Keeping accounts
A business records its money in accounts. Every transaction is entered twice, as a debit in one account and a credit in another, according to the double-entry rule: for every debit there is an equal credit. In a ledger account the debit side is the left and the credit side the right.
| Account type | Increase | Decrease | Examples |
|---|---|---|---|
| Asset | Debit | Credit | Cash, stock, equipment |
| Liability | Credit | Debit | Loan, creditors |
| Capital | Credit | Debit | Owner’s investment |
| Income | Credit | Debit | Sales |
| Expense | Debit | Credit | Rent, wages |
Trial balance
A trial balance is a list of all the account balances on a date. Because of double entry, the total of the debit balances must equal the total of the credit balances. If they differ, there is an error to find.
Check whether the following balances agree: debits cash 80 000, stock 120 000, wages 50 000; credits capital 200 000, sales 50 000.
- Total debits.
- Total credits.
Answer: Both totals are 250 000, so the trial balance agrees.
Balance sheet
A balance sheet shows what the business owns (assets) and what it owes (liabilities and capital) at a date.
| Assets | TSh | Liabilities and capital | TSh |
|---|---|---|---|
| Cash | 80 000 | Creditors | 60 000 |
| Stock | 120 000 | Loan | 40 000 |
| Equipment | 100 000 | Capital | 200 000 |
| Total | 300 000 | Total | 300 000 |
Choose the assets and the liabilities. The capital is what is left.
Key terms
- Debit
- An entry on the left of an account.
- Credit
- An entry on the right of an account.
- Trial balance
- A list of balances used to check the books.
- Balance sheet
- A statement of assets, liabilities and capital.
Summary
- Double entry: every debit has an equal credit.
- A trial balance checks that total debits equal total credits.
- A balance sheet shows assets = liabilities + capital.
- Assets are what the business owns; liabilities are what it owes.