> Increase in Asset

Credit    Money received + Interest -> Increase in Liability

You can read on Cheque as a method of payment here.

 

3. Payment of School Fees

A part-time student who does other jobs to pay his school fees will consider the paid fee (money) an expense. This is true because the student will need to save or budget some money for this purpose.

Conversely, the training and lectures received by the student will be considered as an increase in equity. Equity in this instance (of education) implies that he enjoys the necessary support needed to become successful in his chosen field of study.

You can Len Academy Questions on various Subjects here.

If the student decided to record this inventory in a financial book, the payment of school fees will be recorded on the debit side (because it's an increase in expense) while the lectures received, on the credit side (because it's an increase in equity).

Debit     School Fee -> Increase in Expense

Credit    Lectures received -> Increase in Equity

You can read on the Advantages and Limitations of the double Entry System here.

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len

Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


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Amazing facts in Accounts

It is believed that Bookkeeping is the only English word to contain three sets of double letters repeatedly.

please read our article on bookkeeping vs Accounting here


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