Double Entry, Ledger Accounts, Balancing and the Trial Balance

The rules of double entry

Every transaction has two equal and opposite effects, so total debits always equal total credits. The accounting equation Assets = Capital + Liabilities is preserved by every entry. Debit to increase an asset, an expense or drawings; credit to increase a liability, capital or income. To decrease any of them, do the opposite. Purchases, returns inwards and carriage are debits; sales, returns outwards and discount received are credits.

Divisions of the ledger

The sales ledger holds one account per credit customer (trade receivables); the purchases ledger holds one account per credit supplier (trade payables); the general (nominal) ledger holds every other account — assets, liabilities, capital, income and expenses, including the sales and purchases accounts and, where kept, the sales ledger control and purchases ledger control accounts. The cash book acts as the cash and bank accounts.

Balancing an account

At the period end the larger side is totalled; the difference is inserted on the smaller side as balance c/d so that both sides agree, and the same figure is brought down on the opposite side as balance b/d, which is the opening balance of the next period. A debit balance b/d on a customer's account means the customer owes the business; a credit balance b/d on a supplier's account means the business owes the supplier.

The trial balance

A trial balance lists every ledger balance at a date, debit balances in one column and credit balances in the other. If the totals agree, the arithmetic of the double entry is probably correct — but a balanced trial balance does not prove the absence of errors of omission, commission, principle, original entry, complete reversal or compensating errors. Debit balances: assets, expenses, drawings, purchases, returns inwards. Credit balances: liabilities, capital, income, sales, returns outwards, and provisions such as accumulated depreciation and the allowance for doubtful debts.