Recording financial transactions and double-entry bookkeeping
What the exam tests
This domain tests whether you can record transactions using the dual-effect convention, use the books of prime entry and ledgers, and prove the records with a trial balance. Questions often require journal entries, ledger postings or correction of an imbalance.
Core rules
- Every transaction has two effects: debit one account, credit another. Debits increase assets and expenses; credits increase liabilities, income and capital.
- Books of prime entry: sales daybook, purchase daybook, cash book, petty cash book and journal. Post totals or individual items to the nominal ledger.
- The trial balance proves arithmetic equality of debits and credits, not completeness. It will not detect errors of omission, commission, principle, original entry, reversal or compensating errors.
- A bank overdraft is a credit balance in the cash book; a positive bank balance is a debit.
- Journal entries correct errors and record non-routine items, with a narrative.
Worked example
A trader buys inventory on credit for £2,000 and later pays £1,500 by bank.
Purchase: debit purchases £2,000; credit payables £2,000. The purchase daybook records it, then the nominal ledger is posted.
Payment: debit payables £1,500; credit bank £1,500. The cash book records the payment and the payables ledger is reduced.
Reasoning: the first entry recognises an expense and a liability; the second settles part of the liability and reduces the asset at bank. The trial balance remains equal after both entries.
Traps
Reversing debit and credit is the most common error. Do not debit an asset for a repair expense or credit income for a capital contribution. When correcting an error, identify both the wrong entry and the correct entry before writing the journal. Remember that a trial balance can balance despite serious errors.
Key points
- Debit assets and expenses; credit liabilities, income and capital.
- Use the correct book of prime entry before posting to the ledger.
- A balanced trial balance does not prove accuracy.
- Treat an overdraft as a credit balance.
- Journal narratives should explain the correction, not just repeat the accounts.