Principles of Double-Entry Bookkeeping and Accounting Systems
The whole of financial accounting rests on one idea: every transaction has two equal and opposite effects, so the accounting equation - assets = capital + liabilities - stays in balance at all times. Learn the debit and credit rules cold: an increase in an asset or an expense is a debit; an increase in a liability, capital or income is a credit (DEAD CLIC). A bank overdraft is a liability and therefore a credit balance, not a negative asset.
Transactions are first recorded in the books of prime entry - sales day book, purchases day book, the two returns day books, the cash book and the journal - and then double-entered into the nominal ledger. The receivables and payables ledgers are memorandum records: they hold the customer and supplier detail, but the figures that reach the financial statements come from the nominal ledger control accounts. Sales tax (VAT) is recorded in its own account and is neither income nor expense.
The trial balance is only an arithmetic check that total debits equal total credits. It proves nothing about correctness: an error of principle, an error of commission, a reversed entry or a completely omitted transaction all leave it in agreement.
Worked example. A business buys goods on credit for £400 plus VAT at 20%. Debit Purchases £400, debit VAT £80, credit Payables £480. Both sides of the equation rise by £480, so it still holds.
Traps. Returns inwards (sales returns) are debited, not credited; settlement discount allowed is a debit; carriage outwards is a distribution cost, not part of cost of sales.