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The double entry system is one where transactions are recorded twice in the ledger: One on the debit of an
account and the other on the credit side if another account. The rules for recording transactions using double
entry system are:
1. Every transaction affects two accounts in the ledger: One account is debited and the other is credited.
2. Amount for debit entry is equal to amount for credit entry.
3. Details in one account is the name of the other account affected by the transaction.
We have seen that assets, liabilities and equity (capital) form part of the accounting equation as follows:
Assets = Liabilities + Equity
Now, given that equity increases when the business earns profit and it decreases when the business makes
losses, we can derive the following extended accounting equation:
Assets = Liabilities + Equity + Profit(- loss)
Replacing profit/ loss by the formula “revenue – expenses” in the above extended accounting equation
gives us the following new equation:
Assets = Liabilities + Equity + Revenue – Expenses
Seventh Lecture
IS 5303 – Financial Management
It can be seen that if the equation “Assets + Expenses = Liabilities + Equity + Revenue” is compared with
ledger with the double line at the center of the ledger representing the equal sign of the equation, assets
and expenses represent the debit (Dr) side while liabilities, equity and revenue represent the credit (Cr)
side.
(Please note that the above comparison is simply made to help remember the principles of recording
transactions in the ledger and are not necessarily rules in accounting)
Rules for recording assets, liabilities, equity, revenue and expenses
Whether to debit or credit an account depends on what balance it usually has and this depends whether
the account is one that records an asset, a liability, equity, a revenue or an asset. Usually, an increase is
recorded on the same side as the balance and a decrease is recorded on the opposite side.
The table below shows what balance accounts under each category have and how to record increase and
decrease:
CATEGORY BALANCE INCREASE DECREASE
Assets Dr Dr Cr
Liabilities Cr Cr Dr
Equity Cr Cr Dr
Revenue Cr Cr Dr
Expenses Dr Dr Cr
Note from the table above that we record an increase in an account on the same side as it’s balance is. A
decrease is recorded on the opposite side.
Seventh Lecture
IS 5303 – Financial Management
Answer for Q 1. b. of August 2015
Income Statement of Mr. Kalhara ‐ Sole Proprietorship
For the Year Ended 31st March 2015
Rs. Rs. Rs.
Sales 960,000
Cost of Sales:
Opening Stocks 360,000
Purchases 650,000
Add: Carriage Inwards 3,500
Less: Damage Stocks (21,000)
Stocks ready to sale 992,500
Closing Stocks (280,000)
712,500
Gross Profit 247,500
Other Income
Rent Income 225,000
Discount Received 8,400
Gross Profit with Other Income 480,900
Administrative Expenses
Depreciation on Buildings 37,500
Depreciation on Machinery 30,000
Depreciation on Furniture & Equipments 24,000
Electricity 18,500
Water 2,200
Advertising 12,000
Salaries 240,000
Insurance 28,000
Telephone Expenses 4,500
396,700
Selloing & Distribution Expenses
Bad Debts Written Off 12,000
Depreciation on Motor Vehicle 240,000
Discount allowed 6,500
Selloing & Distribution Expenses 8,500
267,000
Other Expenses
Stock Damages 21,000
Bank Loan Interest 50,000
71,000
Net profit/(loss) for the Year (253,800)
Seventh Lecture
IS 5303 – Financial Management
Fianacial Position Statement of Mr. Kalhara ‐ Sole Proprietorship
As At 31st March 2015
Rs. Rs. Rs.
Non‐Current Assets
Property Plant & Equipment Accumulated Net Book
Cost Depreciation Value
Buildings 750,000 112,500 637,500
Machinery 150,000 90,000 60,000
Motor Vehicle 1,200,000 720,000 480,000
Furniture & Equipments 240,000 72,000 168,000
2,340,000 994,500 1,345,500
Current Assets
Inventories 280,000
Trade Debtors 228,000
Prepayment Water 1,200
Prepayment Advertising 6,000
Cash at Bank 288,000
Cash in Hand 178,000
981,200
Total Assets 2,326,700
Opening Capital 1,750,000
Profit /(loss)for the Year (253,800)
Drawings (26,000)
Closing Capital 1,470,200
Non‐Current Liabilities
Bank Loan (10%) 500,000
500,000
Current Liabilities
Trade Creditors 320,000
Accrued Electricity 6,500
Rent Received in Advance 25,000
Bank Loan Interest Payable 5,000
356,500
2,326,700
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Seventh Lecture