Overview
This lecture introduces ledger accounts and the double entry principle, explaining their structure, types, and how to record transactions in accounting.
Introduction to Ledger Accounts
- Ledger accounts reflect the dual impact of transactions using double entries.
- Recording all transactions under the accounting equation is impractical; therefore, accounts (ledgers) are used.
- Ledger accounts are structured to show increases and decreases in assets, liabilities, equity, income, and expenses.
Structure and Format of Ledger Accounts
- Ledger accounts are drawn in the shape of a capital "T" (T account format).
- Each ledger account has two sides: debit (left) and credit (right).
- Both sides are divided into four columns: Date, Details (Description), Ledger Folio, and Value (Amount).
- The left side is always labeled "Debit (Dr)" and the right side "Credit (Cr)".
Types of Ledger Accounts
- There are five main types of ledger accounts: Asset, Liability, Equity, Income, and Expense accounts.
- Every individual asset, liability, income, or expense must have a separate account.
Double Entry Principle
- The double entry system requires every transaction to be recorded in at least two accounts: one debit and one credit.
- Increases and decreases are recorded differently based on account type:
- Asset: Increase = Debit, Decrease = Credit
- Liability: Increase = Credit, Decrease = Debit
- Equity: Increase = Credit, Decrease = Debit
- Income: Increase = Credit, Decrease = Debit
- Expense: Increase = Debit, Decrease = Credit
- The same amount is recorded in both accounts, ensuring accuracy.
Example of Double Entry
- Owner invests cash into the business: Cash account (asset) debited, Capital account (equity) credited for the same amount.
- Always label the sides as Dr (debit) and Cr (credit) in every account.
Key Terms & Definitions
- Ledger Account — A record used to track increases and decreases in specific assets, liabilities, equity, incomes, or expenses.
- Debit (Dr) — The left side of a ledger account, used to record increases in assets and expenses, and decreases in liabilities, equity, and income.
- Credit (Cr) — The right side of a ledger account, used to record increases in liabilities, equity, and income, and decreases in assets and expenses.
- Double Entry Principle — An accounting rule stating every transaction affects at least two accounts with equal debit and credit entries.
Action Items / Next Steps
- Practice drawing ledger accounts using the T format with proper columns and labels.
- Memorize the rules for debits and credits according to account type.
- Prepare for exercises on recording double entries for various transactions in the next session.