Double-Entry Bookkeeping and the Trial Balance
AdvancedDouble entry records every transaction on both the debit and credit sides in equal amounts: increases in assets and expenses are debited; increases in liabilities, capital and income are credited. At period end the account balances form the trial balance, but balance only proves arithmetical accuracy, not that the books are fully correct.
- Double entry: every transaction carries one debit and one credit of equal amount
- Five categories: assets, liabilities, capital, income, expenses
- Rules: increases in assets and expenses are debited; increases in liabilities, capital and income are credited
文體小知識：商業知識說明文——講解複式記帳原則、五類帳戶的借貸規則與試算表的編製方法，並剖析試算表的功能與限制，是會計記帳技術的核心。
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1The double-entry principle is the heart of bookkeeping: every transaction has a double effect, touching at least two accounts — one debited, one credited — and the two amounts must be equal. For example, when a shop pays rent of $5,000 in cash, rent expense rises by $5,000 and is debited, cash falls by $5,000 and is credited; the accounting equation stays in balance.
2Accounts fall into five categories: assets, liabilities, capital, income and expenses. The debit and credit rules are: increases in assets and expenses are debited, decreases credited; increases in liabilities, capital and income are credited, decreases debited. Master this rule and you can decide which side of which account any transaction belongs to.
3The ledger gathers similar transactions in one account, often shown as a T-account with the debit side on the left and the credit side on the right. At period end each account is balanced: if total debits exceed total credits, the balance is a debit balance, and vice versa. For example, if cash receipts total $60,000 and payments total $18,000, the balance is $42,000 debit.
4The trial balance is prepared at the end of the period by listing the balance of every ledger account; total debits should equal total credits, which checks the arithmetical accuracy of the records. But a balanced trial balance does not prove the books are fully correct: a wholly omitted transaction, an entry in the wrong account, or equal amounts wrongly recorded on both sides will not upset the balance.
1Summary 重點摘要
Double entry records every transaction on both the debit and credit sides in equal amounts: increases in assets and expenses are debited; increases in liabilities, capital and income are credited. At period end the account balances form the trial balance, but balance only proves arithmetical accuracy, not that the books are fully correct.
2Vocabulary cards Vocabulary
The rule that every transaction is recorded with at least one debit and one credit of equal amount.
The left side of an account; increases in assets and expenses, and decreases in liabilities, capital and income, are debited.
The right side of an account; increases in liabilities, capital and income, and decreases in assets and expenses, are credited.
The book holding all accounts, into which journal entries are posted by account for balancing.
A record of the increases and decreases in one category of items, often shown as a T-account, debits left and credits right.
A period-end list of all ledger account balances; total debits should equal total credits, checking arithmetical accuracy.
Customers who bought on credit and owe the firm money — an asset of the business.
Suppliers to whom the business owes payment for goods bought on credit — a liability.
The account for goods bought for resale during the period; expense in nature and debited when increased.
The income account for goods sold during the period; credited when increased.
3Step by step Steps
- Step 1: The double-entry principleThe double-entry principle states that every transaction has a double effect on the firm, touching at least two accounts: one is debited, another is credited, and the two amounts must be equal — echoing the fact that the accounting equation always balances. For example, when a shop buys goods for cash $10,000, inventory rises by $10,000 (debit) and cash falls by $10,000 (credit); the debit and the credit correspond and neither can be missing.
- Step 2: The five categories of accountsAccounts fall into five categories: assets, liabilities, capital, income and expenses. Assets include cash, inventory, equipment and debtors; liabilities include bank loans and creditors; capital is the owner's investment and claim; income includes sales and interest income; expenses include rent, wages and purchases. For example, one credit purchase of $8,000 creates both a purchases account (expense) and a creditors account (liability) — correct classification is the basis of reliable statements.
- Step 3: The debit and credit rulesThe rules can be stated in one line: increases in assets and expenses are debited, decreases credited; increases in liabilities, capital and income are credited, decreases debited. In other words, items on the left of the equation are debited when they rise, and items on the right are credited when they rise. For example, repaying a bank loan of $20,000 debits the loan (liability falls) and credits cash (asset falls); the owner withdrawing cash debits drawings and credits cash.
- Step 4: Analysing transactions on the equationBefore recording, analyse which accounts a transaction affects and whether each rises or falls, then apply the rules. For example, the owner introduces cash $60,000: the asset cash rises (debit) and capital rises (credit), both sides up $60,000. If equipment is bought on credit for $15,000, the asset equipment rises (debit) and the liability to the creditor rises (credit), both sides up $15,000 — the equation stays in balance.
- Step 5: The ledger and T-accountsThe ledger classifies journal entries by account, commonly drawn as a T-account with debits on the left and credits on the right. At period end, total each side to find the balance: if total debits are larger, the balance is a debit balance, otherwise a credit balance. For example, if the cash account shows total debits of $69,000 and total credits of $27,000, the balance is $42,000 debit — cash actually held at period end.
- Step 6: Preparing the trial balancePrepare the trial balance at period end: list the balance of every ledger account — asset, drawings and expense balances on the debit side; liability, capital and income balances on the credit side — then total both columns. Equal totals mean posting and balancing are arithmetically correct, and the financial statements can be prepared. For example, after listing eight accounts, both debit and credit totals come to $88,000 and the trial balance balances.
- Step 7: Functions and limitations of the trial balanceThe trial balance summarises all account balances and checks whether debits equal credits — a checking tool before preparing the financial statements. But it is not foolproof: a wholly omitted or duplicated transaction, an entry posted to the wrong account, or the same wrong amount on both sides will not disturb the balance. For example, recording the purchase of equipment as purchases still balances the trial balance, yet the classification is wrong — so review the contents of the accounts before preparing statements.
5Worked example Example
Tai Wah Bookstore recorded eight transactions in March 2025: the owner introduced cash $60,000; purchased goods for cash $10,000; bought equipment on credit $15,000; made cash sales $9,000; paid rent $5,000; repaid a creditor $8,000; made credit sales $12,000; paid wages $4,000. Record the transactions, balance the accounts and prepare the trial balance as at 31 March.
- Analyse each transaction: capital introduced — debit cash, credit capital; cash purchase — debit purchases, credit cash; equipment on credit — debit equipment, credit creditor; cash sales — debit cash, credit sales; rent — debit rent, credit cash; repayment — debit creditor, credit cash; credit sales — debit debtors, credit sales; wages — debit wages, credit cash.
- Balance the accounts: cash 60,000 − 10,000 + 9,000 − 5,000 − 8,000 − 4,000 = $42,000 (debit); creditor 15,000 − 8,000 = $7,000 (credit); sales 9,000 + 12,000 = $21,000 (credit); capital $60,000 (credit); purchases 10,000, equipment 15,000, rent 5,000, debtors 12,000 and wages 4,000 are debit balances.
- Prepare the trial balance: debit total 42,000 + 10,000 + 15,000 + 5,000 + 12,000 + 4,000 = $88,000; credit total 60,000 + 7,000 + 21,000 = $88,000.
- Check: both sides equal $88,000 — the trial balance balances, so the records are arithmetically correct and the financial statements can be prepared.
- Answer: Trial balance at 31 March 2025 — debits: cash 42,000, purchases 10,000, equipment 15,000, rent 5,000, debtors 12,000, wages 4,000, total $88,000; credits: capital 60,000, creditors 7,000, sales 21,000, total $88,000. Total debits equal total credits, so the ledger records are arithmetically correct.
6Common mistakes Mistakes
7Quick check Quick check
Q1Under double entry, how should every transaction be recorded?
Q2Should an increase in an expense be debited or credited?
Q3Cash has debits of 60,000 and 9,000, and credits of 10,000, 5,000, 8,000 and 4,000. What is the balance?
Q4What is the main function of the trial balance?
Q5Does a balanced trial balance prove the books are fully correct? Give one example.
8Recap Recap
- Double entry: every transaction carries one debit and one credit of equal amount
- Five categories: assets, liabilities, capital, income, expenses
- Rules: increases in assets and expenses are debited; increases in liabilities, capital and income are credited
- The ledger gathers similar transactions; T-accounts show debits left, credits right, balanced at period end
- The trial balance checks debit equals credit, but cannot detect omissions, wrong accounts or equal errors