prepare ledger accounts
2.1 The double entry system of book‑keeping
What is double entry?
Think of a balance scale ⚖️. For every weight you put on one side, you must put an equal weight on the other side to keep it level. In double entry bookkeeping, every transaction is recorded with a debit and a credit of equal value, so the books always stay balanced.
The basic rule is: $$\sum \text{Debit} \;=\; \sum \text{Credit}$$
Why use double entry?
- Provides an internal check – if the totals don’t match, there’s an error.
- Gives a complete picture of how money moves in and out of the business.
- Forms the foundation for preparing financial statements.
Key terms
| Term | Definition |
|---|---|
| Debit (Dr) | An entry that increases assets or expenses, or decreases liabilities, equity, or revenue. |
| Credit (Cr) | An entry that increases liabilities, equity, or revenue, or decreases assets or expenses. |
| Ledger | A book or digital record that lists all accounts and their balances. |
Preparing a Ledger Account
- Identify the account you want to record (e.g., Cash, Inventory, Sales).
- Set up the ledger with columns: Date, Description, Debit, Credit, Balance.
- Record the opening balance (if any).
- For each transaction, add a debit or credit in the appropriate column.
- After each entry, calculate the new balance: $$\text{Balance}_{new} = \text{Balance}_{old} + \text{Debit} - \text{Credit}$$
- Ensure the final balance matches the account’s nature (assets normally have a debit balance, liabilities a credit balance).
Example: Buying Goods for Cash
A shop buys £500 worth of goods and pays cash.
📌 Journal entry:
Debit Inventory £500
Credit Cash £500
Ledger Accounts for the Example
Inventory Account
| Date | Description | Debit | Credit | Balance |
|---|---|---|---|---|
| 01/04/2026 | Opening balance | 0 | 0 | 0 |
| 05/04/2026 | Purchase of goods | £500 | 0 | £500 |
Cash Account
| Date | Description | Debit | Credit | Balance |
|---|---|---|---|---|
| 01/04/2026 | Opening balance | £1,000 | 0 | £1,000 |
| 05/04/2026 | Purchase of goods | 0 | £500 | £500 |
Quick Check: Balancing the Books
After recording all entries, add up all debits and all credits.
If they match, the books are balanced.
🔍 If they don’t, double‑check each transaction for errors.
Practice Task
1️⃣ Record the following transaction in a journal:
• The shop sells goods worth £300 on credit.
• The shop receives £200 cash from a customer.
2️⃣ Prepare the ledger accounts for Cash and Accounts Receivable.
3️⃣ Verify that the total debits equal total credits.
💡 Remember: every debit must have a matching credit. Think of it as a dance where every step on one side has a partner on the other side. Keep the rhythm, and the books will stay in sync! 🎶
Revision
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