Guide
You do not need a qualification to follow this. You need one idea: every transaction changes at least two things, and the books record both of them. Debits, credits and the trial balance are machinery built on top of that single idea.
The second half follows one sale — 1,000.00 of goods plus 210.00 of tax, costing you 600.00 to supply — from the invoice to the money in the bank, entry by entry.
Single-entry bookkeeping is a list of what happened to the money. Double-entry records where the value went and where it came from, which is the only reason the books can be checked at all.
Invoice a customer 1,210.00 and two things change: they owe you money, and you have earned revenue. Take the payment and two more change: the bank goes up, the debt goes away. A cash book records the money and forgets the promise.
A mistake is fixed by posting the opposite entry, not by editing the original. That sounds bureaucratic until the first time somebody asks why last quarter’s figures changed, and the answer is in the ledger rather than in a memory.
Because every entry balances on its own, the whole ledger balances. When it does not, something was recorded badly — and you find that out long before the figures reach a tax return.
A debit is not good news and a credit is not bad news. They are the left and the right column of an entry, and what each one does depends on the type of account it lands on.
The word “credit” on a bank statement is the usual source of confusion. That statement is written from the bank’s books, where your balance is money the bank owes you. In your own books it is the other way round: money arriving in the bank is a debit to Bank, because your asset went up.
Worth memorising, because everything else follows from it: assets and expenses grow on the left. Liabilities, equity and income grow on the right.
| Account type | A debit | A credit | Typical accounts |
|---|---|---|---|
| Assets | Increase | Decrease | Bank, accounts receivable, stock on hand |
| Liabilities | Decrease | Increase | Accounts payable, tax payable, a loan |
| Equity | Decrease | Increase | Capital put in, profit kept in the business |
| Income | Decrease | Increase | Product sales, service fees |
| Expenses | Increase | Decrease | Cost of goods sold, rent, wages |
Five types, ten rules, and no more theory than that. Every entry in the rest of this page is one of these ten moves applied twice.
The accounting equation is the constraint the whole system exists to protect. Equal debits and credits keep it true after every single entry, which is why balancing is not a habit but a property.
Assets = Liabilities + Equity
What you own = what you owe + what is actually yours
Assets + Expenses = Liabilities + Equity + Income
everything a debit increases
everything a credit increases
Earning revenue makes the business worth more to its owners; spending makes it worth less. Rather than adjust equity on every transaction, the books keep income and expense accounts for the year and roll the difference — the profit — into equity at the end of it. That is the whole reason for the expanded form above.
Put the same total on both sides of an entry and the equation cannot break, whatever the entry was. It is not that bookkeepers are careful; it is that an unbalanced entry is not a valid entry, in the same way a sentence with no verb is not a sentence.
One customer, one product, three entries. You sell goods for 1,000.00 plus 210.00 of tax, and those goods cost you 600.00 to buy. Follow the figures rather than the vocabulary.
The customer owes the whole 1,210.00, so accounts receivable — an asset — takes the full amount as a debit. Only 1,000.00 of it is yours, so income is credited with the net. The 210.00 becomes a liability the moment you invoice it.
| Account | Debit | Credit |
|---|---|---|
| 1100 Accounts receivable | 1,210.00 | |
| 4000 Product sales | 1,000.00 | |
| 2100 Tax payable | 210.00 | |
| Balanced | 1,210.00 | 1,210.00 |
Revenue without its cost is not profit. The goods left the warehouse, so stock falls by what those units cost, and the same 600.00 becomes an expense in the same period as the sale it belongs to. Tax does not appear here: it never touched the goods.
| Account | Debit | Credit |
|---|---|---|
| 5000 Cost of goods sold | 600.00 | |
| 1300 Inventory | 600.00 | |
| Balanced | 600.00 | 600.00 |
Where does 600.00 come from when the same product was bought at different prices? That is a question of its own — how inventory costing works →
No income in this entry. The sale was earned when it was invoiced; the payment only swaps one asset for another. Recording revenue again here is the classic double-count, and the second column is exactly what prevents it.
| Account | Debit | Credit |
|---|---|---|
| 1000 Bank | 1,210.00 | |
| 1100 Accounts receivable | 1,210.00 | |
| Balanced | 1,210.00 | 1,210.00 |
Assets rose by 610.00: the bank is up 1,210.00 and stock is down 600.00. Liabilities rose by 210.00, the tax you owe. Equity rose by 400.00, the profit — 1,000.00 of income less 600.00 of cost.
610.00 = 210.00 + 400.00
The equation held, and nobody made it hold. It fell out of three entries that each balanced on their own.
In practice the delivery usually happens before the invoice, and the entries would be dated accordingly. They are shown in this order because it reads more clearly, and because the ledger cares about the dates, not about which one you keyed first.
A trial balance is every account with its balance, debits in one column and credits in the other. If the two totals differ, something is wrong, and you know it before you look at anything else.
| Account | Debit | Credit |
|---|---|---|
| 1000 Bank | 1,210.00 | — |
| 1100 Accounts receivable — raised at 1,210.00 and cleared in full | — | — |
| 1300 Inventory | — | 600.00 |
| 2100 Tax payable | — | 210.00 |
| 4000 Product sales | — | 1,000.00 |
| 5000 Cost of goods sold | 600.00 | — |
| Totals | 1,810.00 | 1,810.00 |
A balanced trial balance means the arithmetic is consistent. It does not mean the story is true. That is what an audit trail, the aging reports and a periodic look at the accounts are for — and it is worth being clear-eyed about, because a system that balances is not the same as a system that is right.
A spreadsheet can hold a trial balance; what it cannot do is refuse an entry →
The income statement and the balance sheet are not separate records that have to be reconciled. They are two readings of the same ledger, taken from different account types.
| Product sales | 1,000.00 |
| Cost of goods sold | (600.00) |
| Profit | 400.00 |
| Bank | 1,210.00 |
| Inventory | (600.00) |
| Tax payable | (210.00) |
| Retained profit | 400.00 |
The 400.00 at the bottom of each is the same 400.00, read twice. The tax sits on the balance sheet and never touches profit, because it was never yours. Aging, stock valuation and sales analysis are further readings of the same entries, which is why they agree with the statements without anyone tying them out.
Everything above is the model, and it is worth knowing whether or not you buy software. In practice you raise the invoice, confirm the delivery and record the receipt; the three entries are written for you, and you can open every one of them.
Each posting is keyed to the document that caused it and is idempotent, so a double-clicked button, a retried request or a second look at the same invoice cannot post the sale twice.
Cancel a posted document and the ledger receives the opposite entry. The original stays where it was. The record shows both the mistake and the correction, which is what an auditor asks for.
Trial balance, income statement, balance sheet, receivables and payables aging, sales analysis and stock valuation are all computed from journal entries, never from the documents. They cannot drift apart.
Every figure is a decimal, and the arithmetic runs in whole minor units — cents, not fractions of them. Nothing is stored as a floating-point number, so nobody hunts a one-cent difference in March.
The codes used above are close to what a new company starts with. Rename them, add your own, or point a posting rule at a different account — whatever is already in the ledger stays exactly where it was posted.
Lock a period and nothing can post into it: not a late invoice, not a correction, not an administrator. What the trial balance said on the day you locked it is what it will say next year.
A company keeps one currency; there is no multi-currency accounting. There is no payment processing, no payroll, no manufacturing, no consolidation of group accounts, no imports or exports, and no mobile app. It is sales, purchasing, inventory and a general ledger, done properly. What is in it, in full →
Signing up installs a chart of accounts already wired to the posting rules. Raise one invoice, ship it, take the payment, then open the trial balance and find the three entries from this page with your own names on them.
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