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Double entry in practice

Chapter 6 of 9 · explanatory only · no rates, thresholds or deadlines

The accounting equation, debits and credits, a worked example and a trial balance.

Double entry is often taught as a set of rules to memorise, which makes it seem harder than it is. It rests on one idea: everything a business holds was funded by somebody, and the two facts are recorded together every time.

6.1The accounting equation

What a business controls equals what it owes to outsiders plus what it owes to its owner. That is the whole framework:

Diagram of the accounting equation drawn as a balance: assets on the left, liabilities plus capital on the right — Figure 1. The accounting equation. Both sides describe the same resources: the left says what they are, the right says where they came from.

Because the two sides describe the same resources from different angles, they cannot get out of step. Any event that changes one side changes the other by the same amount, or changes two items on the same side in opposite directions. Recording both effects every time is what double entry means.

6.2Debits and credits

Debit and credit are just labels for the left and right of an account. They do not mean good and bad, and they do not mean increase and decrease; what they mean depends on the type of account:

Table 1. What a debit and a credit do, by account type
Account type	A debit	A credit
Assets	Increases	Decreases
Expenses	Increases	Decreases
Liabilities	Decreases	Increases
Capital	Decreases	Increases
Income	Decreases	Increases

A working shortcut: assets and expenses behave one way, and everything else behaves the opposite way. Every entry has at least one debit and at least one credit, and the debits equal the credits.

6.3A worked example

The figures below are round illustrative numbers chosen to keep the arithmetic simple. They describe an imaginary one-person workshop in its first month and are not observed data.

Table 2. Ten illustrative transactions and their entries
#	Event	Debit	Credit	Amount
1	Owner puts money into the business	Cash at bank	Owner's capital	10,000
2	Buys equipment, paying immediately	Equipment	Cash at bank	4,000
3	Buys materials on credit	Stock of materials	Trade payables	1,500
4	Sells for cash	Cash at bank	Sales	2,500
5	Sells on credit	Trade receivables	Sales	1,200
6	Materials used in those sales	Materials used	Stock of materials	900
7	Pays part of the supplier bill	Trade payables	Cash at bank	900
8	Pays rent for the month	Rent	Cash at bank	300
9	Charges one month of equipment wear	Depreciation charge	Accumulated depreciation	100
10	Customer from entry 5 has not yet paid	No entry: nothing has happened		—

Entry 10 is included on purpose. A very common beginner's error is to record the same sale twice, once when it is made and again when it is paid. The sale was recognised at entry 5; when the money arrives, the only entry is a movement from receivables to cash, which changes nothing about profit.

6.4The trial balance

Listing every account balance with debits in one column and credits in the other produces the trial balance. It is the first checkpoint of the whole system.

Table 2. Trial balance after the ten illustrative entries
Account	Debit	Credit
Cash at bank	7,300	—
Trade receivables	1,200	—
Stock of materials	600	—
Equipment	4,000	—
Accumulated depreciation	—	100
Trade payables	—	600
Owner's capital	—	10,000
Sales	—	3,700
Materials used	900	—
Rent	300	—
Depreciation charge	100	—
Totals	14,400	14,400

NoteA trial balance that agrees proves only that every entry had two equal sides. It cannot detect a transaction omitted entirely, one posted to the wrong account, or one entered twice in full. Agreement is necessary, not sufficient.

6.5From the trial balance to the statements

The income and expense balances are collected into the profit and loss account: sales of 3,700 less materials used of 900, rent of 300 and depreciation of 100, giving a profit of 2,400 for the month. The asset, liability and capital balances form the balance sheet, with that 2,400 added to the owner's capital, because profit belongs to the owner. Chapter 8 reads both statements properly.