balance ledger accounts as required and make transfers to financial statements

2.1 The Double‑Entry System of Book‑keeping

Learning objectives

By the end of this lesson you should be able to:

• Explain the double‑entry (dual‑aspect) principle.
• Identify the source documents that give rise to journal entries.
• Know which “book of prime entry” each type of transaction is recorded in.
• Record transactions correctly in the journal.
• Post journal entries to the appropriate ledger (T‑) accounts, using the correct posting conventions.
• Balance each ledger account and determine its closing balance.
• Prepare a trial balance and check it for errors.
• Transfer the balances to the Income Statement (Profit & Loss Account) and the Balance Sheet.

1. The double‑entry (dual‑aspect) principle

Every transaction affects at least two accounts so that the total value debited equals the total value credited:

Total Debits = Total Credits

Cambridge wording:

• Debit the receiver – the party that receives an economic benefit.
• Credit the giver – the party that gives up the benefit.

This keeps the fundamental accounting equation in balance at all times:

Assets = Liabilities + Equity

2. Source documents & books of prime entry

Before a transaction reaches the journal it is first recorded in a “book of prime entry”. The book used depends on the nature of the source document.

3. Recording transactions – the journal

All entries are recorded chronologically. Each entry must contain:

1. Date
2. Accounts affected – debit side first, then credit side
3. Amount to be debited and credited
4. A brief description (narration)

Example – small trading business (January 2025)

Posting conventions

• The debit side of a journal entry is always posted to the debit (left) side of the relevant T‑account.
• The credit side of a journal entry is always posted to the credit (right) side of the relevant T‑account.
• Each posting must retain the original date and amount for audit‑trail purposes.

4. Posting to ledger (T‑) accounts

Below are the fully worked‑out T‑accounts for the example above.

5. Balancing ledger accounts

Steps (illustrated with the Inventory account):

1. Add all debit entries: £2,200.
2. Add all credit entries: £1,500.
3. Debit total > Credit total, so subtract £1,500 from £2,200.
4. Closing balance = £700 on the debit side (written as “Balance b/d 700 Dr”).

All other accounts have been balanced in the T‑account tables above.

6. Preparing a trial balance

The trial balance lists the closing balances of every ledger account. Debit balances are placed in the left column, credit balances in the right column.

6.1 Spot‑the‑error box (common errors that do NOT affect the trial balance)

• Transposition error (e.g., £1,250 entered as £1,520) – totals still balance.
• Omission of a transaction – both debit and credit are missing, so the trial balance still balances.
• Commission recorded on the wrong side (debit instead of credit) – the amounts cancel each other out.

When the trial balance *does* fail to balance, check for:

• Single‑sided entries (debit without credit or vice‑versa).
• Incorrect amounts.
• Mis‑posted accounts.

7. Transfers to the financial statements

7.1 Mapping of accounts

• Nominal accounts (Revenue & Expenses) → Income Statement (Profit & Loss Account).
• Real & Personal accounts (Assets, Liabilities, Equity) → Balance Sheet.

7.2 Income Statement (Profit & Loss Account)

7.3 Balance Sheet (as at 31 January 2025)

8. Summary checklist – from transaction to financial statements

1. Identify the source document (invoice, receipt, etc.).
2. Determine which book of prime entry the transaction belongs to.
3. Apply the dual‑aspect rule: Debit the receiver, credit the giver.
4. Record the transaction in the journal (date, accounts, amounts, narration).
5. Post each debit to the debit side and each credit to the credit side of the appropriate T‑account.
6. Balance every ledger account and write the closing balance.
7. Prepare a trial balance – ensure total debits = total credits.
8. Check the trial balance for common errors (omission, transposition, single‑sided entry).
9. Transfer:

   • Revenue & expense balances → Income Statement.
   • Asset, liability & equity balances → Balance Sheet.

10. Verify that the Balance Sheet satisfies Assets = Liabilities + Equity.

9. Practice question

Using the journal entries shown in section 3, complete the tasks below.

1. Post each entry to the T‑accounts for Cash, Capital, Inventory, Sales Revenue and Cost of Goods Sold (use the format shown in section 4).
2. Balance each ledger account and prepare a trial balance.
3. Prepare a full Income Statement and Balance Sheet for the period.

When you have finished, check that:

• The trial‑balance totals are equal.
• The Balance Sheet balances (Assets = Liabilities + Equity).
• No single‑sided entries or transposition errors remain.