22208 Chap.2 Debits, Credits, Journals and the Trial Balance
Debits, Credits, Journals and the Trial Balance
Week 2 replaces the spreadsheet of pluses and minuses with a dual entry system. Debit means the left side of an account and credit the right; assets normally carry debit balances, liabilities and equity credit balances, and each increases on its normal side.
Transactions are entered in the general journal in date order, posted to the ledger, and listed in a trial balance, and the trial balance is the source for the income statement, the balance sheet and the statement of changes in equity.
The worked material follows a single small business through a month: issuing shares, buying equipment on credit, taking a customer deposit, providing services on account, paying an expense and paying a dividend.
The same chain of journal, ledger and trial balance then produces all three statements. The module practice set extends this with missing-value T-account puzzles and lists of errors to classify by whether they would unbalance the trial balance.
What this chapter covers
- 01
T-accounts and the dual entry system
- 02
Debit and credit rules from normal balances
- 03
The general journal: date, accounts, amounts and narration
- 04
Posting to the general ledger
- 05
Preparing and checking a trial balance
- 06
Preparing the three statements in order
- 07
Errors a balanced trial balance cannot reveal
Worked example · free
Journalising a credit purchase and its payment
- 13 March: supplies, an asset, increase, so debit Supplies 640.
- 13 March: the amount owed, a liability, increases, so credit Accounts payable 640.
- 120 March: the liability is settled, so debit Accounts payable 640 and credit Cash 640.
- 1After both entries supplies show a $640 debit, payables are back to nil and cash is $640 lower; total debits still equal total credits.
Key terms
- Debit
- An entry on the left side of an account, which increases assets, expenses and dividends.
- Credit
- An entry on the right side of an account, which increases liabilities, equity and revenue.
- General ledger
- The collection of all of a business’s accounts, showing the activity and balance of each.
- Trial balance
- A list of every account and its balance at one date, used to check that total debits equal total credits.
- Normal balance
- The side, debit or credit, on which an account’s increases are recorded and its balance usually sits.
Debits, Credits, Journals and the Trial Balance FAQ
Why do expenses increase with a debit?
Expenses reduce equity, and equity normally carries a credit balance, so anything that lowers equity is recorded on the debit side. Dividends follow the same logic, while revenue, which raises equity, is credited.
Can a trial balance agree and still be wrong?
Yes. If an entry posts equal debits and credits to the wrong accounts, or is never recorded at all, both columns still agree. Only errors that make the two sides unequal, such as a one-sided posting, are revealed by the totals.
In what order should the financial statements be prepared?
Prepare the income statement first to find profit, then the statement of changes in equity, which adds profit and deducts dividends to give closing retained earnings, and finally the balance sheet, which uses that closing figure.
Where does unearned revenue go?
It is a liability. Cash has been received for goods or services still to be delivered, so the business owes performance; it becomes revenue only when the work is done.
How do I find a missing figure in a T-account?
Write the account as an equation: opening balance plus increases minus decreases equals closing balance, using the account’s normal side to decide which entries are increases. Then solve for the unknown. For cash, receipts are debits and payments are credits.
Why not record transactions straight into the ledger?
The journal keeps every transaction in one place in date order, with both sides of the entry and a short explanation. That gives a complete chronological record and formalises the reasoning behind each entry, which makes errors easier to trace; the ledger then sorts the same information by account.
Exam move
Draw the three T-accounts of the equation from memory before every practice set, then journalise each transaction before touching the ledger. Total your trial balance every time, and when it agrees, still scan for entries posted to the wrong account. When you practise journalising, always add a short narration; it forces you to state why the entry exists, which is the reasoning markers look for in short-answer questions.
Then prepare the three statements from your own trial balance at least once without looking at a solution, because the order of the statements and the movement of dividends into retained earnings are both regular sources of lost marks in the final exam.
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