Double entry bookkeeping tutorial
The rules for formulating journal entries are known as “Golden Rules of Double entry bookkeeping” which are as follows:
|1||Debit is the receiver, Credit is the giver;||Personal|
|2||Debit what comes in, Credit what goes out;||Real|
|3||Debit all expenses and losses, Credit all profits and gains.||Nominal|
While applying these rules, one must be aware of the type of the transactions because sometimes two rules may need to be applied to journalize one single transaction.
Double entry bookkeeping example
A company pays cash salary of $100,000 to the employees. This transaction is of Nominal and Real type, and will be generalized using rule 2 and 3. The journal entry will be as follows:
The classification of accounts into real, personal and nominal is based on their nature i.e. physical asset, liability, juristic entity or financial transaction.
Double entry bookkeeping explained
|Real||Tangible things and certain intangible things||Plant, Machinery, Furniture, Fixtures, Computers and Equipment. And Goodwill, Patents and Copyrights|
|Personal||Business and Legal Entities||Individuals, Partnership Firms, Corporate entities, any local or statutory bodies|
|Nominal||Income and Expenditure Accounts established to record the impact of the financial transactions||Sales, Purchases, Electricity Charges|
What is Double entry bookkeeping?
Bookkeeping includes recording and classifying the financial transactions in books of accounts based on Accounting Double Entry principles, preparing ledgers and extracting a trial balance. The entries are recorded in the “Books of Accounts” by ensuring that each financial transaction is recorded in at least two different nominal ledger accounts.
Double entry bookkeeping basics
The transaction is recorded as a “debit” (Dr.) in one account, and a “credit” (Cr.) entry in the other account. The debit entry will be recorded on the debit side (left-hand side) of a Nominal ledger and the credit entry will be recorded on the credit side (right-hand side) of a Nominal ledger account.
The two entries have equal amounts and opposite signs (Dr and Cr.), so that when all entries in the accounts are summed, the total is exactly the same. This is a partial check that each and every transaction has been correctly recorded.