This article may require cleanup to meet Wikipedia's quality standards. Please improve this article if you can. (March 2008)

The double-entry bookkeeping system refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits, and serves as a kind of error-detection system: if, at any point, the sum of debits do not equal the corresponding sum of credits, then an error has occurred.

Contents 1 Timeline 2 Account (accountancy) 3 Account Types (Nature) 4 Account Types (Periodicity of Flow) 5 Accounting Entries 6 Books of Accounts 7 Bookkeeping process 8 Abbreviations used in bookkeeping 9 Debits and credits 9.1 Examples of debits and credits 10 Example 1 10.1 Purchase invoice daybook 10.2 Bank payments daybook 10.3 Supplier ledger cards 10.4 Sales/customers 10.4.1 Sales daybook 10.4.2 Customer ledger cards 10.5 General (Nominal) ledger 10.5.1 Bank account 10.5.2 Unadjusted trial balance 10.5.3 Profit-and-loss statement and balance sheet 11 Example 2 11.1 Transactions 11.2 Ledgers 12 See also 13 Notes and references 14 External links

[edit] Timeline

Century	Development Stage
551-479 BCE	Confucius is described, by Sima Qian and other sources, as having endured a poverty-stricken and humiliating youth and been forced, upon reaching manhood, to undertake such petty jobs as accounting and caring for livestock. [1]
Roman Empire	The origins of a primitive double-entry system may possibly be traced as far back as the Roman Empire, in ""ex Oratione Ciceronis pro Roscio Comaedo", and Naturalis Historiae Plinii, lib. 2, cap. 7 where the advised system was "That the one side of their book was used for Debitor, the other for Creditor" (Huic Omnia Expensa. Huic Omnia Feruntur accepta et in tota Ratione mortalium sola. Utramque Paginam facit.).[citation needed]
12th	Later there are traces of the double-entry system in the accounting of the Islamic world from at least the 12th century.[1]
13th	The earliest extant records that follow the modern double-entry form are those of Amatino Manucci, a Florentine merchant at the end of the 13th century.[2]
14th	Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century.
15th	By the end of the 15th century, the merchant venturers of Venice used this system widely. Luca Pacioli, a monk and collaborator of Leonardo da Vinci, first codified the system in a mathematics textbook of 1494.[3] Pacioli is often called the "father of accounting" because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it.[4][5]

[edit] Account (accountancy)

An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. Financial Transaction Flows primarily encompass inflows on account of incomes and outflows on account of expenses. Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups i.e. assets, liabilities, and equity.^[6]

Within these primary groups each distinctive asset, liability, income and expense is represented by its respective "account". An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they only represent the inflows and outflows which are absorbed in the financial position elements on completion of the time period.

[edit] Account Types (Nature)

Type	Represent	Examples
Real	Physically tangible things in the real world and certain intangible things not having any physical existence	Tangibles - Plant and Machinery, Furniture and Fixtures, Computers and Information Processing Equipment etc. Intangibles - Goodwill, Patents and Copyrights
Personal	Business and Legal Entities	Individuals, Partnership Firms, Corporate entities, Non-Profit Organisations, any local or statutory bodies including governments are country, state or local levels
Nominal	Temporary Income and Expenditure Accounts for recognition of the implications of the financial transactions during each fiscal year till finalisation of accounts at the end	Sales, Purchases, Electricity Charges

e.g.: Sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account).

Similarly expenses during the financial period are recorded using the respective Expense accounts which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.

[edit] Account Types (Periodicity of Flow)

The classification of accounts into real, personal and nominal is based on their nature i.e. physical asset, liability, juristic entity or financial transaction.

The further classification of accounts is based on the periodicity of their inflows or outflows in context to the fiscal year.

Income is immediate inflow during the fiscal year.

Expense is the immediate outflow during the fiscal year.

Asset is long term outflow with implications extending beyond the financial period and hence represents un-amortised expense as per the traditional view. Conversely, an asset could be valued at the present value of its future inflows.

Liability is long term inflow with implications extending beyond the financial period and hence could represent un-claimed income as per traditional view. Conversely, a liability could be valued as the present value of future outflows.

Type of Accounts	Long Term Inflows	Long Term Outflows	Short Term Inflows	Short Term Outflows
Real Accounts	Assets
Personal Accounts	Assets	Liability
Nominal Accounts			Incomes	Expenses

Items in accounts are classified into five broad groups, also known as the elements of the accounts:^[7] Asset, Liability, Equity, Revenue, Expense.

The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept" as for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.

[edit] Accounting Entries

• The double entry accounting system records financial transactions in relation to asset, liability, income or expense related to it through accounting entries.
• Any accounting entry in double entry accounting system has two effects one of increasing one account and decreasing another account by equal amount.
• As any financial transaction has two different effects on two different accounts, it is known as "double entry" book keeping system.
• If the accounting entries are recorded without any errors, at any point of time the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances.
• The double entry bookkeeping system ensures that the financial transaction has equal and opposite effects in two different accounts.
• The accounting entries use terms such as debit and credit to avoid confusion regarding the opposite effect of the accounting entry e.g. If a accounting entry debits a particular account, the opposite account will be credited and vice versa.
• The rules for formulating accounting entries are known as "Golden Rules of Accounting".
• The accounting entries are recorded in the "Books of Accounts".

[edit] Books of Accounts

It does this by ensuring that each individual financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system. The two entries have equal amounts and opposite signs, so that when all entries in the accounts are summed, the total is exactly the same, in other words the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit entry" (Dr.) in one account, and a "credit" (Cr.) entry in the other account. A debit entry generally means that value has been added to the account, and a credit entry means that value is being subtracted from the account. The debit entry will be recorded on the debit side (left hand side) of a nominal ledger account and the credit entry will be recorded on the credit side (right hand side) of a nominal ledger account. A nominal ledger has a Debit (left) side and a Credit (right) side. If the total of the entries on the debit side is greater than the total on the credit side of the nominal ledger account then that account is said to have a debit balance.

As there are two entries for each transaction, the expression Double-Entry is used. As the total of the debit entries equals the total of the credit entries, when the nominal ledger accounts are listed in columns, the left column for accounts with net Debit balances and the right column for accounts with net Credit balances, then the total of all the Debit balances will equal the total of all the Credit balances. If this does not happen then an error has been made somewhere, for instance one of the transactions may not have been recorded twice, i.e. once as a debit and once as a credit as required in the double-entry bookkeeping system.

An example of an entry being recorded twice for double-entry bookkeeping would be a supplier's invoice for stationery costing $100. The expense or Debit entry is Stationery Nominal Ledger a/c $100 Dr (showing that $100 has been spent on stationery) and the Credit entry is to the Supplier's Control Nominal Ledger a/c $100 Cr (showing that we now owe the supplier $100). This transaction has now been recorded twice in the financial accounting system and the total value is $100 for both Debit and Credit values.

Double entry is only used within the nominal ledgers. It is not used in the daybooks, which normally do not form part of the nominal ledger system. The information from the daybooks themselves will be taken and used within the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct).

(The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger. If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double entry system.)

However as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance.

The double entry system uses nominal ledger accounts. From these nominal ledger accounts a Trial balance can be created. The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.

From the Trial balance the Profit and Loss Statement and the Balance Sheet can then be produced. The Profit and Loss statement will contain nominal ledger accounts that are Income or Expense type nominal ledger accounts. The Balance Sheet will contain nominal ledger accounts that are Asset or Liability accounts.

[edit] Bookkeeping process

The book keeping process primarily refers to recording the financial effects of financial transactions only into accounts. The variation between manual and any electronic accounting system simply stems from the latency between the recording of the financial transaction and its getting posted in the relevant account. This delay absent int electronic accounting systems due to instantenous posting into relevant accounts is not replicated in manual systems thus giving rise to primary books of accounts such as Sales Book, Cash Book, Bank Book, Purchase Book for recording the immediate effect of the financial transaction.

In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach.

After a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. For example the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money) and a credit entry might be made in the account for "Sale of Class 2 Widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing, which is simply a process to arrive at the balance of the account.

As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree - this agreement is not by chance - because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made either in the journals or during the posting process. The error must be located and rectified and the totals of debit column and credit column recalculated to check for agreement before any further processing can take place.

Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule. For example, the "Inventory" account asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements.

Finally financial statements are drawn from the trial balance, which may include:

• the income statement, also known as the statement of financial results, profit and loss account, or P&L
• the balance sheet, also known as the statement of financial position
• the cash flow statement
• the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity

[edit] Abbreviations used in bookkeeping

• A/C - Account
• A/R - Accounts Receivable
• A/P - Accounts Payable
• B/S - Balance Sheet
• c/d - Carried down
• b/d - Brought down
• c/f - Carried forward
• b/f - Brought forward
• Dr - Debit
• Cr - Credit
• G/L - General Ledger; (or N/L - Nominal Ledger)
• P&L - Profit & Loss; (or I/S - Income Statement)
• PP&E - Property, Plant and Equipment
• TB - Trial Balance
• VAT - Value Added Tax
• TDS - Tax Deducted at Source
• MAT - Minimum Alternate Tax
• EBIDTA - Earnings before Interest, Depreciation, Taxes and Amortisation.
• EBDTA - Earnings before Depreciation, Taxes and Amortisation.
• EBT - Earnings before Taxes.
• EAT - Earnings after Tax.

[edit] Debits and credits

This section duplicates, in whole or part, the scope of other article(s) or section(s). Please discuss this issue on the talk page and conform with Wikipedia's Manual of Style by replacing the section with a link and a summary of the repeated material, or by spinning off the repeated text into an article in its own right.

Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true:

assets = liabilities + equity

For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in any transaction must equal the sum of all credits made. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.

Debits and credits are then defined as follows:

• debit: A debit is recorded on the left hand side of a T account
• credit: A credit balance is recorded on the right hand side of a 'T' account
• Debit accounts = Asset and Expenses (also debit money received into bank accounts)
• Credit accounts = Gains (income) and Liabilities (also credit money paid out of bank accounts)

The following accounts have a normal balance of debit:

• Assets
• Accounts receivable: debts promised by other entities but not yet paid
• Drawings by the owners on equity
• Expenses

The following accounts have a normal balance of credit:

• Liabilities
• Accounts payable and taxes payable, notes or loans payable: debts promised to outsiders but not yet paid
• Revenue
• Capital

Credit and debit items are summarized at the end of a recording period in a trial balance which is a list of all the debit and credit balances. The trial balance acts as a self checking mechanism for the correctness of entries in the individual accounts and also as a starting point for the preparation of the Final Account which is made up of the balance sheet and the trading, profit and loss account.

[edit] Examples of debits and credits

Purchase of a Computer

Debit Computer account (Fixed asset account) is increased.

Credit Creditors account (Liability account) is increased.

Paying supplier for the computer

Debit Creditors account (Liability account) is reduced.

Credit Bank account (Asset account) is reduced.

The following table summarizes how debits and credits affect the different elements of the accounts.

▲ = increase, ▼ = decrease

Debit/credit

Account	Debit	Credit
Assets	▲	▼
Expenses	▲	▼
Liabilities	▼	▲
Equity	▼	▲
Revenue	▼	▲

[edit] Example 1

In this example the following will be used:

Books of prime entry (Books of original entry)

• Sales Invoice Daybook (records customer Invoice Daybook)
• Bank Receipts Daybook (records customer & non customer receipts)
• Purchase Invoice Daybook (records supplier Invoice Daybook)
• Bank Payments Daybook (records supplier & non supplier payments)

The books of prime entry are where transactions are first recorded. They are not part of the Double-entry system.

Ledger Cards

• Customer Ledger Cards
• Supplier Ledger Cards
• General Ledger (Nominal Ledger)
• Bank Account Ledger
• Trade Creditors Ledger
• Trade Debtors Ledger

[edit] Purchase invoice daybook

Purchase Invoice Daybook

Date	Supplier Name	Reference	Amount	Electricity	Widgets
10 July 2006	Electricity Company	PI1	1000	1000
12 July 2006	Widget Company	PI2	1600		1600
			-------	-------	-------
		Total	2600	1000	1600
			====	====	====
			Credit	Debit	Debit
			Trade	Electricity	Widgets
			Creditors	G/L	G/L
			control a/c	a/c	a/c

Each individual line is posted as follows:

• The amount value is posted as a credit to the individual supplier's ledger a/c
• The analysis amount is posted as a debit to the relevant general ledger a/c

From example above:

• Line 1 - Amount value 1000 is posted as a credit to the Supplier's ledger a/c ELE01-Electricity Company
• Line 2 - Amount value 1600 is posted as a credit to the Supplier's ledger a/c WID01-Widget Company

The totals of each column are posted as follows:

• Amount total value 2600 posted as a credit to the Trade creditors control a/c
• Electricity total value 1000 posted as a debit to the Electricity General Ledger a/c
• Widget total value 1600 posted as a debit to the Widgets General Ledger a/c

Double-entry has been observed because Dr = 2600 and Cr = 2600.

[edit] Bank payments daybook

The payments book is not part of the double-entry system.

Bank Payments Daybook

Date	Supplier Name	Reference	Amount	Suppliers	Wages
17 July 2006	Electricity Company	BP701	1000	1000
19 July 2006	Widget Company	BP702	900	900
28 July 2006	Owner's Wages	BP703	400		400
			-------	-------	-------
		Total	2300	1900	400
			====	====	====
			Credit	Debit	Debit
			Bank	Trade	Wages
			Account	Creditors	control a/c
				control a/c

Keys: PI = Purchase Invoice, BP = Bank Payment

Each individual line is posted as follows:

• The amount value is posted as a debit to the individual supplier's ledger a/c.
• The analysis amount is posted as a credit to the relevant general ledger a/c.

From example above:

• Line 1 - Amount value 1000 is posted as a debit to the Supplier's ledger a/c ELE01-Electricity Company.
• Line 2 - Amount value 900 is posted as a debit to the Supplier's ledger a/c WID01-Widget Company.

The totals of each column are posted as follows:

• Amount total value 2300 posted as a credit to the Bank Account.
• Trade Creditors total value 1900 posted as a debit to the Trade creditors control a/c.
• Other total value 400 posted as a debit to the Wages control a/c.

Double-entry has been observed because Dr = 2300 and Cr = 2300.

The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.

[edit] Supplier ledger cards

Supplier Ledger Cards

A/c Code: ELE01 - Electricity Company
Date	Details	Reference	Amount	Date	Details	Reference	Amount
17 July 2006	Bank Payments Daybook	BP701	1000	10 July 2006	Invoice	PI1	1000
31 July 2006	Balance c/d		0
			-------				-------
			1000				1000
			====				====
				1 August 2006	Balance b/d		0
A/c Code: WID01 - Widget Company
Date	Details	Reference	Amount	Date	Details	Reference	Amount
19 July 2006	Bank Payments Daybook	BP702	900	12 July 2006	Invoice	PI2	1600
31 July 2006	Balance c/d		700
			-------				-------
			1600				1600
			====				====
				1 August 2006	Balance b/d		700

[edit] Sales/customers

[edit] Sales daybook

Sales Invoice Daybook

Date	Customer Name	Reference	Amount	Parts	Service
2 July 2006	JJ Manufacturing	SI1	2500	2500
29 July 2006	JJ Manufacturing	SI2	3200		3200
			-------	-------	-------
		Total	5700	2500	3200
			====	====	====
			Debit	Credit	Credit
			Trade	Sales	Sales
			debtors	Parts	Service
			control a/c	a/c	a/c

Each individual line is posted as follows:

• The amount value is posted as a debit to the individual customer's ledger a/c.
• The analysis amount is posted as a credit to the relevant general ledger a/c.

From example above:

• Line 1 - Amount value 2500 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing.
• Line 2 - Amount value 3200 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing.

The totals of each column are posted as follows:

• Amount total value 5700 posted as a debit to the Trade debtors control a/c.
• Sales-parts total value 2500 posted as a credit to the Sales parts a/c.
• Sales-service total value 3200 posted as a credit to the Sales service a/c.

Double-entry has been observed because Dr = 5700 and Cr = 5700.

[edit] Customer ledger cards

Customer Ledger cards are not part of the Double-entry system. They are for memorandum purposes only. They allow you to know the total amount an individual customer owes you.

CUSTOMER LEDGER CARDS

A/c Code: JJM01 - JJ Manufacturing
Date	Details	Reference	Amount	Date	Details	Reference	Amount
2 July 2006	Sales invoice daybook	SI1	2500	20 July 2006	Bank receipts daybook	BR1	2500
29 July 2006	Sales invoice daybook	SI2	3200	31 July 2006	balance c/d		3200
			-------				-------
			5700				5700
			====				====
1 August 2006	Balance b/d		3200

[edit] General (Nominal) ledger

GENERAL (NOMINAL) LEDGER

Sales parts
Date	Details	Reference	Amount	Date	Details	Reference	Amount
31 July 2006	Balance	c/d	2500	2 July 2006	Sales invoice daybook	SDB	2500
			-------				-------
			2500				2500
			====				====
				1 August 2006	Balance	b/d	2500
Sales service
Date	Details	Reference	Amount	Date	Details	Reference	Amount
31 July 2006	Balance	c/d	3200	29 July 2006	Sales invoice daybook	SDB	3200
			-------				-------
			3200				3200
			====				====
				1 August 2006	Balance	b/d	3200
Electricity
Date	Details	Reference	Amount	Date	Details	Reference	Amount
10 July 2006	Electricity Co.	PDB	1000	31 July 2006	Balance	c/d	1000
			-------				-------
			1000				1000
			====				====
1 August 2006	Balance	b/d	1000
Widgets
Date	Details	Reference	Amount	Date	Details	Reference	Amount
12 July 2006	Widget Co.	Pdb	1600	31 July 2006	Balance	c/d	1600
			-------				-------
			1600				1600
			====				====
1 August 2006	Balance	b/d	1600
Other a/c
Date	Details	Reference	Amount	Date	Details	Reference	Amount
28 July 2006	Owner's Wages	BPDB	400	31 July 2006	Balance	c/d	400
			-------				-------
			400				400
			====				====
1 August 2006	Balance	b/d	400
Bank Control A/c
Date	Details	Reference	Amount	Date	Details	Reference	Amount
31 July 2006	Bank receipts daybook	BRDB	2500	31 July 2006	Bank payments daybook	BPDB	2300
				31 July 2006	Balance	c/d	200
			-------				-------
			2500				2500
			====				====
1 August 2006	Balance	b/d	200
Trade Debtors Control A/c
Date	Details	Reference	Amount	Date	Details	Reference	Amount
1 July 2006	Balance	b/d	0	31 July 2006	Bank receipts daybook	BRDB	2500
31 July 2006	Sales Invoice Daybook	SDB	5700	31 July 2006	Balance	c/d	3200
			-------				-------
			5700				5700
			====				====
1 August 2006	Balance	b/d	3200
Trade Creditors Control A/c
Date	Details	Reference	Amount	Date	Details	Reference	Amount
31 July 2006	Bank Payments Daybook	BPDB	1900	1 July 2006	Balance	b/d	0
31 July 2006	Balance	c/d	700	31 July 2006	Purchase Daybook	PDB	2600
			-------				-------
			2600				2600
			====				====
				1 August 2006	Balance	b/d	700

The customers ledger cards shows the breakdown of how the trade debtors control a/c is made up. The trade debtors control a/c is the total of outstanding debtors and the customer ledger cards shows the amount due for each individual customer. The total of each individual customer account added together should equal the total in the trade debtors control a/c.

The supplier ledger cards shows the breakdown of how the trade creditors control a/c is made up. The trade creditors control a/c is the total of outstanding creditors and the suppliers ledger cards shows the amount due for each individual supplier. The total of each individual supplier account added together should equal the total in the trade creditors control a/c.

Each Bank a/c shows all the money in and out through a bank. If you have more than one bank account for your company you will have to maintain separate bank account ledger in order to complete bank reconciliation statements and be able to see how much is left in each account.

[edit] Bank account

Bank A/c
Date	Details	Reference	Amount	Date	Details	Reference	Amount
1 July 2006	Balance	b/d	0	17 July 2006	Bank Payments Daybook	BP701	1000
20 July 2006	Bank Receipts Daybook	BR1	2500	19 July 2006	Bank Payments Daybook	BP702	900
				28 July 2006	Bank Payments Daybook	BP703	400
				31 July 2006	Balance	c/d	200
			-------				-------
			2500				2500
			====				====
1 August 2006	Balance	b/d	200

[edit] Unadjusted trial balance

Trial balance as at 31 July 2006
	A/c description	Debit	Credit
	Sales-parts		2500
	Sales-service		3200
	Widgets	1600
	Electricity	1000
	Other	400
	Bank	200
	Trade Debtors Control A/c	3200
	Trade Creditors Control A/c		700
		-------	-------
		6400	6400
		=====	=====
Both sides must have the same overall total
Debits = Credits.

The individual customer accounts are not to be listed in the trial balance, as the Trade debtors control a/c is the summary of each individual customer a/c......

The individual supplier accounts are not to be listed in the trial balance, as the Trade creditors control a/c is the summary of each individual supplier a/c.

Important note: this example is designed to show double entry. There are methods of creating a trial balance that significantly reduce the time it takes to record entries in the general ledger and trial balance.

[edit] Profit-and-loss statement and balance sheet

Profit and loss statement

for the month ending 31 July 2006
		Dr
x	Sales
x	Sales-parts	2500
x	Sales-service	3200
x		-------
x		5700
x	Widgets	1600
x		-------
x	Gross Profit	4100
x	Less expenses
x	Electricity	1000
x	Other	400
x		-------
x		1400
x		-------
x	Net Profit	2700
x		====

Balance sheet

as at 31 July 2006
			Dr
x	Current Assets
x	Bank A/c		2000
x	Trade Debtors		3200
x			-------
x			3400
x	Current Liabilities
x	Trade Creditors		700
x			-------
x			700
x			-------
x	Net Current Assets		2700
x			====
x	Capital & Reserves
x	Revenue Reserves a/c		2700
x			-------
x			2700
x			====

---

[edit] Example 2

[edit] Transactions

XYZ Company is closing its books for the end of the month. Each of the daily journals has been summarized and the amounts are ready to be transferred to the general ledger. The amounts to be transferred are:

• Purchase raw materials on trade credit: $500,000
• Pay workers from cash in bank to make goods: $1,500,000
• Pay sales force from cash in bank to sell goods: $1,000,000
• Sell goods for cash: $3,500,000

To close the books for the month, we will adjust expenses and revenue to zero by appropriately crediting and debiting the income summary and then closing the income summary to retained earnings (part of equity).

These items are entered in the ledger below; each matching credit and debit have been numbered to make finding them in the ledger easier.

[edit] Ledgers

General Ledger (in 000s)

Transaction	Debit	Credit	Balance
Expenses
Balance forward			-
1 Raw materials	$ 500		$ 500
2 Labor	$ 1500		$ 2000
3 Sales costs	$ 1000		$ 3000
5 Income summary		$ 3000	-
Total	$ 3000	$ 3000
Revenue
Balance forward			-
4 Revenue from sales		$ 3500	$ 3500
6 Income summary	$ 3500		-
Total	$ 3500	$ 3500
Cash
Balance forward			$11000
2 Labor		$ 1500	$ 9500
3 Sales costs		$ 1000	$ 8500
4 Revenue from sales	$ 3500		$12000
Total	$ 3500	$ 2500
Accounts Payable
Balance forward			$ 1000
1 Raw materials		$ 500	$ 1500
Total	-	$ 500
Income summary
Balance forward			-
5 Expense	$ 3000		$ 3000
6 Revenue		$ 3500	$ 500
7 Retained earnings	$ 500		-
Total	$ 3500	$ 3500
Retained earnings
Balance forward			$10000
7 Income summary		$ 500	$10500
Total	-	$ 500
Total all accounts:	$13500	$13500

The amount in equity (in the form of retained earnings) has changed with a net credit of $500,000. Since equity has a normal balance of credit, this means there is now $500,000 more in equity than at the beginning of the month.

[edit] See also

• Accounting equation
• Fiscal Year
• Nostro and vostro accounts
• Single-entry accounting system

[edit] Notes and references

[edit] External links

Wikibooks has a book on the topic of Accounting

• A Concise Explanation of the Accounting Equation
• A double entry GnuCash How-to
• Bean Counter's bookkeeping tutorial
• Bookkeeping Terms
• GnuCash data entry concepts