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Ledgers and double entry
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Every transaction affects two accounts. Double entry records both sides, so the books always balance.
The ledgers
Nominal (general) ledger: accounts for income, expenses, assets, liabilities and capital.
Receivables ledger (sales ledger): an account for each credit customer.
Payables ledger (purchases ledger): an account for each credit supplier.
Receivables ledger (sales ledger): an account for each credit customer.
Payables ledger (purchases ledger): an account for each credit supplier.
Debit and credit rules
Examples
Owner pays £10 000 into the business bank: Dr bank, Cr capital.
Buys goods for cash £500: Dr purchases, Cr cash.
Sells goods on credit to A Ray £800: Dr A Ray, Cr sales.
Pays rent by cheque £600: Dr rent, Cr bank.
The accounting equation: assets = capital + liabilities.
Buys goods for cash £500: Dr purchases, Cr cash.
Sells goods on credit to A Ray £800: Dr A Ray, Cr sales.
Pays rent by cheque £600: Dr rent, Cr bank.
The accounting equation: assets = capital + liabilities.
A business buys equipment on credit from Tools Ltd for £2000. Which accounts are debited and credited?
- Equipment is an asset that increases: debit.
- Tools Ltd becomes a liability (payable): credit.
Answer: Dr equipment £2000, Cr Tools Ltd £2000
Debit increases assets, expenses and drawings. Credit increases liabilities, capital and income. Every transaction has an equal debit and credit. Assets = capital + liabilities.
The interactive lesson includes the diagrams for this topic.
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