Module 1 of 2 · 75 minutes
The accounting equation, double entry and the books it produces
By the end of this module you will be able to
- State and apply the accounting equation
- Post any routine transaction as a debit and a credit
- Use the day books and ledgers for their intended purpose
- Prepare a trial balance and interpret what it proves
Amara Every bookkeeping course opens with debits and credits, and that is where most people stop.
Nadia Because the words are badly chosen and nobody says so. A bank credits your account when money arrives, so credit reads as more. In your own books it means the opposite.
Amara Which of the two uses is correct?
Nadia Both, from their own side. Your deposit is money the bank owes you. In the bank's books that is a liability, and liabilities increase on the credit side. Their entry is right and so is yours.
Amara So what is the rule underneath it?
Nadia One line. Assets equal liabilities plus capital. Everything a business controls was funded either by somebody it owes or by its owners, and every entry you make keeps that true.
Amara And that is why the system self checks.
Nadia It is. Record one side only and the books do not balance, so the error announces itself before anybody has to find it. That is the entire design intent of double entry.
Amara Then a balanced trial balance means the accounts are right.
Nadia It means debits equal credits. Nothing more, and the gap matters.
Amara Give me what it cannot see.
Nadia Three things. An invoice never entered at all, because nothing is missing from either side. Rent posted to the insurance account, because both are expenses. And two errors of equal size in opposite directions, which cancel and leave the balance immaculate.
Amara So what catches those?
Nadia Reconciliation and judgement. Cash book against the bank statement, supplier statements against the purchase ledger, and somebody asking whether the figures are plausible. The trial balance is where checking starts, not where it finishes.
The written material
The equation everything rests on
Assets equal liabilities plus capital. Everything a business controls was funded either by somebody it owes, or by its owners. That is the whole of accounting in one line, and every entry you will ever make keeps it true.
Because it must stay true, a change on one side forces a matching change somewhere else. That is not a convention somebody invented to make life difficult. It is arithmetic, and it is the reason double entry catches errors that single entry cannot.
- Buy a van for cash: one asset up, another asset down
- Buy a van on credit: an asset up, a liability up
- Owner puts money in: an asset up, capital up
- Pay a supplier: an asset down, a liability down
Debits and credits, and why the words mislead
A debit increases an asset or an expense and decreases a liability, capital or income. A credit does the reverse. Learners fight this because a bank says your account has been credited when money arrives, which feels like the opposite.
It is the opposite, and for a good reason: the bank is describing its own books, not yours. Your deposit is money the bank owes you, so in the bank's books it is a liability, and a liability increases on the credit side. Once that lands, the confusion never returns.
The day books, the ledgers and the trial balance
Day books are the first record: sales, purchases, returns, cash and the journal for anything that fits nowhere else. They exist so that hundreds of similar transactions can be listed once and posted in total rather than one at a time.
From there entries reach the ledgers: sales and purchase ledgers for individual customers and suppliers, and the nominal ledger holding the accounts that build the financial statements. The trial balance lists every nominal balance and checks that the debits equal the credits.
It is worth being precise about what that check is worth. A balanced trial balance proves the arithmetic. It cannot see a transaction you never recorded, a purchase posted to the wrong expense account, or two errors that happen to cancel out.
Knowledge check
The knowledge check and your certificate need a free account, so that your progress and results can be saved as evidence.
The learning itself stays free and open. You are reading all of it right now without an account.