Meaning of Double-Entry book-keeping

Double-entry bookkeeping can be define as an accounting system where every financial transaction impact a minimum of two accounts. This technique guarantees continual balance of the accounting equation (Assets = Liabilities + Equity).

The management of an asset in double-entry accounting entails documenting its purchase and shifts in worth by means of appropriate debiting or crediting. The process is as follows:

1. Acquisition: Debit the Vehicle account to reflect the rise in assets with ₦3,000,000; Credit Cash or Accounts Payable to indicate the amount paid in conducting the business or liability that has been incurred.


2. Depreciation: Debit Depreciation Expense with ₦300,000 in order to show all depreciated expenses; Credit Accumulated Depreciation to reduce truck’s value by ₦300,000.


3. Disposal: Debit Cash with ₦1,500,000 for recording the proceeds from sale; Credit Vehicle account with ₦3,000,000 for removing it from records as its original cost; Credit Accumulated Depreciation for reducing cumulative depreciation; Record any gain or loss due to the difference between book value and sale price.

Here is a table showing double-entry treatment of the vehicle asset, including calculations for depreciation and disposal:

Transaction	Account	Debit (₦)	Credit (₦)
Acquisition	Vehicle	3,000,000
	Cash / Accounts Payable		3,000,000
Depreciation	Depreciation Expense	300,000
	Accumulated Depreciation		300,000
Disposal	Cash	1,500,000
	Vehicle		3,000,000
	Accumulated Depreciation		1,000,000
	Gain on Sale of Asset		500,000

Calculation

1. Dpreciation


• Annual Depreciation Expense: ₦300,000.


• Accumulated Depreciation: Assumed total ₦1,000,000 before disposal.



2. disposal


• Book Value of Truck: ₦3,000,000 (cost) - ₦1,000,000 (accumulated depreciation) = ₦2,000,000.


• Sale Price: ₦1,500,000.


• Gain on Sale: ₦1,500,000 (sale price) - ₦2,000,000 (book value) = -₦500,000 (a loss in this case).

The way liabilities are treated in the double-entry system of accounting is as follows:

1. incurred liability:


• When a business incurs a liability, it means it has an obligation to pay in the future.


• Credit: The liability account is credited to show an increase in the amount owed.


• Debit: The corresponding account, such as Cash (if the liability is paid immediately) or an asset or expense account, is debited.



Example: If a business takes a loan of ₦2,000,000 from a bank:


• Debit Cash account ₦2,000,000 (increase in cash asset).


• Credit Loan Payable account ₦2,000,000 (increase in liability).




2. Payment of Liability:


• When a liability is paid off, it decreases the liability and decreases the cash or bank balance.


• Debit: The liability account is debited to reduce the amount owed.


• Credit: The Cash or Bank account is credited to reflect the outflow of funds.




Example: If the business pays off ₦500,000 of the loan:



• Debit Loan Payable account ₦500,000 (decrease in liability).


• Credit Cash account ₦500,000 (decrease in cash asset).




3. Adjusting Liability :



• When a liability needs to be adjusted, such as an increase due to interest or a decrease due to a partial payment.


• Debit/Credit: The liability account is adjusted accordingly, with the other side affecting either an expense (e.g., interest) or an asset account.




Example: If interest of ₦50,000 is added to the loan:



• Debit Interest Expense account ₦50,000 (record the expense).


• Credit Loan Payable account ₦50,000 (increase the liability).

An example of this would be a Nigerian business that has borrowed money, has accrued interest, and has made some repayments on the loan.

Transaction	Account	Debit (₦)	Credit (₦)
1. Loan Taken	Cash	2,000,000
	Loan Payable		2,000,000
2. Interest Incurred on Loan	Interest Expense	50,000
	Loan Payable		50,000
3. Partial Loan Repayment	Loan Payable	500,000
	Cash		500,000

1. Loan Taken :


• Debit Cash ₦2,000,000 : The cash asset increases as the business receives the loan.


• Credit Loan Payable ₦2,000,000: The liability increases because the business now owes this amount.



2. Interest incured on loan :



• Debit Interest Expense ₦50,000: Recognize the interest cost as an expense.


• Credit Loan Payable ₦50,000: Increase in liability as the interest adds to the total amount owed.




3. Partial Loan Repayment



• Debit Loan Payable ₦500,000: Decrease in liability as part of the loan is paid off.


• Credit Cash ₦500,000: Decrease in cash asset due to repayment of the loan.

1. Recording an Expense: Debit the Expense account ₦100,000 to reflect the cost incurred, and Credit the Cash or Accounts Payable account ₦100,000 to show the reduction in cash or the obligation to pay.


2. Accrued Expense: Debit the Expense account ₦50,000 to record the cost incurred but not yet paid, and Credit the Accrued Expenses or Accounts Payable account ₦50,000 to show the liability created.


3. Paying an Accrued Expense: Debit the Accrued Expenses or Accounts Payable account ₦50,000 to reduce the liability, and Credit the Cash or Bank account ₦50,000 to reflect the cash outflow when the payment is made.

Account	Debit (₦)	Credit (₦)
Rent Expense	100,000
Electricity Expense	50,000
Accrued Expenses		50,000
Cash (Payment for Rent)		100,000
Accrued Expenses (Paid)	50,000
Cash (Payment for Accrued)	50,000

Summary :

• Rent Expense is debited for ₦100,000.


• Electricity Expense is debited for ₦50,000.


• Accrued Expenses are credited for ₦50,000 to reflect the unpaid electricity bill.


• Cash/Accounts Payable is credited for ₦100,000 for rent payment.


• Accrued Expenses are debited for ₦50,000 when the accrued expense is paid off.


• Cash is credited for ₦50,000 when the accrued expense is paid.