2.1. Double entry system is applied to prepare ledger accounts.

1. Meaning of the Double Entry System

The double entry system states that for every debit (Dr), there must be a corresponding credit (Cr) of equal value.

This follows the accounting equation:

$\text{Assets} = \text{Capital} + \text{Liabilities}$

Assets=Capital+Liabilities

---

2. Rules of Double Entry

The rules are applied depending on the type of account:

---

3. Steps for Applying Double Entry in Ledger Accounts

Step 1: Identify the accounts involved

Every transaction affects two accounts or more.

Step 2: Determine the type of each account

Is it an asset, liability, capital, expense, or income account?

Step 3: Apply the double entry rule

Decide which account to debit and which to credit.

Step 4: Post to the ledger

Enter the information in the appropriate ledger accounts, including:

• Date

• Details (narration)

• Amount

• Folio (if used)

Step 5: Balance off the ledger account

At the end of a period, each ledger account is balanced to find:

• Balance c/d (carried down)

• Balance b/d (brought down)

---

4. Worked Examples

Example 1: Owner invests Ksh 100,000 into the business

• Dr Cash (asset increases)

• Cr Capital (capital increases)

Ledger Entries:

Cash Account

Capital Account

---

Example 2: Bought furniture for cash Ksh 20,000

• Dr Furniture

• Cr Cash

---

Example 3: Sold goods on credit to John for Ksh 15,000

• Dr Accounts Receivable (John)

• Cr Sales

---

Example 4: Paid electricity bill Ksh 5,000

• Dr Electricity Expense

• Cr Cash

---

5. Purpose of Applying Double Entry to Ledgers

Applying the double entry system ensures:

• Accuracy of financial records

• Completeness of transactions

• Ability to detect some errors

• Preparation of trial balance

• Preparation of financial statements

The ledger forms the basis for:

• Trial Balance

• Income Statement

• Statement of Financial Position

---

6. Short Exam-Ready Answer

The double entry system requires every transaction to be recorded with equal debits and credits. Ledger accounts are prepared by identifying the accounts affected, applying the debit and credit rules, posting entries to the relevant ledger accounts, and balancing them. This ensures accurate records that lead to the preparation of the trial balance and financial statements.