Accounting for Bankers and Finance Managers, Masters in Banking and Investment

2021

CH4

DOUBLE ENTRY BOOK KEEPING SYSTEM

Double-entry bookkeeping system ensures the integrity of the financial values recorded
in a financial accounting system. It does this by ensuring that each individual transaction
is recorded in at least two different nominal ledgers (sections) of the financial accounting
system and so implementing a double checking system for every transaction. It does this
by first identifying values as either a Debit or a Credit value.

A Debit value will always be recorded on the debit side (left hand side) of a nominal
ledger account and the credit value will be recorded on the credit side (right hand side) of
a nominal ledger account. A nominal ledger has both a Debit (left) side and a Credit
(right) side. If the values on the debit side are greater than the value of the credit side of
the nominal ledger then that nominal ledger is said to have a debit balance.

Each transaction must be recorded on the Debit side of one nominal ledger and that same
transaction and value is also recorded on the Credit side of another nominal ledger hence
the expression Double-Entry (entered in two locations) one debit and one credit. This
ensures that when the nominal ledgers (sometimes known as accounts) are placed in a list
which has two columns, the left column for listing nominal ledgers with Debit balances
and the right column for ledgers with Credit balances, then the total of all the Debit
values will equal the total of all the Credit balances. If this does not happen that may
mean that one of the transactions was not 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 is recorded and analysed. The expense or
Debit entry is Stationery Ledger a/c $100 Dr and the Credit entry is to the Supplier's
Ledger a/c $100 Cr. 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 ledgers. It is not used within the recording of the
daybooks. 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.

Lectures by; Robert A Kakande, Msc Accounting and Finance, FCCA, CPA, 1
B.Com (Accounting), HDM
Accounting for Bankers and Finance Managers, Masters in Banking and Investment
2021

The double entry system uses ledger accounts. From these ledger accounts a Trial balance
can be created. The trial balance lists all the ledger account balances sequentially. The list
is spilt 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.
BOOKKEEPING PROCESS/ ACCOUNTING CYCLE

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 recording the details of all of these source
documents into multi-column journals (also known as books. For example, all credit sales
are recorded in the Sales Journal; all Cash Payments are recorded in the Cash Payments
Journal. Columns in the journal normally correspond 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 or daily, 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. The 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

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

Lectures by; Robert A Kakande, Msc Accounting and Finance, FCCA, CPA, 2
B.Com (Accounting), HDM
Accounting for Bankers and Finance Managers, Masters in Banking and Investment
2021

 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.

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 ▼ ▲

BOOKS OF PRIME ENTRY (BOOKS OF ORIGINAL ENTRY)

The books of prime entry are where transactions are first recorded. They are not part of
the Double-entry system. A journal is a book of original entry where transactions are first
recorded when they occur. The journal was once the most widely used book in book
Lectures by; Robert A Kakande, Msc Accounting and Finance, FCCA, CPA, 3
B.Com (Accounting), HDM
Accounting for Bankers and Finance Managers, Masters in Banking and Investment
2021

keeping but today entries in the journal are limited to records of unusual transactions
which normally don’t involve receipt or payment of money. The typical journals are;
a) Sales journals
b) General journal
c) Purchase journal
d) Cashbook
e) Bank Receipts Daybook (records customer & non customer receipts)
f) Bank Payments Daybook (records supplier & non supplier payments)

In a banking institution, the general journal is what is most commonly used and it records
all types of transactions. It records;
a) The date on which the transaction occurred
b) The name of the account to be debited
c) The name of the account to be credited
d) Brief explanation of the transaction
e) Ledger page column

Example
The following were the transactions of XYZ for the month of August 2012.
a) Aug 1; started a Microfinance business with cash of his own of UGX.
100,000,000 in the bank
b) Aug 2; Borrowed UGX. 50,000,000 from the bank and kept it on the bank
account
c) Aug 2; Rented premises and paid by cheque UGX.12,000,000
d) Aug 3; Bought a car and paid by cheque UGX. 20,000,000
e) Aug 5; Paid electricity by cheque UGX. 1,000,000
f) Aug 5; Withdrew funds from the bank for operational use of UGX.100,000,000
and locked them up in the strong room.
g) Aug 7; Bought stationery by cheque of UGX. 1,000,000
h) Aug 10; Disbursed loans to the following customers;
i. Mukasa UGX.1,000,000
ii. Okello UGX. 500,000
iii. Mukwasi UGX.2,000,000
iv. Mugisha UGX. 3,000,000

i) Aug 10; Received acceptance commission on disbursed loans of 1% of all.

j) Aug 30; Received loan repayments as follows with interest and the loans are paid
on time;
i. Mukasa UGX. 150,000, where UGX.20,000 is interest
ii. Okello UGX.25,000, where 3,000 is interest
iii. Mukwasi UGX. 250,000, where 30,000 is interest
iv. Mugisha UGX. 300,000, where 40,000 is interest

Required;
Lectures by; Robert A Kakande, Msc Accounting and Finance, FCCA, CPA, 4
B.Com (Accounting), HDM
Accounting for Bankers and Finance Managers, Masters in Banking and Investment
2021

Enter the above transactions in the General journal

THE LEDGER
After transactions have been recorded in the Journal, they are then posted to the ledger.
The ledger is the main book of accounts. It comprises of different sections each of which
is called an account.

Accounts can be classified as personal accounts or impersonal accounts;

Personal accounts are accounts which contain the name of the business, person or firm.
In a ledger there may be three different types of personal accounts;

 Capital account; Records the transactions between the proprietor and the
business. Any amount invested or withdrawn by the proprietor is recorded in this
account
 Creditors/Payables Account; The persons to whom money is owed by the
business are called creditors. The good purchased on credit basis from suppliers
create a liability which is recorded in their personal accounts. In a bank the
savings depositors are creditors to the bank and their deposits are recorded on
their personal accounts.

 Debtors/Receivable Account; they are persons owing money to the business. In

a bank loan customers are debtors to the bank and the loan advanced is recorded
on their personal accounts

Impersonal accounts are accounts which do not contain the name of any personal
business. They may be of two kinds;

 Real accounts; These relate to tangible items. Something we can see or touch. E.g
cash, fixtures and fittings, land and buildings, motor vehicles, etc

 Nominal accounts; relate to intangible items like purchases, rent, sales, salaries,
electricity, revenue, etc

POSTING OF TRANSACTIONS FROM THE LEDGER AND BALANCING OFF

LEDGER ACCOUNTS

The transfer of transactions from the journals to the ledgers is referred to as posting. The
transactions that appear on the debit column of the general ledger will be posted on the
debit side of the respective ledger and those on the credit column will be posted on the
credit side of the ledger.

Balancing off the accounts involves the following stages;

i) Adding both sides of the accounts to determine the total for each side
ii) The larger amount after adding both sides will become the total for both sides

Lectures by; Robert A Kakande, Msc Accounting and Finance, FCCA, CPA, 5
B.Com (Accounting), HDM
Accounting for Bankers and Finance Managers, Masters in Banking and Investment
2021

iii) Subtract the smaller total from the larger total

iv) Enter the difference on the side with the smaller total
v) Now both sides will have the same total
vi) If the balance carried down is on the credit side of the account then the balance
brought down will be on the debit side of the same account.

Exercise;
Post the transactions of XYZ above in the ledger and balance off the relevant accounts

Lectures by; Robert A Kakande, Msc Accounting and Finance, FCCA, CPA, 6
B.Com (Accounting), HDM