ACCA FA – Chapter 3 Study Notes

Double-Entry Bookkeeping

Exam Weight: ⭐⭐⭐⭐⭐ (Very Important)
Double-entry bookkeeping is the foundation of Financial Accounting. Almost every numerical question in ACCA FA depends on this chapter.

Chapter Mind Map

Double-Entry Bookkeeping
│
├── Accounting Equation
├── Double Entry Rules
├── Debits & Credits
├── Ledger Accounts (T-Accounts)
├── Balancing Accounts
├── Capital & Drawings
├── Income & Expenses
└── Common Journal Entries

1. What is Double-Entry Bookkeeping?

Every business transaction has two equal effects.

Therefore:

• Every debit has a corresponding credit.
• Total debits always equal total credits.

2. Accounting Equation

Formula

Assets = Capital (Equity) + Liabilities

Every transaction keeps this equation balanced.

Example

Owner invests ₹1,00,000.

3. Why Double Entry?

It helps to:

• Maintain complete records
• Detect errors
• Prepare trial balance
• Prepare financial statements
• Reduce fraud

4. Debit and Credit Rules

Golden Rule

Easy Memory Trick

DEA LER

• Debit → Expenses
• Debit → Assets
• Credit → Liabilities
• Credit → Equity
• Credit → Revenue

DEA = Debit

LER = Credit

5. Types of Accounts

Assets

Examples

• Cash
• Bank
• Inventory
• Machinery
• Vehicles
• Building
• Receivables

Increase → Debit

Decrease → Credit

Liabilities

Examples

• Payables
• Loan
• Tax payable

Increase → Credit

Decrease → Debit

Capital

Increase → Credit

Decrease → Debit

Income

Examples

• Sales
• Commission received
• Interest received

Increase → Credit

Decrease → Debit

Expenses

Examples

• Rent
• Salary
• Electricity
• Insurance
• Advertising

Increase → Debit

Decrease → Credit

6. Effect of Transactions

Owner introduces capital

Dr Cash
    Cr Capital

Cash ↑

Capital ↑

Purchase equipment for cash

Dr Equipment
    Cr Cash

Equipment ↑

Cash ↓

Purchase goods on credit

Dr Purchases (Inventory)
    Cr Payables

Inventory ↑

Liability ↑

Cash sale

Dr Cash
    Cr Sales

Cash ↑

Income ↑

Pay rent

Dr Rent
    Cr Cash

Expense ↑

Cash ↓

7. T-Accounts (Ledger Accounts)

Example

Cash Account

Cash
Debit          Credit
Capital 50,000
Sales   20,000      Rent 5,000
                 Equipment 10,000
Balance c/d 55,000

8. Rules for T-Accounts

Debit Side

• Asset increases
• Expense increases

Credit Side

• Liability increases
• Capital increases
• Income increases

9. Balancing Ledger Accounts

Steps

1. Total both sides.
2. Find difference.
3. Write Balance c/d.
4. Bring down Balance b/d.

Example

Cash

Debit
Capital 50,000
Sales 5,000
Credit
Rent 2,000
Balance c/d 53,000

Next period

Balance b/d 53,000

10. Capital and Drawings

Capital

Money invested by owner.

Entry

Dr Cash
    Cr Capital

Drawings

Money withdrawn for personal use.

Entry

Dr Drawings
    Cr Cash

Drawings reduce owner’s equity.

11. Income and Expenses

Income

Increases profit.

Examples

• Sales
• Rent received
• Interest received

Credit Nature

Expenses

Decrease profit.

Examples

• Salary
• Electricity
• Insurance
• Rent

Debit Nature

12. Typical Transactions

Purchase inventory for cash

Dr Purchases
    Cr Cash

Purchase inventory on credit

Dr Purchases
    Cr Payables

Credit sale

Dr Receivables
    Cr Sales

Receive cash from customer

Dr Cash
    Cr Receivables

Pay supplier

Dr Payables
    Cr Cash

Receive bank loan

Dr Cash
    Cr Loan

Pay electricity

Dr Electricity Expense
    Cr Cash

Buy furniture

Dr Furniture
    Cr Cash

13. Common Ledger Accounts

14. Common Credit Accounts

15. Effect on Accounting Equation

16. Common Exam Mistakes

❌ Debiting Sales

✔ Sales is always Credit.

❌ Crediting Expenses

✔ Expenses are Debit.

❌ Debiting Capital

✔ Capital normally has Credit balance.

❌ Crediting Assets when assets increase

✔ Asset increase = Debit.

Memory Tricks

Debit

A + E

Assets

Expenses

Credit

L + C + I

Liabilities

Capital

Income

Most Tested Journal Entries

One-Minute Revision Sheet

Accounting Equation

Assets = Capital + Liabilities

Debit

✔ Assets

✔ Expenses

Credit

✔ Liabilities

✔ Capital

✔ Income

Every Transaction

• Two effects
• Equal debit and credit
• Accounting equation remains balanced

Most Important Ledger Accounts

• Cash
• Bank
• Sales
• Purchases
• Receivables
• Payables
• Capital
• Loan
• Rent
• Salary
• Equipment

Remember

DEA = Debit

• Debit → Expenses
• Debit → Assets

LER = Credit

• Credit → Liabilities
• Credit → Equity
• Credit → Revenue