Bookkeeping: The Accounting Cycle and Double Entry
The accounting equation and normal balances
Every transaction keeps Assets = Liabilities + Equity in balance. Debits increase assets, expenses, and drawings; credits increase liabilities, equity, and revenue. Memorize normal balances cold: assets and expenses are debit-balance accounts; liabilities, equity, and revenue are credit-balance accounts. Contra accounts - Accumulated Depreciation, Sales Returns and Allowances, Owner's Drawings - run opposite to their parent account.
The accounting cycle
Source documents feed the journal, then the ledger, then an unadjusted trial balance. Adjusting entries record accruals (earned or incurred but unrecorded), deferrals (prepaid expenses and unearned revenue), and depreciation. After the adjusted trial balance come the financial statements, closing entries, and a post-closing trial balance. Temporary accounts (revenues, expenses, drawings) close to capital each period; permanent accounts carry forward.
Traps that appear in questions
- A trial balance that balances proves only that debits equal credits. Offsetting errors - equal wrong amounts on both sides, a wholly omitted transaction, or the right amount posted to the wrong account on the correct side - survive undetected.
- Cash received before it is earned is a liability (Unearned Revenue), not revenue.
- Owner withdrawals reduce equity; they are never an expense.
- Buying equipment with loan proceeds changes no equity.
Rule of thumb and worked example
Debit what you received; credit where it came from. A business buys $5,000 of equipment, paying $2,000 cash and financing $3,000 on a note. Debit Equipment $5,000; credit Cash $2,000; credit Notes Payable $3,000. Total assets still rise by $3,000, liabilities rise by $3,000, and the equation balances.