Double-Entry Bookkeeping and Journal Entries
What the exam tests
This domain tests the debit and credit rules, the layout of a journal, narrations, and the ability to record transactions that are not handled by a specialised day book. Expect corrections, opening entries, drawings and non-routine transfers.
Core rules
- Debit entries increase assets and expenses; credit entries increase liabilities, capital and income.
- Debits decrease liabilities, capital and income; credits decrease assets and expenses.
- A journal entry must show date, accounts debited, accounts credited, amounts and a short narration.
- Total debits must equal total credits for every entry.
Worked example
A trader buys inventory on credit for 1,200, pays rent of 300 by bank, and the owner takes 200 cash.
- Credit purchase: Dr Purchases 1,200; Cr Payables 1,200. Inventory cost is an expense of the period, and the supplier is now owed money.
- Rent paid: Dr Rent expense 300; Cr Bank 300. The expense increases and the bank asset decreases.
- Drawings: Dr Drawings 200; Cr Cash 200. The owner's withdrawal reduces capital and reduces cash; it is not rent or wages.
Traps
Do not debit a liability to increase it. Do not omit the credit entry when recording a cash payment. Do not use the purchases account for a non-current asset purchase; debit the asset account instead. In a compound journal, check that each line is on the correct side before adding totals.
Key points
- Debit assets and expenses; credit liabilities, capital and income.
- Every journal needs equal debits and credits plus a narration.
- Purchases of inventory and purchases of non-current assets go to different accounts.
- Drawings reduce capital, not profit.