Module 1 of 1 · 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 I have avoided this subject my whole life because debits and credits make no sense to me. Fix that.
Nadia I will, and I will start by agreeing with you. The words are badly chosen. Your bank tells you it has credited your account when money arrives, so credit feels like more. In your own books it means the opposite.
Amara So which of us is wrong?
Nadia Neither. The bank is describing its own books. Your deposit is money the bank owes you, which is a liability to them, and liabilities go up on the credit side. From their chair the entry is perfectly correct.
Amara That is genuinely the first time that has made sense.
Nadia Then hold on to it, because everything else follows from one line: assets equal liabilities plus capital. Everything the business has was funded by somebody it owes or by its owners.
Amara And double entry keeps that true.
Nadia Exactly. Which is why it catches mistakes. If you only write down one side, the books will not balance, and the system tells you before anybody else has to.
Amara So if my trial balance balances, I am safe.
Nadia You are arithmetically safe and that is all. A trial balance cannot see an invoice you never entered at all, because nothing is missing from either side. It cannot see rent posted to the insurance account, because both are expenses. And two mistakes of the same size in opposite directions will sit there looking immaculate.
Amara So what does actually catch those?
Nadia Reconciliation and judgement. Compare the cash book to the bank statement, compare supplier statements to the purchase ledger, and look at whether the numbers are plausible. A balanced trial balance is the beginning of checking, not the end of it.
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.