Double Entry System and Journal
The double entry system records every transaction in at least two accounts — a debit entry and a credit entry — maintaining the accounting equation. This system, developed in 15th-century Italy, is the foundation of modern accounting used worldwide.
Rules of Debit and Credit
For personal accounts (individuals/organisations): Debit the receiver, Credit the giver. For real accounts (assets): Debit what comes in, Credit what goes out. For nominal accounts (income/expenses): Debit all expenses and losses, Credit all incomes and gains. Modern approach uses the accounting equation: Assets and Expenses increase with debits; Liabilities, Equity, and Revenue increase with credits.
Journal Entries
The journal (book of original entry) records transactions chronologically. Format: Date | Particulars (account debited... Dr, To account credited) | L.F. (ledger folio) | Debit amount | Credit amount. Each entry includes a narration explaining the transaction. Example: 'Purchased goods for cash Rs 50,000' → Debit: Purchases A/c Rs 50,000, Credit: Cash A/c Rs 50,000. Narration: (Being goods purchased for cash).
Types of Journal Entries
Simple entries: one debit and one credit account. Compound entries: multiple debits and/or multiple credits in one entry (total debits must equal total credits). Opening entries: recording assets and liabilities at the start of a period. Closing entries: transferring income and expense accounts to Profit and Loss account at period end. Adjusting entries: recording accrued, prepaid, and outstanding items.
Ledger Posting
The ledger (book of final entry) classifies journal entries into individual accounts. Each account has a T-format with debit side (left) and credit side (right). Posting transfers amounts from journal to the respective ledger accounts. At period end, accounts are balanced — the difference between total debits and credits is the balance.
Trial Balance
The trial balance lists all ledger account balances at a specific date. Total debits must equal total credits. It verifies arithmetic accuracy but doesn't guarantee correctness (compensating errors, errors of principle, errors of omission won't be detected). It serves as the basis for preparing financial statements.
Common Journal Entries
Capital introduction: Cash Dr, To Capital. Purchase of goods: Purchases Dr, To Cash/Creditor. Sale of goods: Cash/Debtor Dr, To Sales. Payment of expenses: Expense Dr, To Cash. Receipt of income: Cash Dr, To Income. Purchase of asset: Asset Dr, To Cash/Bank. Depreciation: Depreciation Dr, To Asset.
Summary
The double entry system ensures every transaction is recorded with equal debits and credits. Journal entries record chronologically, ledger accounts classify by account, and the trial balance verifies accuracy.
Worked Example: Journal Entries
Record the following transactions of Laxmi Traders in the journal for Baisakh 2081:
| Date | Particulars | L.F. | Dr (Rs) | Cr (Rs) |
|---|---|---|---|---|
| 1 Baisakh | Cash A/c Dr To Capital A/c (Being business started with cash) | 300,000 | 300,000 | |
| 3 Baisakh | Purchases A/c Dr To Cash A/c (Being goods purchased for cash) | 80,000 | 80,000 | |
| 5 Baisakh | Furniture A/c Dr To Hari & Sons A/c (Being furniture purchased on credit) | 50,000 | 50,000 | |
| 10 Baisakh | Cash A/c Dr Discount Allowed A/c Dr To Ram A/c (Being cash received from Ram in full settlement) | 19,000 1,000 | 20,000 | |
| 15 Baisakh | Salary A/c Dr To Cash A/c (Being salary paid to staff) | 25,000 | 25,000 |
Key observations: Entry on 1 Baisakh uses Personal A/c rule (Cash comes in → debit real; Capital is given by owner → credit personal). Entry on 10 Baisakh is a compound entry — two debits and one credit. The narration in brackets explains each entry. Total debits (475,000) = Total credits (475,000) ✔️.
Ledger Posting Example
From the journal above, the Cash Account in ledger would look like:
| Cash Account | |||
|---|---|---|---|
| Dr Side | Rs | Cr Side | Rs |
| To Capital A/c | 300,000 | By Purchases A/c | 80,000 |
| To Ram A/c | 19,000 | By Salary A/c | 25,000 |
| By Balance c/d | 214,000 | ||
| Total | 319,000 | Total | 319,000 |
The closing balance of Rs 214,000 (debit balance) means the business has Rs 214,000 cash in hand. This balance appears in the trial balance and ultimately the balance sheet.
Rules Summary Table
| Account Type | Debit | Credit | Examples |
|---|---|---|---|
| Personal | Receiver | Giver | Ram A/c, Bank A/c, Capital A/c |
| Real | What comes in | What goes out | Cash, Machinery, Stock, Building |
| Nominal | Expenses & Losses | Incomes & Gains | Salary, Rent, Sales, Commission received |
Exam Tips
Tip 1: Always write narration for each journal entry — marks are deducted for missing narrations. Tip 2: In compound entries, total Dr must equal total Cr — verify before moving on. Tip 3: When posting to ledger, write the opposite account name (To/By). If Cash is debited in journal, write "To Capital" on the debit side of Cash A/c. Tip 4: Practice at least 50 journal entries covering all transaction types — this is the most fundamental and frequently tested skill. Tip 5: Remember: Assets and Expenses have debit balances; Liabilities, Capital, and Income have credit balances.