After reading this topic you should be able to understand 1-Double Entry System 2- Accounts and their classification 3- Rules of Debit and Credit

1. Understanding Double Entry System

8. Five elements of accounts with their respective normal balance Rules of Debit and Credit CREDIT DEBIT DEBIT DEBIT CREDIT WHEN DECREASE DEBIT CREDIT CREDIT CREDIT DEBIT WHEN INCREASE DEBIT CREDIT CREDIT CREDIT DEBIT NORMAL BALANCE EXPENSES REVENUE CAPITAL LIABILITIES ASSETS

9. Assets Accounts’ classification Machinery, Plant, Equipments, Building, Computer, Vehicle Furniture, Fixture etc + Inventory Cash Advance payments of Expenses Advance Rent Advance Insurance etc Bank Accounts Receivable Assets increase when debited and decrease when credited Credited Debited When you buy these assets When you sell these assets When you receive cash When you pay cash When you deposit When you withdraw When you Sell on credit When you Receive payment Against cr sales When you pay expense in advance When you Adjust them

11. Liabilities increase when credited and decrease when debited Purchase on credit Accounts Payable Rent Payable Wages payable etc Advances from customers Credited Debited When you buy Goods/ assets on Credit When expenses Not paid on time When you pay for Goods/ assets Bought on Credit When unpaid expenses Are paid When advance Received from Customers When goods Deliver for the Amount received Or Cash returned Liabilities.

13. Equity or Capital Equity or Capital 1-Suffering a loss 2- withdraw of cash 3-withdraw of Goods 1-Start business with Cash and Assets 2-Earning Profit 3-Investing further cash or assets. Add Capital or Equity increase when credited and decrease when debited Minus Credit When increase Debit when decrease Capital or Equity = Assets-Liabilities

15. Revenue or Income increase when credited and decrease when debited Credit Revenue when increase -When goods or services are sold on Cash or on credit

16. Revenue or Income increase when credited and decrease when debited Debit Revenue when decrease -Technically revenue not credited usually except 1-At the end of period when closed and 2-Sales returns

18. Expenses When incurred/ increased are debited Wages Purchases Utility bills Other Exp Rent Bank charges Taxes

20. How to originate Journal entry We have successfully completed our first part of understanding Double Entry system , next we have to do is how to make a Journal Entry. To make Journal entries we must recall how to debit or credit accounts. Lets have a look below to understand it more practically. On 1 st of Feb 2012, Sameer started a business by Investing Rs. 200,000 in Cash. We know that when we start business our two accounts are affected. One of two is Capital which increased so wed credit it secondly our cash also increase so we debit it. Don’t forget to use “To” before each credit.

22. On 2 nd of Feb 2012, Sameer purchased building for cash Rupees 80,000. In the above transaction two assets accounts are affected. Sameer purchased Building, resulting an increase in asset (building) secondly cash paid for building thus decreasing in Cash. We know that we debit assets when increase and credit when decrease. We originate Journal entry in the following manner.