Course Title: Basics Of Finance And Procurement Management

Course Code: GST 06103

Topic 3: Financial transactions recording books

3.1 Double entry book keeping system
3.2 Abbreviation for Debit and Credit
3.3 Identification of essential financial data

What is book keeping?

Bookkeeping is the process of systematically recording and organizing financial
transactions of a business or organization. It involves tracking income, expenses,
assets, and liabilities to maintain accurate financial records. This information is crucial
for preparing financial statements, such as the balance sheet and income statement,
and for making informed financial decisions.
Bookkeeping is typically done through methods like single entry or double entry
accounting, with the latter being more comprehensive and widely used in businesses.
Books Of Accounting:
Books of account are records that track financial transactions of a business. They
provide a systematic, organized way to document income, expenses, assets, liabilities,
and equity, essential for assessing the financial health of a company.
Types Of Books Of Account
1. Journal: The first book where all business transactions are initially recorded in
chronological order. It includes details like date, description, debit, and credit
amounts.
2. Ledger: After journal entries are made, transactions are classified and posted
into their respective ledger accounts. Posting is the process of transferring
journal entry amounts to the respective ledger accounts. For instance, all cash
transactions will be posted to the Cash Ledger, and all sales transactions will be

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 posted to the Sales Ledger. Ledger Balances: At the end of an accounting
period, ledger accounts are balanced. The balance in each ledger is what gets
used to prepare financial statements. For example, the total of the cash ledger
at the end of a month represents the company’s cash balance.
3. Subsidiary Books: These are specialized books used for recording specific types
of transactions:
 Sales Book: Records all credit sales.
 Purchase Book: Records all credit purchases.
 Cash Book: Keeps track of all cash and bank transactions.
 Sales Return Book: For returned goods that were sold on credit.
 Purchase Return Book: For returned goods that were bought on credit.

Importance of Books of Account

1. Legal Requirement: Maintaining books of accounts is a legal requirement for

many businesses for tax purposes.
2. Financial Health: They help in assessing a company’s financial position at any
given time.
3. Audit Trail: They serve as an audit trail for tracking and verifying financial
transactions.
4. Decision Making: Proper accounting records provide valuable data for
managerial decision-making.

Double Entry System

The double entry system is a fundamental concept in accounting, where every
financial transaction has two equal and opposite effects, one debit and one credit.
This system ensures the accounting equation (Assets = Liabilities + Equity) always
stays in balance.
Principles of Double Entry System:
 Dual Aspect: Every transaction involves two aspects – one that is debited and
another that is credited.

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  Debits and Credits: Debit is an entry made on the left side of an account and
Credit is an entry made on the right side of an account.
The sum of debits must always equal the sum of credits for each transaction.
Advantages of Double Entry System:
I. Accuracy: It ensures the books are balanced, and errors are easier to detect.
II. Comprehensive: It gives a complete view of all transactions and their impact on
the financial position.
III. Legal Compliance: Double entry is widely accepted and recognized by financial
authorities and auditors.
IV. Financial Statements: It facilitates the preparation of essential financial
statements, such as the Balance Sheet, Income Statement, and Cash Flow
Statement.
Key Accounts in Double Entry:
a) Assets: Resources owned by the business (e.g., cash, inventory).
b) Liabilities: Obligations owed by the business (e.g., loans, creditors).
c) Equity: The owner's claim on the business (e.g., capital, retained earnings).
d) Revenue: Income earned from business activities (e.g., sales, interest).
e) Expenses: Costs incurred in running the business (e.g., rent, salaries).

Differentiating Between Debit And Credit

When first starting to use debits and credits, the hardest thing for most people to
learn is whether a debit increases or decreases an account and whether a credit
increases or decreases an account. It all depends on the type of account
Account type Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Income Decrease Increase
Expenses Increase Decrease

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Now; let us break it down:
Example 01:
Suppose you bought furniture using cash totaling $1,000. You spent cash to buy the
furniture, but you also added a new asset. How would you develop a journal entry to
enter this financial transaction in your books?
Solution:
Account debit credit
Furniture $1000
Cash $1000

Example 02:
Cash sale
Suppose a company sells goods worth $1000 for cash.
Solution:
Journal entry
Account type Debit Credit
Cash $1,000
Sales $1,000

Example 03:
Payment of liability
A company pays off part of its accounts payable amounting to $200.
Solution:
Account Debit Credit
Account payable $200
Cash $200

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Example 04:
Press journal entries for the following transactions in the books of Mr. Thabiti 2024.
Tshs
Jan: 01 commenced business with the capital 20,000
03 deposited to the bank amounting to 5,000
06 goods purchased for cash 7,000
10 furniture purchased from chimmoy 5,000
11 goods sold to Anil majumdar for cash 8,000
13 Goods sold to Ashim Das 2000
25 Cash drew for private users 500
31 Salaries paid 800
Solution:
Date Particulars F Dr Cr
Jan Cash 20,000
01 Capital 20,000
(being capital invested)
03 Bank account 5,000
Cash 5,000
(being cash deposited into
bank)
06 Purchase 7,000
Cash 7,000
(being goods purchased for
cash)
10 Furniture 5,000
Chimmoy’s account 5,000
(being furniture purchased
from chimmoy)
11 Cash 8,000
Sales 8,000
(being goods sold to

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 mazumdar on cash)
13 Ashim das 2,000
Cash 2,000
(being goods sold to Ashim
Das)
25 Drawings 500
Cash 500
Being cash drew for
personal use)
31 Salaries 800
Cash 800
(being salaries paid)

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