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.