ACCA Applied Knowledge · Financial Accounting

Double-Entry Bookkeeping Principles and Maintaining Accounting Records for ACCA

Double-entry bookkeeping records every transaction twice: a debit in one account and an equal credit in another. This keeps the accounting equation, Assets = Capital + Liabilities, in balance. To solve questions, identify the two accounts affected, decide whether each rises or falls, then apply the debit and credit rules.

What this chapter covers

This chapter is the base of the Financial Accounting exam. It explains how a business records transactions, from the first source document to the trial balance. You learn the accounting equation, the five types of account, the debit and credit rules, books of prime entry, ledger accounts, the cash book and the trial balance. You also learn why a business must keep proper records.

The method is simple but strict. Every transaction affects at least two accounts. The total of debits must equal the total of credits. If you follow the rules in the same order every time, you get the right answer without memorising each case.

Later chapters build directly on this one. Sales tax, receivables and payables, non-current assets, inventory, accruals, bank reconciliations, control accounts, errors and suspense accounts, and the financial statements all use ledger entries. Consolidations in Section B also rely on you handling debits and credits with ease. If this chapter is weak, the rest of the paper feels harder than it is.

Section A of the FA exam is 35 two-mark objective test questions, and many of them need a quick, correct journal or ledger entry. Section B accounts preparation questions also assume you can handle ledgers and a trial balance without hesitation. Time is limited to two hours, so slow bookkeeping costs you marks elsewhere. Because this chapter feeds almost every other chapter, effort here pays back many times. It is also one of the easiest places to gain secure marks early in your study.

Double-entry bookkeeping principles including the maintenance of accounting records: topics in the order to study them

1Accounting Equation and Types of AccountsStart here because every later rule rests on the equation and on knowing whether an item is an asset, liability, capital, income or expense.
2Double-Entry Bookkeeping Rules: Debits and CreditsOnce you know the account types, you can learn which side increases or decreases each one.
3Books of Prime Entry and Day BooksThis shows where transactions are first recorded before they reach the ledger, using the entries you now know.
4Ledger Accounts and the Cash BookNext you post from the books of prime entry into ledger accounts and see how the cash book works as both a book of prime entry and a ledger.
5Trial Balance and Preparing Accounts from LedgersThe trial balance checks your postings, and it leads naturally to drawing up accounts from the balances.
6Maintenance of Accounting Records and Source DocumentsFinish with the purpose of records and documents, which is easier to remember once you have seen the full recording process.

How to prepare Double-entry bookkeeping principles including the maintenance of accounting records

Treat this chapter as a skill, not a set of facts. Practise entries by hand until the rules are automatic, then add the theory on records.

Learn the accounting equation and rearrange it in all forms. Test yourself by working out the missing figure from a short list of assets, liabilities and capital.
Memorise the debit and credit rules by account type: debit assets and expenses to increase them, credit liabilities, capital and income to increase them. Then drop the memory aid and reason from the equation.
For each transaction you practise, write the two accounts first, then the direction of change, then debit or credit. Do this on paper before checking the answer.
Draw out the day books and cash book yourself from a list of transactions. Post them to ledger accounts and balance each account, bringing down the balance.
Extract a trial balance from your ledgers. If it does not balance, find out why, rather than just redoing it.
Learn the purpose of accounting records and the main source documents, such as invoices, credit notes, statements and remittance advices, and link each to the book where it is first recorded.
Finish with timed objective test questions on your phone or computer. Practise multiple choice, multiple response and number entry, and review every wrong answer.

Common mistakes in Double-entry bookkeeping principles including the maintenance of accounting records

Treating debit as meaning increase and credit as meaning decrease for every account.
Fix: Decide the account type first. A debit increases assets and expenses but decreases liabilities, capital and income. Check with the accounting equation.
Putting a transaction on the wrong side of the cash book or bank account.
Fix: Money in is a debit to bank. Money out is a credit to bank. Write this before you start each cash book question.
Believing a balanced trial balance means there are no errors.
Fix: Remember it only shows that debits equal credits. Errors of omission, commission, principle, original entry and compensating errors can all remain.
Treating drawings as an expense or recording them as a credit.
Fix: Drawings are a reduction of capital. Debit drawings and credit cash or bank. They never go to profit or loss.
Posting day book totals and individual entries both to the same ledger.
Fix: Post the day book total to the general ledger. Post individual invoices to the personal accounts for each customer or supplier. Do not post any item twice in the same ledger.
Rushing objective test questions and picking an answer with the right amount but the wrong side.
Fix: Before choosing, state the debit and the credit in your head or on scrap paper. Then match both the account and the side, not only the amount.

Last-day revision: Double-entry bookkeeping principles including the maintenance of accounting records

Accounting equation: Assets = Capital + Liabilities, and Capital rises with profit and falls with drawings.
Every transaction has at least one debit and one credit of equal value.
Debit increases assets and expenses; credit increases liabilities, capital and income.
Debit decreases liabilities, capital and income; credit decreases assets and expenses.
Books of prime entry include the sales day book, purchases day book, returns day books, cash book, petty cash book and journal.
Day books list credit transactions; totals are posted to the ledger, and individual entries go to the receivables or payables ledger.
The cash book records receipts and payments through the bank and, in many systems, is part of the double entry itself.
To balance a ledger account, total both sides, insert the difference on the smaller side as the balance carried down so the totals agree, then bring the balance down on the opposite side.
A trial balance lists debit and credit balances; total debits must equal total credits.
A balanced trial balance does not prove the records are free of errors, such as omissions or wrong accounts.
Source documents, such as invoices, credit notes and receipts, support each entry and provide an audit trail.
Drawings reduce capital and are not an expense.

Double-entry bookkeeping principles including the maintenance of accounting records practice questions

Double-entry bookkeeping principles including the maintenance of accounting records in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Double-entry bookkeeping principles including the maintenance of accounting records: frequently asked questions

What is double-entry bookkeeping in simple terms?

It is a method where every transaction is recorded in two accounts, once as a debit and once as a credit, for equal amounts. This keeps the accounting equation balanced. It also makes errors easier to spot.

How do I decide which account to debit and which to credit?

First identify the two accounts affected. Decide whether each is an asset, liability, capital, income or expense, and whether it rises or falls. Then apply the rule: debit increases assets and expenses, credit increases liabilities, capital and income.

Is the cash book part of the double entry?

It depends on how the system is set up. In many exam questions the cash book is both a book of prime entry and a ledger account, so entries in it are part of the double entry. Read the question to see how it is treated.

What does a trial balance prove?

It proves only that total debit balances equal total credit balances. It does not prove every entry is correct. Some errors, such as posting to the wrong account, leave it balanced.

How should I practise this chapter for the computer-based exam?

Practise writing entries by hand first, then move to timed objective test questions. Include multiple response and number entry types. Review each wrong answer to see whether the mistake was the account, the side or the amount.