Question

1) What is the principle of double entry accounting? Provide an example that would illustrate this principle. (100–120 words)

2) Explain what a general journal is; describe the process of entering a correcting entry then explain the general principles for reconciling balances outstanding and how would you enter something from the statement that decreases the bank balance. (100–160 words)

Answer 1

1. The principle of Double entry accounting:

The principle of Double Entry Accounting is “Every debit has a corresponding credit”. Essentially, the principle is that for every financial transaction there shall be two effects- One debit and one credit. Hence the total of all debits has to be equal to the total of all credits.

To follow this principle one needs to know the Golden rules of accounting in order to understand which accounts are to be debited and which are to be credited. The Golden rules of accounting are:

Type of a/c	Debit	Credit
Personal a/c(involving person like debtors):	The receiver	The giver
Real(Assets and liabilities)	What comes in	What goes out
Nominal(Expenses and incomes)	All expenses and losses	All income and gains

Example: Entry when a business sells an Asset worth $100,000.

Here an asset has been solved by the business, Hence the real a/c principle applies to it. So since asset goes out, it shall be credited and Cash/Bank which comes into business towards consideration for the asset sold shall be debited.

Journal entry

Cash/Bank a/c    Dr      $100,000

        To Asset a/c              $100,000

2.Principle of General Journal:

The general journal is the master journal that all company transactions or journal entries are recorded in. All the transactions that an entity makes are recorded in General journal following the principles of accounting and double entry system. Examples of few transactions are: Asset purchase, Depreciation, Sales, Expenditure etc

Correcting entry:

A correcting entry or rectification entry is made to fix a wrongly entered transaction in the general journal. For this first one has to identify the accounts to be rectified. One has to figure out if there has been any shortage of amounts, then post another entry using same accounts with difference amount. If greater amount is recorded, then reversal entry needs to be made. If wrong accounts are entered, the correcting entry should reverse the wrong a/c and record the correct a/c.

General principles for reconciling balances outstanding:

Account reconciliation is the process by which the Bank balances in the books is cross verified with external sources such as Bank statements, cheque books etc. In cases where the bank balance in books and as per statements donot tally, the reasons for the same should be known and bank reconciliation statement should be prepared.

How to decrease the bank balance:

Where there is something in the bank statement in the bank balance that decreases the bank balance, the same have to be expenditure or payment to creditor or purchase of assets etc. For different cases different head of a/c is used based on the nature of payment

Assuming that the payment is towards expenditure, the principle used shall be of nominal a/c for expenditure a/c and Real a/c principle for Bank a/c since it is asset to the entity.

Journal entry

Expenditure a/c Dr     xxx

      To Bank a/c            xxx