Double Entry Bookkeeping Principle
The double entry bookkeeping principle is profoundly important in the world of accounting. It is essential that students of accounting gain an understanding, from the outset, of this principle that is more than 500 years old.
This best way to explain the double entry bookkeeping principle is to give an example of transactions from the books of the imaginary organisation called Lots of Fun Pty Ltd.
| Example 1: | Lots of Fun Pty Ltd purchased a car for $5,000 using a loan from the bank, the two effects are:
Refer to the figure 1: “nature of accounts” below. |
| Example 2: | Lots of Fun Pty Ltd received $30 cash from a customer for the hire of a tennis court, the two effects are:
Refer to the figure 1: “nature of accounts” below. |
| Example 3: | Lots of Fun Pty Ltd employs a bookkeeper and pays that person a weekly wage of $500, the two effects are:
Refer to the figure 1: “nature of accounts” below. |
| Example 4: | If Lots of Fun Pty Ltd pays a debt that it owes to a supplier of $1000, the two effects are:
Refer to the figure 1: “nature of accounts” below. |
Your job (as an accountant or a bookkeeper) is to correctly record these transactions in the financial ledgers of the organisation. You have to record one debit affect and one credit affect for each transaction. Of course, these days modern account software does the job for you but understanding the principle is important in understanding how accounting software works.
Would you like to try some double-entry bookkeeping exercises?
Working Out Debits and Credits
Now let’s introduce to you a diagram (figure 1) that you must indelibly print into your brain! Your ability to remember this diagram might be the key to understanding the double entry bookkeeping principle and your success in book-keeping.