Double Entry and Accounting Cycle



What is Double Entry Accounting?
The term "double entry accounting" has the same meaning as "double entry bookkeeping" and is in fact the one and same thing.

There are 2 basic methods used in accounting - single entry and double entry.

  1. Single Entry - is a system whereby only one entry is recorded for each transaction - hence the term single entry. Many businesses can run quite well using the single entry system. The only problem is that there is no check on accuracy and if you leave out an item then it is very difficult to pick up if the item has been missed. Single entry is sufficient for smaller businesses where there is little need for a double entry type system.

  2. Double Entry - requires 2 entries for every transaction. It means that for every debit there has to be a credit. For every transaction going out there must be a corresponding transaction coming in. This double entry method provides a cross check and ensures that errors are minimised. It is the best option and is the accepted accounting system in use for most businesses today.


The Accounting Cycle
The accounting cycle is as follows:

  1. Complete Journals (incl CashBook) - A transaction occurs in the business. This gives rise to a document being written up (or raised). The document results in information that is then recorded in the business's books of original entry - known as "Journals". 

  2. Complete General Ledger - The totals of the Journals and CashBook are summarised and transferred to another book known as the "General Ledger". The General Ledger contains details of each of the individual accounts maintained in the business.

  3. Complete Trial Balance - The General Ledger accounts are all listed in the form of debits and credits. Another report is extracted from this to form what is known as a "Trial Balance". A Trial Balance is simply a list of the balances of each account in the General Ledger.

  4. Complete Financial Statements - From the Trial Balance, adjustments and changes can be incorporated and the information is then ready for the preparation of the "Financial Statements" of the business for the financial period in question. These financial statements comprise the "Profit and Loss Accounts" or "Revenue Statements" (also known as Statements of Performance) and Balance Sheets (also known as Statements of Position). 



What are the Accounting Books
Accounting books are as follows:

  1. Journals - From a transaction such as a sale or a purchase a journal entry is raised. This originates from the source or original documents which record the transaction. In a business where a lot of transactions are happening at the same time, it is usually a good idea to create sub-journals so that it is easier to find or allocate transactions. These sub-journals would usually be in the area of credit sales (Sales Journal), credit purchases (Purchases Journal), sales returned (Returns In Journal), purchases returned (Returns Out Journal), cash income received (Inwards Cash Book), cash expenses paid (Outwards Cash Book) and "non cash" transactions (General Journal).

  2. General Ledgers - The summary and totals of all the journals are entered into a larger account called the General Ledger. The General Ledger is a summary book that records all the accounts of the business and is organised into various classes for ease of classification and location. These classes are:

      • Assets - This is a record of all items the business owns.
      • Liabilities - This is the record of all the items that the business owes to others (i.e. its debts).
      • Sales - This is a record of all the revenue or income earned by the business for a particular period.
      • Expenses - This is a record of all the expenses or costs incurred by the business for a particular period.
      • Capital - this is a record of the ownership or "equity" that belong to the owners or shareholders of the business.

  3. Trial Balance - At the end of each accounting period or accounting financial year the accounts in the General Ledger are totaled and balanced off. The balances in each account are then summarised and put into another report called the Trial Balance. The Trial Balance is a list of all the balances in the General Ledger - hence the term Trial Balance.

  4. Financial Statements - The information in the Trial Balance will then be interpreted and put into reports known as Financial Statements. Financial Statements consist of Revenue or Income Statements (also known as Profit and Loss Statements), Balance Sheets and Cash Flow Statements 

  5. Revenue Statement - this report shows the income and the expenses of the business plus arrives at the net result after expense are deducted from income. The net result is known as the Net Profit (or Net Loss if expenses are greater than income). It is in effect a statement showing theperformance of the business in monetary terms.

  6. Balance Sheet - this is simply a report of the financial condition of the business at any time and records its assets, liabilities and capital. It is in effect a statement of the position of the business . The Balance Sheet is a list of all the balances remaining in the accounts of the business at the end of a particular accounting period. 

  7. Other Statements - These include reports such as Cash Flow Statements which identify the amount of cash coming in and how that cash was applied or used.