What you'll learn
Double entry is the rule that every transaction affects two accounts, once as a debit and once as a credit, in equal amounts. Everything else in accounting rests on it, and a student who is secure on debits and credits finds the rest of the syllabus mechanical while one who is not struggles at every stage. This guide covers the accounting equation, the rules of debit and credit and why they work as they do, the accounting cycle from source document to financial statements, books of original entry, ledgers and the trial balance, and the errors a trial balance will and will not reveal. It opens Unit 1.
Key terms and definitions
Transaction — an event with a financial effect on the business.
Source document — the evidence of a transaction: invoice, receipt, cheque counterfoil, credit note.
Double entry — the principle that every transaction is recorded twice, as a debit and an equal credit.
Debit — an entry on the left of an account, increasing assets and expenses and decreasing liabilities, capital and income.
Credit — an entry on the right of an account, increasing liabilities, capital and income and decreasing assets and expenses.
Accounting equation — Assets = Liabilities + Capital.
Asset — a resource owned or controlled by the business.
Liability — an amount owed by the business.
Capital — the owner's claim on the business, being assets less liabilities.
Ledger — the collection of accounts in which transactions are recorded.
Book of original entry — a journal in which transactions are first recorded before posting to the ledger.
Posting — transferring entries from a book of original entry to the ledger.
Trial balance — a list of ledger balances proving total debits equal total credits.
Balancing off — calculating and carrying down the closing balance of an account.
Accounting cycle — the sequence from source document through to financial statements.
Core concepts
The accounting equation
Everything a business has must have been funded from somewhere, so:
Assets = Liabilities + Capital
Assets are what the business controls; liabilities are what outsiders are owed; capital is what the owner is owed. Rearranged, Capital = Assets − Liabilities, which is why capital rises when the business profits and falls when it loses or the owner withdraws.
The equation always holds after every transaction, which is what makes double entry self-checking. Buying a vehicle for cash raises one asset and lowers another, leaving the totals unchanged. Buying it on credit raises an asset and a liability by the same amount. Introducing capital raises an asset and capital together.
Debits and credits
The rule most students memorise and few are taught to understand:
| Account type | Increase | Decrease |
|---|---|---|
| Asset | Debit | Credit |
| Expense | Debit | Credit |
| Liability | Credit | Debit |
| Capital | Credit | Debit |
| Income | Credit | Debit |
Why it works this way. The equation places assets on the left and liabilities and capital on the right. Debit means left, credit means right. So an increase on the left of the equation is a debit, and an increase on the right is a credit. Expenses reduce capital, so they sit with the left; income increases capital, so it sits with the right. The rule is not arbitrary — it follows from the equation, and understanding that is what makes it recoverable under pressure when memory fails.
A useful check: every entry must have a debit and a credit of equal value, and if you cannot name both, you have not finished analysing the transaction.
Worked transactions
The owner introduces $50,000 cash. Cash is an asset increasing, so debit Cash $50,000. Capital is increasing, so credit Capital $50,000.
Goods bought on credit for $8,000. Purchases is an expense increasing, so debit Purchases $8,000. A liability to the supplier increases, so credit the supplier's account $8,000.
A customer pays $3,000 owed. Cash increases, so debit Cash $3,000. The customer owes less, so that asset decreases, and credit the customer's account $3,000.
Rent of $1,200 paid by cheque. Rent is an expense increasing, so debit Rent $1,200. Bank decreases, so credit Bank $1,200.
The owner withdraws $2,000 for personal use. Drawings reduce capital, so debit Drawings $2,000. Cash decreases, so credit Cash $2,000.
The accounting cycle
The cycle runs in a fixed order, and understanding why each stage exists prevents the sequence being memorised as a list.
1. The transaction occurs and generates a source document — the evidence that it happened, and the point at which the audit trail begins.
2. Entry in a book of original entry. Transactions are first recorded in a journal grouped by type, so that similar transactions can be totalled and posted efficiently rather than one at a time.
3. Posting to the ledger. Entries transfer to individual accounts, so the position of each account can be seen in one place.
4. Balancing off the accounts at the period end, calculating each closing balance.
5. The trial balance, listing every balance to check that total debits equal total credits.
6. Adjustments for accruals, prepayments, depreciation, bad debts and closing inventory, because the trial balance records what was paid rather than what the period actually used.
7. Financial statements — the income statement showing performance over the period and the statement of financial position showing the position at its end.
8. Closing the books, transferring income and expense balances so the next period starts clean, while asset, liability and capital balances carry forward.
Books of original entry
Six journals, each for one kind of transaction:
Sales day book — credit sales. Purchases day book — credit purchases. Sales returns day book — goods returned by customers. Purchases returns day book — goods returned to suppliers. Cash book — receipts and payments of cash and through the bank. The journal (general journal) — everything not fitting the others, including opening entries, purchase of non-current assets on credit, and correction of errors.
The cash book is unusual in being both a book of original entry and a ledger account, which is why cash and bank balances appear in the trial balance directly from it rather than being posted elsewhere first.
Note that day books record credit transactions only. Cash sales go straight to the cash book.
The ledger
The ledger is divided for practical reasons: the sales ledger holds individual customer accounts, the purchases ledger holds individual supplier accounts, and the general (nominal) ledger holds everything else — assets, expenses, income, capital and the control accounts.
Each account has a debit side on the left and a credit side on the right. Balancing off totals both sides, enters the difference as the balance carried down on the smaller side so the two agree, and brings it down on the opposite side as the opening balance for the next period.
The trial balance and what it cannot detect
A trial balance lists every ledger balance in debit and credit columns and totals them. If the totals agree, the arithmetic of double entry is consistent.
It does not prove the accounts are correct. Six errors leave a trial balance in balance, and naming them is directly examinable:
Error of omission — a transaction left out entirely, so both sides are missing.
Error of commission — the right amount posted to the wrong account of the same type, such as one customer's account instead of another's.
Error of principle — the right amount posted to an account of the wrong type, such as treating the purchase of a vehicle as a motor expense. This is the most serious, because it misstates both profit and the statement of financial position.
Error of original entry — the wrong amount entered in the book of original entry, so both sides carry the same wrong figure.
Complete reversal of entries — the account that should be debited is credited and the other debited.
Compensating errors — two separate errors of equal value on opposite sides, cancelling one another.
Errors that do unbalance a trial balance include one-sided entries, different amounts on each side, addition errors, and a balance entered in the wrong column. These are located with a suspense account, which holds the difference until the error is found and corrected through the journal.
Worked examples
Example 1: Recording transactions (calculation)
Question: "Record the following in ledger account form: owner introduces $50,000 cash; goods bought on credit $8,000; rent paid by cheque $1,200; owner withdraws $2,000 cash." (12 marks)
Working.
| Transaction | Debit | Credit |
|---|---|---|
| Capital introduced | Cash $50,000 | Capital $50,000 |
| Credit purchases | Purchases $8,000 | Supplier $8,000 |
| Rent paid | Rent $1,200 | Bank $1,200 |
| Drawings | Drawings $2,000 | Cash $2,000 |
Check. Cash: debit $50,000 less credit $2,000 = $48,000 debit balance. Every line has equal debit and credit, and the equation still holds — assets of cash $48,000 plus goods, against a liability of $8,000 and capital of $50,000 less drawings of $2,000. State the check explicitly, because examiners award it and it catches most errors.
Example 2: Trial balance errors
Question: "A trial balance agrees. Explain why this does not prove the accounts are free from error." (10 marks)
Outline. Explain first what agreement does prove: that total debits equal total credits, so the arithmetic of double entry is internally consistent. Then name and illustrate each of the six errors that leave it balanced — omission, commission, principle, original entry, complete reversal and compensating — giving a one-line example of each rather than only the label, since the marks are for demonstrating you can recognise them. Single out error of principle as the most serious, because capitalising an expense or expensing a capital item misstates both profit and the statement of financial position, while an error of commission between two customer accounts leaves both totals correct. Conclude that a trial balance is a check on arithmetic rather than on judgement, which is why it is followed by adjustments and review rather than treated as the end of the process.
Example 3: Correcting an error
Question: "A vehicle costing $30,000 was debited to Motor Expenses. State the error and the correcting entry." (8 marks)
Working. This is an error of principle — a capital item treated as revenue expenditure.
Correction: Debit Motor Vehicles $30,000 · Credit Motor Expenses $30,000
Effect of the error if uncorrected. Expenses were overstated by $30,000, so profit was understated by $30,000. Non-current assets were understated by $30,000, so the statement of financial position was understated on both sides once the profit effect flows through to capital. Add that depreciation would also have been omitted, so the correction is not complete until the year's depreciation charge on the vehicle is also recorded — that further point is where the higher marks sit.
Common mistakes and how to avoid them
Memorising debits and credits without the equation. Derive the rule from Assets = Liabilities + Capital and it is recoverable.
Recording only one side. If you cannot name both entries, the analysis is unfinished.
Putting cash sales in the sales day book. Day books record credit transactions only.
Treating a balanced trial balance as proof of accuracy. Six error types survive it.
Confusing error of commission with error of principle. Commission is the wrong account of the same type; principle is the wrong type of account.
Forgetting that drawings reduce capital. They are debited to Drawings, not to Expenses.
Omitting the consequential adjustment when correcting an error. Correcting a capitalised asset also requires its depreciation.
Inventing figures in a correction question. Use the amounts given and show the entry.
How this links to your Internal Assessment
Your project is likely to involve a real small business, and the accounting cycle is what determines whether usable records exist at all.
Establish what the business actually keeps: source documents, any books of original entry, whether a ledger exists in any form, and whether a trial balance is ever drawn up. Many small Caribbean businesses keep receipts and a cash book and nothing further, and establishing that — then showing what it prevents the owner from knowing — is genuine analysis rather than criticism.
Where records exist, you can demonstrate the cycle on real transactions, which is far stronger than a worked textbook example. Where they do not, the productive question is what the owner cannot determine as a result: true profit, what customers owe, whether a particular line is profitable. Treat any figures supplied as the owner's own and say so in your limitations.
Exam technique for the accounting cycle and double entry
State the debit and the credit for every transaction; a single-sided answer earns nothing.
Show the account name, not just the amount.
Check against the accounting equation and say that you have — the check itself is credited.
Name the error type precisely; the six that survive a trial balance are examined by name.
Give the effect on profit and on the statement of financial position when an error is discussed.
Use a suspense account where the trial balance does not agree, and clear it through the journal.
Watch the command word: record and prepare want the entries, explain wants the reasoning, discuss wants a judgement.
Quick revision summary
The accounting equation, Assets = Liabilities + Capital, holds after every transaction, and the rules of debit and credit follow from it: assets and expenses increase on the debit side, liabilities, capital and income on the credit side. Every transaction produces a debit and an equal credit, and being unable to name both means the analysis is incomplete. The accounting cycle runs from source document, through books of original entry, posting to the ledger, balancing off, the trial balance, adjustments, financial statements and closing the books. Six books of original entry record credit transactions by type, with the cash book unusual in being both a journal and a ledger account, and the general journal taking everything that fits nowhere else. The ledger divides into sales, purchases and general ledgers. A trial balance proves that total debits equal total credits, but six errors survive it — omission, commission, principle, original entry, complete reversal and compensating errors — of which error of principle is the most serious because it misstates both profit and the statement of financial position. Errors that unbalance the trial balance are held in a suspense account until corrected through the journal.