Double Entry System Questions and Answers [With PDF]
The double entry system is the heart of modern accounting. Once you understand that every transaction has two sides, debit and credit, the rest of the subject falls into place. Here are 25 important questions with clear answers and a worked example, ready for your exam.
This is Chapter 4 of our Accounting course. You will find it easier if you have already read Transaction and Account.
Meaning and Features
Q1. What is the double entry system?
It is a method of bookkeeping in which every transaction is recorded in two accounts: one is debited and the other is credited, both for the same amount. Because both effects are recorded, the books give a complete picture of the transaction.
Q2. Who is called the Father of the Double Entry System?
The Italian mathematician Luca Pacioli. In 1494 he published Summa de Arithmetica, Geometria, Proportioni et Proportionalita, which explained the method used by Venetian merchants. He did not invent it, but he was the first to describe it in print, so he is called the Father of Accounting.
Q3. What are the features of the double entry system?
- Every transaction affects at least two accounts.
- One account is debited and another is credited with an equal amount.
- Each transaction has a receiver (debit) and a giver (credit).
- Total debits always equal total credits.
- Accounts are classified separately, so every account can be checked.
- It allows a trial balance to be prepared to check arithmetical accuracy.
Q4. Why is the double entry system called a scientific method?
Because it follows fixed rules, and because its accuracy can be tested. Debits must equal credits, so a trial balance shows quickly whether there is an arithmetical error.
Q5. What is the dual aspect of a transaction?
Every transaction has a giver and a receiver. The account that receives value is debited and the account that gives value is credited. When you buy furniture for cash, furniture comes in (debit) and cash goes out (credit).
Q6. What are the advantages of the double entry system?
- It is a complete and scientific system.
- It checks arithmetical accuracy through the trial balance.
- It shows profit or loss and the financial position.
- It helps detect and prevent errors and fraud.
- It allows comparison with earlier years and helps in planning.
- It is accepted worldwide and by tax authorities and lenders.
Q7. What are the limitations of the double entry system?
- It is more complex than simple record keeping.
- It needs trained staff and takes more time, labour and cost.
- It involves a larger volume of work.
- Some errors are not caught by the trial balance, such as a transaction omitted completely or an entry in the wrong account.
- It can be difficult for people with little accounting knowledge to decide the two sides of a transaction.
Debit, Credit and the Accounting Equation
Q8. What is debit?
Debit (Dr) is the left side of an account. It records increases in assets and expenses, and decreases in liabilities, owner’s equity and income.
Q9. What is credit?
Credit (Cr) is the right side of an account. It records increases in liabilities, owner’s equity and income, and decreases in assets and expenses.
Q10. What methods are used to decide debit and credit?
Two methods: the traditional method (personal, real and nominal accounts) and the modern or equation method (assets, liabilities, equity, income and expenses).
Q11. What is the traditional method?
| Type of account | Debit | Credit |
|---|---|---|
| Personal account | The receiver of the benefit | The giver of the benefit |
| Real account (property) | What comes in | What goes out |
| Nominal account | All expenses and losses | All incomes and gains |
Q12. What is the modern (equation) method?
| Account | Normal balance | Increase | Decrease |
|---|---|---|---|
| Assets | Debit | Debit | Credit |
| Expenses | Debit | Debit | Credit |
| Drawings | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Capital | Credit | Credit | Debit |
| Income | Credit | Credit | Debit |
Q13. What are the basic and expanded accounting equations?
Basic equation: Assets = Liabilities + Owner’s Equity (A = L + OE).
Expanded equation: Assets = Liabilities + Capital + Revenue – Expenses – Drawings.
Debits and credits keep this equation in balance after every transaction.
Q14. Can you show a worked example of double entry?
| Transaction | Debit | Credit | Amount |
|---|---|---|---|
| 1. Owner starts business with cash | Cash A/c | Capital A/c | 50,000 |
| 2. Bought furniture for cash | Furniture A/c | Cash A/c | 10,000 |
| 3. Bought goods on credit from Karim | Purchases A/c | Karim A/c (creditor) | 15,000 |
| 4. Sold goods for cash | Cash A/c | Sales A/c | 8,000 |
| 5. Paid rent in cash | Rent A/c | Cash A/c | 2,000 |
In each row the debited account and the credited account carry the same amount, so total debits always equal total credits.
Books of Accounts
Q15. What books are kept under the double entry system?
Two main groups: the journal (books of original entry) and the ledger (the book of final entry). The journal is divided into subsidiary books to save time:
- Purchases book and sales book
- Purchases returns book and sales returns book
- Bills receivable book and bills payable book
- Cash book
- Journal proper (general journal)
Q16. What is a journal?
The journal is the book where every transaction is first recorded, in date order, showing the accounts to be debited and credited. It is called the book of original entry.
Q17. What is the purchases book?
It records only purchases of goods on credit meant for resale. Cash purchases and purchases of assets such as furniture do not go here. It is also called the purchases journal or purchases day book.
Q18. What is the sales book?
It records only sales of goods on credit. Cash sales go to the cash book. It is also called the sales journal or sales day book.
Q19. What are the purchases returns and sales returns books?
- Purchases returns book (returns outward): records goods bought on credit that are sent back to the supplier.
- Sales returns book (returns inward): records goods sold on credit that customers send back.
Q20. What are the bills receivable and bills payable books?
- Bills receivable book: records bills accepted by customers, which the business will receive money for later.
- Bills payable book: records bills the business has accepted in favour of its suppliers, which it must pay later.
Q21. What is the journal proper?
The journal proper (general journal) records transactions that do not fit in any special book, such as opening entries, closing entries, adjustments, rectification of errors and writing off bad debts.
Q22. What is a cash book?
The cash book records all cash receipts and cash payments. It works as a journal and as a ledger for the cash account at the same time.
Q23. What is a ledger?
The ledger is the main book of accounts where journal entries are classified and posted account by account. It is called the book of final entry.
Comparison and Exam Tips
Q24. What is the difference between the double entry system and the single entry system?
| Point | Double entry | Single entry |
|---|---|---|
| Recording | Both effects of every transaction | Only one effect, and often only cash and personal accounts |
| Nature | Complete and scientific | Incomplete and unscientific |
| Trial balance | Can be prepared | Cannot be prepared |
| Accuracy check | Arithmetical accuracy can be checked | Cannot be checked easily |
| Acceptance | Widely accepted | Limited, used by very small traders |
Q25. What mistakes do students make in double entry?
- Recording only one side of a transaction.
- Mixing up giver and receiver, which gives debit and credit in the wrong order.
- Forgetting that drawings are debited, because they reduce capital.
- Treating the purchase of an asset as a purchase of goods.
- Writing different amounts on the two sides.
Quick Revision Points
- Every transaction has a debit and a credit of equal amount.
- Debit the receiver, credit the giver (personal accounts).
- Assets and expenses increase on the debit side. Liabilities, capital and income increase on the credit side.
- Journal is the book of original entry. Ledger is the book of final entry.
- Luca Pacioli (1494) described the system.
Test yourself with the chapter quiz below, then continue to Accounting Cycle.
