Topic 3: Application of the Double Entry System – Book Keeping Notes Form One New Syllabus

The accounting equation

Accounting equation

is the equation that shows resources owned by a business against those due to others (liabilities).

Accounting equation

is the equation that show the relationship between assets, capital and liabilities. Assets: are resources that an enterprise controls and uses to conduct its business. Capital or owner equity: is the amount of resources contributed by the owner.

Liabilities:

are resources in the business supplied by non-owners of the business.

They are obligations that a business has to settle by means of transferring resources to other persons or business.

At a point when the business has just started, the total value of assets equals the value of capital:

 

When a business has resources supplied by the owner of the business and others who do not own the business, the accounting equation changes as follows:

 

 

 

Example 1.

Complete gaps in the following table.

S/n	Assets TZS	Liabilities TZS	Capital TZS
a)	5000,000	720,000	?
b)	1,120,000	196,000	?
c)	6,720,000	?	5,000,000
d)	7840,000	?	6,580,000
e)	?	4,660,000	1,580,000
f)		2,520,000	7,680,00

?

Solution: From the accounting equation which state that

 

Question 1; Complete the following table

STATEMENT OF AFFAIRS:

is the statement which shows the list of all assets and liabilities (together with their financial value) at a particular date to enable one calculate value of capital.

STATEMENT OF AFFAIRS:

Is the statement shows the figures of assets and liabilities to determine the amount of capital.
This approach is specifically helpful in a situation where one knows the assets and liabilities of the business and wants to calculate the figure if capital.

The effects of revenue and expenses on the equity element of accounting can lead to an extended accounting equation which appears as follows

 

 

Arithmetically, this equation can be re-arranged. Foe ease of understanding the double entry principle, the re-arrangement of the extended accounting equation is as follows:

 

 

FORMAT OF A STATEMENT OF AFFAIRS:

Statement of Affairs as at (date, Month, Year)

Example 1. Kyela Business Enterprise has invested in farming activities. They do not keep complete books of accounts.

However, the following information is available as at 31st December 2020. Prepare statement of affairs to calculate amount of capital.

Example 2. Mr. Salim has the following transaction took place during the year 2023 December 31st. you are required to calculate capital and prepare the initial statement of the affairs.

CONCEPT OF DOUBLE ENTRY:

The accounting equation is the foundation of the concept of double entry. Double entry deals with the recording and posting of business transactions in the books of accounts. Business transactions are posted to ledger accounts following principle of double entry.

Meaning of double entry system:

This is the principle which calls for recording each business transactions twice in the books of accounts.

The principle of double entry states that, every business transaction should be recorded twice, that is, every debit entry must have its corresponding credit entry of the same amount.

Therefore, one side of the account receives while the other side gives depending on the nature of transaction.

Double entry is the most commonly used system of book keeping based on the principle that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice.

Application of the Double Entry System

IMPORTANCE OF DOUBLE ENTRY