Double entry concept relevant to FA1/FA2/FFA

Double entry concept is a very important concept underpinning financial accounting. The idea is that every financial transaction has dual effect and therefore is recorded twice, one debit and one credit. This concept is sometime difficult to apply in certain transactions, it requires practice.

The followings are some examples:
1. Debit expenses = more expenses are incurred.
2. Debit asset = more asset is controlled.
With the above, you should understand that credit will be the opposite:
1. Credit income = more incomes are earned.
2. Credit liability = more liability is obliged.
3. Credit capital = more capital is injected/created.
Note: Capital provider injects money or other assets to the business, thus created capital. Capital is therefore the amount that business owes to the capital provider and so it is on the credit side, like liability.

Now let's mix them up:
1. Debit income = income is reduced.
2. Credit asset = asset is reduced.
3. Debit liability = liability is reduced.
Therefore, by knowing a little of double entry principles, you can do the rest, this is where common sense applies.

Certain accounts are known as contra asset, for example accumulated depreciation and allowance for receivables (provision for doubtful debt). The word "contra" implies cancel, so you would credit them to the relevant assets, ie. non-current assets and trade receivables. Drawing made by the sole proprietor or partner is a contra capital/equity account so you debit drawing to the capital account.

One more common question asked by student is why profit is credited to the capital account. This is because profit earned from the business belongs to the capital provider, by crediting the capital account, the business is owing more to the capital provider.

Do not underestimate this concept because you will use it throughout your accountancy life, it is still very important even in ACCA P2. Catch the logic and master them now. :)