DOUBLE-ENTRY ACCOUNTING SYSTEM

AND THE ACCOUNTING CYCLE 3

Intended Learning Outcomes:

By the end of this module, the student should be able to:

• Illustrate the double entry accounting system using business transactions;

• Identify and differentiate the different stages in the accounting cycle.

Double Entry Bookkeeping

Under the double entry method, every transaction is recorded in at least two accounts. Once
all transactions are processed into the accounting system, the balances of all accounts will be
readily available. All accounts have a debit and a credit side.
The Theory of Debit and Credit
The term debit means “left” and credit means “right”. This refers to an equation where the
left side is equal to the right side. The final rule is that, “left will always equal to the right”.
VALUE RECEIVED = VALUE PARTED WITH
The amount of value received will always equal with that of the amount of the value parted with.
DEBIT = CREDIT
The amount entered on the debit side of an item’s account will always have a corresponding
amount entered on the credit side of another item’s account. Because of the two-fold or duality
effect of transactions, the total effect on the left will always be equal to total the effect on the
right. Hence, the amount of debit will always equal to the amount of credit.
Normal Balance of Accounts
The normal balance of an account is the side that will increase its value. Remember the basic
accounting equation: ASSETS = LIABILITIES + EQUITY
Table 3.1 illustrates the normal balances of each accounting element:
Accounting Element Normal balance To decrease
(to increase)
1. Assets Debit Credit
2. Liabilities Credit Debit
3. Equity Credit Debit
4. Income Credit Debit
5. Expense Debit Credit
Table 3.1. Normal Balance of Accounting Elements

Transactions are recorded using journal entries in the journal. A journal entry is a record
showing the date of the transaction, the account/s debited, the account/s credited, their
respective amounts, and an explanation to describe the transaction. Using the transactions
presented in the previous module, the journal would look like this:
Date
Transactions Debit Credit
2023
July 01 Cash 20,000
Taylor, Capital 20,000
To record cash invested by owner
#
05 Cash 30,000
Loans Payable 30,000
To record cash proceeds from TS Bank loan
#

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 08 Printing equipment 5,000
Cash 5,000
To record printer bought in cash
#
10 Print Supplies 1,000
Cash 1.000
To record print ink bought in cash
#
12 Cash 2,500
Printing Income 2,500
To record revenue earned
#
15 Loans Payable 15,000
Cash 15,000
To record partial payment of bank loan
#
73,500 73,500

The preparation of journal entries through the double entry bookkeeping method, along with
the other steps in the accounting cycle, results in a more systematic accounting system. You will
learn more about journal entries in detail, including how to prepare them, and the rest of the
steps of the process in later lessons.

The Accounting Cycle

The accounting cycle is a multistep process used by businesses to create an accurate record
of their financial position, as summarized on their financial statements. The accounting cycle
comprises eight steps businesses follow to ensure that their books are balanced so they can be
closed and reset for the next accounting period, when the cycle begins again. The main purpose
of the accounting cycle is to keep track of all financial activities that occur during a specific
accounting period, be it monthly, quarterly or annually.
The goal of the accounting cycle is to develop an accurate account of a company’s financial
position. Below are the eight steps of the accounting cycle.

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Identify and Analyze Transactions. The accounting process starts with identifying and analyzing
business transactions and events. Not all transactions and events are entered into the accounting system.
Only those that pertain to the business entity are included in the process.
For example, a personal loan made by the owner that does not have anything to do with the business
entity is not accounted for.
The transactions identified are then analyzed to determine the accounts affected and the amounts
to be recorded.

Record Journal Entries. A journal is a book – paper or electronic – in which transactions are recorded.
They are recorded in journal entries containing at least two accounts (one debited and one credited).
To simplify the recording process, special journals are often used for transactions that recur
frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to
record those that cannot be entered in the special books. Transactions are recorded in chronological
order and as they occur. Journals are also known as Books of Original Entry.

Post to the Ledger. Also known as Books of Final Entry, the ledger is a collection of accounts that
shows the changes made to each account as a result of past transactions, and their current
balances. After the posting all transactions to the ledger, the balances of each account can now be
determined.
For example, all journal entry debits and credits made to Cash would be transferred into the Cash
account in the ledger. We will be able to calculate the increases and decreases in cash; thus, the ending
balance of Cash can be determined.

Generate Unadjusted Trial Balance. A trial balance is prepared to test the equality of the debits
and credits. All account balances are extracted from the ledger and arranged in one report. Afterwards,
all debit balances are added. All credit balances are also added. Total debits should be equal to total
credits.

Prepare Worksheets. This step identifies errors and anomalies that may have occurred up until this
point by lining up debits and credits from various accounts in a single spreadsheet.

Prepare Adjusting Journal Entries. Adjusting entries are prepared as an application of the accrual
basis of accounting. At the end of the accounting period, some expenses may have been incurred but not
yet recorded in the journals. Some income may have been earned but not entered in the books.
Adjusting entries are prepared to update the accounts before they are summarized in the financial
statements.

Generate Financial Statements. When the accounts are already up-to-date and equality between
the debits and credits have been tested, the financial statements can now be prepared. The financial
statements are the end-products of an accounting system.

Prepare Closing Entries. Temporary or nominal accounts, i.e. income statement accounts, are
closed to prepare the system for the next accounting period. Temporary accounts include income,
expense, and withdrawal accounts. These items are measured periodically. The accounts are closed to a
summary account (usually, Income Summary) and then closed further to the appropriate capital account.
Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e.
balance sheet accounts, are not closed.

FURTHER READINGS AND REFERENCES

o Accounting 101: The Basics. Retrieved from www.accountingverse.com
o Lopez, R. (2016). Fundamentals of Accounting (Simplified Procedural Approach). MS LOPEZ Printing
and Publishing

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