Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes

  • You need to pay close attention because this is where the accounting part in accounting begins.
  • This is the basic rule in accounting which states that any accounting transaction should be recorded twice.
  • Every debit should have a corresponding credit and every credit should have a corresponding credit.
  • No matter the case,there are always two sides or aspects to every financial transaction a debit and a credit.
  • In accounts you should always credit the giver and debit the receiver.
  • Often times the receiver and the giver are not actual persons but “accounts” or representations for example a business might an account for J. Jimu but can also have a Wages account where they record all the wages payments they make to their employees.
  • An account therefore is a collection of summarised financial transaction of a similar class, category and nature or pertaining to the same person, entity or expense, revenue, liability,asset etc.
  • The first thing you need to do when recording a transaction is to identify the accounts involved.
  • Identify which account is giving and therefore must be credited
  • Next identify the account receiving which therefore must be debited
  • The identify the effective amounts involved int the transaction.
  • Below are some of the most business transactions that you will encounter during your course.

Illustration of the double entry principle.

Example 1 Transactions involving capital

  • M. Mukoyi started a business by depositing a cheque of $25 000 into the business bank account
  • Account to be debited: Bank
  • Account to be credited: Capital
  • This is typical of all transactions involved in the starting of a business. You should never record the proprietor (owner’s) name in his/her own book of accounts.
  • The proprietor’s stake in the business is always represented by the Capital account which is almost always Credited except in instances that are beyond the scope of Ordinary Level accounts.
  • It is therefore a safe bet to assume that whenever you encounter the Capital account it must therefore be credited.
  • Amount involved:$25 000

Example 2 Cash Purchases

  • Goods (intended for resale) are bought on cash for $1 500.
  • Account to be debited: Purchases
  • Account to be credited: Cash
  • Amount involved: $1 500
  • You should never confuse the Purchases account ( which always has a debited balance) and the Purchases (Ledger) Control account which will be examined later in your studies.
  • Most students confuse these too invariably leading to their failing the question involved.

Example 3 Credit Purchases

  • Goods (intended for resale) worth $800 bought on credit from Mohammed Mussa.
  • Accounts to be debited: Purchases accounts.
  • Accounts to be credited: Mohammed Mussa.
  • Amount involved: $800
  • When goods from a supplier on credit the supplier’s name is recorded into an account named after the supply i.e. the amount is eponymous.

Example 4 Accounts involving assets

  • Bought a Motor Vehicle on cash for $5 000.
  • Account to be debited: Motor Vehicle
  • Account to be credited: Cash
  • Amount involved: $5 000
  • Asset accounts are usually named after the asset involved in the transaction e.g. Property Plant and Equipment Account, Buildings Account, Furniture and Fittings Account etc

Example 5 The sale of an assets

  • Sold Buildings to ABC Limited for $ 50 000 cash.
  • Account to be debited: Cash
  • Account to be credited: Buildings
  • Amount involved: $50 000
  • The temptation would have been somehow to include an account named ABC Limited
  • This would have been incorrect as all transactions involving cash must be recorded into the cash account without involving the name of the other party paying cash.
  • This is consistent with example two above.

To practice double entry go and try the following exercise.

To access more topics go to the Principles of Accounts Notes page.