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.