Double-Entry Bookkeeping, Ledger Accounts and the Trial Balance
This domain tests whether you can apply the double-entry rule, keep ledger accounts properly balanced, and extract a trial balance that agrees. Questions often give a small set of transactions and ask for the ledger entries, the closing balances, or the trial balance. Understanding why each entry goes where it does is more reliable than memorising lists.
The double-entry rule
Every transaction affects at least two accounts: debit the receiving account, credit the giving account. Use DEAD CLIC: Debits increase Expenses, Assets and Drawings; Credits increase Liabilities, Income and Capital. An increase in an asset or expense is a debit; an increase in a liability, income or capital is a credit. Reductions go the opposite way.
Types of account
Assets and expenses normally carry debit balances; liabilities, capital and income normally carry credit balances. Drawings carry a debit balance and are deducted from capital in the balance sheet, not charged as an expense.
Balancing an account
Total both sides. Enter the difference on the side with the smaller total as balance c/d, then bring the same figure down on the opposite side as balance b/d at the start of the next period. The balance b/d must appear on the side where the larger total was.
Trial balance
List every debit balance in the debit column and every credit balance in the credit column. Agreement shows only that the ledger is arithmetically balanced, not that it is correct: errors of omission, commission, principle, original entry, reversal and compensating errors leave the trial balance agreeing. One-sided postings, wrong-side entries, addition errors and transposition do disturb agreement and are cleared through a suspense account.
Worked example
Transactions: capital 800,000 in cash; goods bought for cash 250,000; credit sales 100,000; cash sales 300,000; rent paid 60,000; wages paid 40,000. Cash: 800,000 − 250,000 + 300,000 − 60,000 − 40,000 = 750,000 Dr. Purchases 250,000 Dr; debtors 100,000 Dr; rent 60,000 Dr; wages 40,000 Dr; sales 400,000 Cr; capital 800,000 Cr. Debits total 1,200,000 and credits total 1,200,000. Each receipt was debited to cash and each payment credited, which is why the cash account is self-checking.
Traps
- Bringing the balance b/d down on the same side as balance c/d.
- Debiting sales when a customer returns goods; returns inwards are debited to the returns inwards account.
- Treating discount received as an expense; it is income.
- Assuming that an agreed trial balance proves there are no errors.