Lesson 2: Double Entry Bookkeeping | O Level Accounting

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1. The Double Entry System 7707

Double Entry Bookkeeping: Every financial transaction is recorded in two accounts — one account is debited and another is credited by the same amount. This reflects the dual effect principle from Lesson 1 and ensures the accounting equation always remains in balance.

The double entry system was formalised by Luca Pacioli, an Italian mathematician, in 1494 — but the principles he described are identical to what Cambridge students use today. Every entry has two sides: a debit (Dr) and a credit (Cr).

DEBIT (Dr) — Left Side

An entry on the left side of a ledger account. Debits increase asset and expense accounts. Debits decrease liability, capital, and revenue accounts.

CREDIT (Cr) — Right Side

An entry on the right side of a ledger account. Credits increase liability, capital, and revenue accounts. Credits decrease asset and expense accounts.

🧠 The Golden Rules of Double Entry

Rule 1 — Real Accounts (Assets): Debit what comes in. Credit what goes out.
Rule 2 — Personal Accounts (Debtors/Creditors): Debit the receiver. Credit the giver.
Rule 3 — Nominal Accounts (Income/Expense): Debit all expenses and losses. Credit all income and gains.

Simplified summary: DEAD CLIC
Debits = Expenses, Assets, Drawings | Credits = Liabilities, Income, Capital

2. The Ledger Account (T-Account) 7707

Ledger Account: The basic unit of recording in bookkeeping. Each account has a T-shape with a debit (Dr) side on the left and a credit (Cr) side on the right. Separate accounts are maintained for every asset, liability, capital, income, and expense.

The format of a ledger account is standardised. Cambridge examinations require you to present ledger accounts in this exact format:

Standard Ledger Account Format

Name of Account
Dr Date Details	PKR	Date Details Cr	PKR
Left side — Debit entries	Amount	Right side — Credit entries	Amount

Date | Narrative (what the other account is) | Amount — recorded on each side

What Goes in the "Details" Column?

The Narrative Rule: In the details (description) column of a ledger account, you write the name of the other account that was affected by the same transaction. This is how you trace the double entry — each entry points to its counterpart.

Example: When cash is received from a debtor, the Cash account is debited and the details say "Trade Receivables." The Trade Receivables account is credited and the details say "Cash." Each entry names the other.

3. Debit and Credit Rules — Full Reference 7707

Account Type	To INCREASE — enter on:	To DECREASE — enter on:	Normal Balance
Asset Account	Debit (Dr) side	Credit (Cr) side	Debit balance
Liability Account	Credit (Cr) side	Debit (Dr) side	Credit balance
Capital Account	Credit (Cr) side	Debit (Dr) side	Credit balance
Revenue / Income	Credit (Cr) side	Debit (Dr) side	Credit balance
Expense Account	Debit (Dr) side	Credit (Cr) side	Debit balance
Drawings Account	Debit (Dr) side	Credit (Cr) side	Debit balance

Why does this work? Assets and expenses are on the same side (debit) because both represent things the business has spent or acquired. Liabilities, capital, and income are on the credit side because they represent what the business owes or has received. The equation Assets = Capital + Liabilities is reflected in the debit/credit structure.

4. Recording Transactions — Step by Step 7707

Three-Step Method for Every Transaction:
1. Identify the two accounts affected.
2. Decide which account is debited and which is credited (use DEAD CLIC).
3. Record the entry in both accounts — same date, same amount, cross-referencing each other.

📐 Worked Example 1 — Starting a Business and Early Transactions

Amina starts a fabric business in Lahore. Record the following transactions in ledger accounts for June 2026.

1 Jun: Amina invests PKR 400,000 cash as capital.
3 Jun: Buys sewing equipment for PKR 80,000 cash.
5 Jun: Buys fabric stock PKR 60,000 on credit from Textile Mills Ltd.
8 Jun: Sells fabric for PKR 25,000 cash.
12 Jun: Pays rent PKR 15,000 cash.
15 Jun: Amina withdraws PKR 10,000 cash for personal use.

Identify accounts and debit/credit for each transaction:
1 Jun: Cash Dr (asset ↑) / Capital Cr (capital ↑)
3 Jun: Equipment Dr (asset ↑) / Cash Cr (asset ↓)
5 Jun: Purchases Dr (expense ↑) / Textile Mills Ltd Cr (liability ↑)
8 Jun: Cash Dr (asset ↑) / Sales Cr (income ↑)
12 Jun: Rent Dr (expense ↑) / Cash Cr (asset ↓)
15 Jun: Drawings Dr (drawings ↑) / Cash Cr (asset ↓)

Cash Account:

Cash Account

Dr Date

Details

PKR

Dr Date	Details	PKR	Cr Date	Details	PKR
1 Jun	Capital	400,000	3 Jun	Equipment	80,000
8 Jun	Sales	25,000	12 Jun	Rent	15,000
			15 Jun	Drawings	10,000
	Balance c/d			Balance c/d	320,000
		425,000			425,000
b/d	Balance b/d	320,000

Capital Account:

Details	PKR	Cr Date	Details	PKR
Balance c/d	400,000	1 Jun	Cash	400,000
	400,000			400,000
		b/d	Balance b/d	400,000

Balancing a Ledger Account

How to Balance a Ledger Account:
1. Total both the debit and credit sides separately.
2. Find the difference — this is the balance.
3. Insert the balance on the smaller side as "Balance c/d" (carried down) to make both sides equal.
4. Rule off with double lines at the same level on both sides.
5. Bring the balance down on the opposite side below the total as "Balance b/d" (brought down) — this is the opening balance for the next period.

A debit balance = the account has more debits than credits (typical for assets and expenses).
A credit balance = the account has more credits than debits (typical for liabilities, capital, income).

5. Division of the Ledger 7707

In practice, businesses keep thousands of accounts. To manage them efficiently, the ledger is divided into three sections — each kept as a separate book or section in accounting software.

Division	What It Contains	Cambridge Term
Sales Ledger	Individual accounts for every credit customer (trade receivable/debtor). Shows how much each customer owes and their payment history.	Accounts Receivable Ledger
Purchases Ledger	Individual accounts for every credit supplier (trade payable/creditor). Shows how much is owed to each supplier.	Accounts Payable Ledger
General Ledger (Nominal Ledger)	All other accounts — assets (except individual debtors/creditors), liabilities, capital, revenue, and expenses. The main ledger of the business.	Nominal Ledger

Exam Tip — Sales Ledger vs Sales Account: The Sales Ledger contains individual customer accounts — it does NOT contain the Sales Account itself. The Sales Account (recording total sales revenue) is in the General Ledger. This distinction is tested in Cambridge examinations.

6. Business Source Documents 7707

Source Document: The original paper or electronic record that provides evidence of a financial transaction. Every accounting entry must be supported by a source document — this is the foundation of reliable financial records. No document = no entry.

Document	Purpose	Used By
Invoice	Sent by the seller to the buyer — requests payment for goods/services supplied on credit. States quantity, price, and total amount due.	Seller (issues), Buyer (receives)
Credit Note	Sent by the seller to the buyer — reduces the amount owed, issued when goods are returned or an overcharge is corrected.	Seller (issues), Buyer (receives)
Debit Note	Sent by the buyer to the seller — requests a reduction in the amount owed, often when returning goods. The buyer's equivalent of requesting a credit note.	Buyer (issues), Seller (receives)
Receipt	Confirms that payment has been received. Issued by the seller when payment is made.	Seller (issues)
Cheque Counterfoil	The stub retained when a cheque is issued — records the amount, date, and payee as evidence of payment made.	The payer retains
Paying-in Slip	Used when depositing cash or cheques into a bank account. The counterfoil is retained as evidence.	The depositor retains
Bank Statement	Sent by the bank to the business — lists all transactions on the account. Used to verify the cash book and prepare bank reconciliation statements.	Bank issues to business
Petty Cash Voucher	A small form authorising and recording a small cash payment from petty cash. Must be signed by the person receiving the cash.	Internal document

📐 Worked Example 2 — Identifying Source Documents

For each transaction, state the source document that would be used to record it in the books.

A customer, Kareem & Sons, returns damaged goods worth PKR 8,000.
→ Credit Note (issued by the seller to reduce the amount owed)

The business pays its electricity bill by cheque.
→ Cheque Counterfoil (retained as evidence of payment made)

A supplier delivers goods on credit worth PKR 45,000.
→ Invoice (received from supplier — becomes a purchase invoice in the business's records)

The office manager buys stamps for PKR 500 from petty cash.
→ Petty Cash Voucher (authorises and records the small cash payment)

7. A Complete Set of Double Entry Records 7707

📐 Worked Example 3 — Recording Five Transactions with Full Ledger Accounts

Hassan runs a wholesale business in Karachi. Record these July 2026 transactions and show the Sales account and the Rent account balanced at month end.

2 Jul: Cash sales PKR 30,000
7 Jul: Credit sales to Ali Traders PKR 18,000
10 Jul: Cash sales PKR 22,000
14 Jul: Ali Traders returns goods PKR 3,000
25 Jul: Paid rent PKR 12,000 by cash

Double entries identified:
2 Jul: Cash Dr 30,000 / Sales Cr 30,000
7 Jul: Ali Traders (Sales Ledger) Dr 18,000 / Sales Cr 18,000
10 Jul: Cash Dr 22,000 / Sales Cr 22,000
14 Jul: Sales Returns Dr 3,000 / Ali Traders Cr 3,000
25 Jul: Rent Dr 12,000 / Cash Cr 12,000

Sales Account (in General Ledger):

Dr Date	Details	PKR	Cr Date	Details	PKR
31 Jul	Balance c/d	70,000	2 Jul	Cash	30,000
			7 Jul	Ali Traders	18,000
			10 Jul	Cash	22,000
		70,000			70,000
			1 Aug	Balance b/d	70,000

Note: Sales Returns are in a separate account (Sales Returns Dr), not deducted from Sales account directly.

Rent Account:

Dr Date	Details	PKR	Cr Date	Details	PKR
25 Jul	Cash	12,000	31 Jul	Balance c/d	12,000
		12,000			12,000
1 Aug	Balance b/d	12,000

📝 Exam Practice Questions

Q1 [4 marks] — State whether each account would be debited or credited, and name the other account affected.

Transaction	Account Debited	Account Credited
Owner pays PKR 200,000 cash into the business	?	?
Business buys a computer PKR 80,000 on credit from TechMart	?	?
Business pays salaries PKR 35,000 in cash	?	?
A debtor, Saad & Co, pays PKR 12,000 cash	?	?

Owner invests cash: Cash Dr / Capital Cr
Buy computer on credit: Computer (Equipment) Dr / TechMart (Trade Payables) Cr
Pay salaries cash: Salaries Dr / Cash Cr
Debtor pays cash: Cash Dr / Saad & Co (Trade Receivables) Cr

Q2 [4 marks] — In which division of the ledger would each of the following accounts be found?
(a) Fatima Traders (a credit customer) (b) Rent account (c) Habib Textiles (a credit supplier) (d) Motor vehicles account

(a) Fatima Traders (credit customer) → Sales Ledger
(b) Rent account → General Ledger
(c) Habib Textiles (credit supplier) → Purchases Ledger
(d) Motor vehicles → General Ledger

Q3 [5 marks] — Bilal starts a trading business on 1 August 2026. Write up the Cash Account and Capital Account from the following transactions and show them balanced at 31 August.

1 Aug: Bilal invests PKR 250,000 cash. 5 Aug: Pays PKR 60,000 cash for equipment. 12 Aug: Cash sales PKR 40,000. 20 Aug: Pays rent PKR 8,000 cash. 28 Aug: Drawings PKR 5,000 cash.

Cash Account balances:
Dr side total: 250,000 + 40,000 = 290,000
Cr side total: 60,000 + 8,000 + 5,000 = 73,000
Balance c/d (on Cr side): 290,000 − 73,000 = PKR 217,000 Dr balance

Capital Account:
Cr side: 1 Aug Cash 250,000
Balance c/d on Dr side: 250,000
Balance b/d on Cr side: PKR 250,000 Cr balance

Exam Tip: When balancing, always place "Balance c/d" on the SMALLER side to make both sides equal. The balance b/d then appears on the OPPOSITE side below the total. A debit balance b/d means the account has a debit balance — normal for assets and expenses.

Q4 [2 marks] — Explain what is meant by a "credit balance" in a ledger account. Give one example of an account that would normally have a credit balance.

A credit balance means that the total of the credit (right) side of the account exceeds the total of the debit (left) side — the account has more credits than debits. It indicates that the account represents an amount owed by the business or a source of funds.

Example: Capital account (or any liability account such as a bank loan, or a trade payables account).

Q5 [3 marks] — A business receives an invoice from a supplier for PKR 75,000 of goods purchased on credit. Three weeks later it returns PKR 10,000 of faulty goods. State the source document for each transaction and record both entries in the supplier's account in the Purchases Ledger.

Invoice received: source document = Invoice (from supplier)
Goods returned: source document = Credit note (issued by supplier)

Supplier Account (Purchases Ledger):
Dr: Returns Outwards 10,000 (goods returned reduces liability)
Dr: Balance c/d 65,000
Cr: Purchases 75,000
Balance b/d Cr: PKR 65,000 — amount still owed to supplier

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