Difficulty: Introductory | Prerequisites: Read the companion notes on Balance Sheet and Transaction Analysis (ACCT 100 Ch. 2, Part 1) first, or at minimum understand the accounting equation (A = L + SE).
Once you understand what a transaction is and how it affects the accounting equation, the next question is: how do you write it down? This set of notes covers the recording process, the mechanical step-by-step system accountants use to capture transactions and organise them into a usable set of records. You will learn journal entries (the initial record), T-accounts (a visual tracking tool), and the ledger system that ties everything together. These mechanics are used in every accounting course and every real-world accounting system from here on out.
Transactions are first written as journal entries (debits on the left, credits on the right, always equal). Each entry is then posted to T-accounts or ledger accounts so you can track running balances. A trial balance at the end checks that total debits still equal total credits across all accounts.
Debit
An entry recorded on the left side of a T-account or journal entry. Debits increase asset accounts and decrease liability and stockholders' equity accounts.
Think of it as: left side. Left does not mean "bad" or "subtraction" on its own; it depends on the account type.
Credit
An entry recorded on the right side of a T-account or journal entry. Credits increase liability and stockholders' equity accounts and decrease asset accounts.
In simple terms, this means: right side, the mirror of a debit.
Journal entry
A dated, formal record of a single transaction, listing every account debited and credited along with the dollar amounts. Total debits must equal total credits.
Think of it as the first written record of "what happened" in accounting terms.
T-account
A simplified, T-shaped diagram used to track all debits and credits to a single account. The left side records debits, the right side records credits.
In simple terms, this means: a quick visual sketch that shows the running activity in one account.
Normal balance
The side (debit or credit) where an account's balance is expected to sit. Assets carry a normal debit balance. Liabilities and stockholders' equity carry a normal credit balance.
Think of it as the account's "home side." If an asset account ends up with a credit balance, something has probably gone wrong.
General journal
The complete chronological listing of all journal entries for a business, recorded in the order they occur.
In simple terms, this means: the master diary of transactions, sorted by date.
Posting
The process of transferring the debit and credit amounts from each journal entry into the corresponding T-accounts or ledger accounts.
Think of it as copying each line of the journal entry into the right account's running tally.
Ledger
A formalised version of a T-account. Each individual account (Cash, Accounts Receivable, etc.) has its own ledger page with columns for date, description, debit, credit, and running balance.
In simple terms, this means: the official, detailed record for a single account.
General ledger
The complete collection of all individual ledger accounts for the business.
Think of it as the big book (or software system) that holds every account the company uses.
Trial balance
A report listing every account and its balance at a specific date, used to verify that total debits equal total credits across the entire set of accounts.
In simple terms, this means: a quick check to confirm the books are in balance before preparing financial statements.
Every transaction is recorded using debits and credits. These are not "good" or "bad"; they are simply left-side and right-side entries.
The effect of a debit or credit depends entirely on the account type:
Assets: Debit to increase, credit to decrease.
Liabilities: Credit to increase, debit to decrease.
Stockholders' Equity: Credit to increase, debit to decrease.
A helpful mnemonic: assets sit on the left side of the accounting equation (A = L + SE), and they increase with left-side entries (debits). Liabilities and SE sit on the right side, and they increase with right-side entries (credits).
Every journal entry must have at least one debit and at least one credit, and their totals must be equal.
Each journal entry includes:
A reference (usually the date, sometimes a letter or number).
At least one debit and at least one credit.
Formatting rules:
Debit account(s) are listed first, flush left.
Credit account(s) are listed after the debits, with the account titles indented.
Dollar amounts for debits appear in the left (debit) column.
Dollar amounts for credits appear in the right (credit) column.
Total debits must always equal total credits. This is the single most important rule of journal entries.
Every journal entry gets its own date, even if multiple entries occur on the same day.
While learning, a useful habit is to label each account with its type (A, L, or SE) and whether it is increasing or decreasing, e.g., Cash (+A).
Example journal entry:
A company receives $17,000 cash by issuing 1,000 shares of $1 par value common stock.
Date: (a)
Debit: Cash (+A) ..... $17,000
Credit: Common Stock (+SE) ..... $1,000Credit: Additional Paid-in Capital (+SE) ..... $16,000A T-account is a visual tool shaped like the letter T.
The account name sits at the top.
The left side records all debits to that account.
The right side records all credits to that account.
Each account in the business has its own T-account.
When a journal entry is posted, each debit and credit amount goes to the appropriate side of the appropriate T-account.
Calculating the ending balance:
Add up all entries on the debit (left) side.
Add up all entries on the credit (right) side.
Subtract the smaller total from the larger total.
The remaining amount is the account's ending balance, and it sits on whichever side had the larger total.
Debits and credits within the same T-account offset each other. They only equal each other if the account balance is exactly $0.
The "normal balance" is the side on which an account's balance is expected to fall.
Assets: Normal balance is a debit (left side). To increase an asset, debit it. To decrease, credit it.
Liabilities: Normal balance is a credit (right side). To increase a liability, credit it. To decrease, debit it.
Stockholders' Equity: Normal balance is a credit (right side). To increase SE, credit it. To decrease, debit it.
This follows directly from the accounting equation. Assets are on the left of A = L + SE, so they increase on the left (debit). Liabilities and SE are on the right, so they increase on the right (credit).
If you ever see an asset account with a credit balance or a liability account with a debit balance, it usually signals an error or an unusual situation worth investigating.
The general journal is where all transactions are first recorded, in chronological order. It is the complete diary of journal entries.
Posting is the process of transferring each debit and credit from the journal to the corresponding account in the ledger.
Each debit in a journal entry is posted to the debit side of the relevant account's T-account (or ledger page).
Each credit is posted to the credit side.
A ledger is the formalised version of a T-account. It includes columns for date, description, debit, credit, and a running balance. Each account has its own ledger page.
The general ledger is the collection of all individual ledger accounts for the business. It is the central repository of all account data.
The flow is: Transaction occurs, journal entry is written in the general journal, then amounts are posted to the general ledger.
The trial balance is prepared after all journal entries have been posted to the ledger.
Its purpose is to verify that total debits across all accounts equal total credits across all accounts.
If the two totals match, the books are "in balance." If they do not, there is an error somewhere that must be found and corrected.
A trial balance that balances does not guarantee the accounts are error-free. Certain errors (such as posting to the wrong account, or omitting a transaction entirely) will not show up on a trial balance because both sides would still be equal.
The trial balance is a checkpoint, not a financial statement. It is an internal tool used before preparing the income statement, balance sheet, and other reports.
Debit/Credit Rules by Account Type
Account Type | Increases With | Decreases With | Normal Balance |
|---|---|---|---|
Assets | Debit | Credit | Debit |
Liabilities | Credit | Debit | Credit |
Stockholders' Equity | Credit | Debit | Credit |
T-Account Ending Balance
\text{Ending Balance} = \text{Larger Side Total} - \text{Smaller Side Total}The balance sits on whichever side (debit or credit) had the larger total.
The Recording Flow
Transaction occurs, journal entry is written in the general journal, journal entry amounts are posted to T-accounts or ledger accounts, trial balance is prepared to check that total debits equal total credits.
Every piece of accounting software, from QuickBooks to SAP, automates the exact process described here: it writes a journal entry behind the scenes, posts it to a digital ledger, and runs a trial balance continuously. Understanding the manual process means you can diagnose problems when the software produces unexpected results, and you can read any company's general ledger extract with confidence.
Students often think "debit" means "increase" and "credit" means "decrease." That is only true for assets. For liabilities and stockholders' equity, the relationship is reversed.
Students sometimes believe that if a trial balance is in balance, the books must be correct. A trial balance will not catch errors such as posting the correct amount to the wrong account, or omitting a transaction entirely.
Students forget that credit account titles in a journal entry must be indented. Formatting matters on exams.
Students occasionally assume that T-account debits and credits should always be equal. They only equal each other when the account balance is exactly zero.
⚠️ Be able to write a correctly formatted journal entry from a transaction description: debits first, credits indented, totals equal.
⚠️ Know which side increases each account type cold. This will be tested directly and indirectly in nearly every problem.
⚠️ Understand the difference between a journal, a ledger, and a trial balance, and the order in which they are used.
⚠️ Be prepared for questions that ask you to calculate a T-account's ending balance given a list of transactions.
⚠️ Remember that a balanced trial balance does not prove the accounts are error-free. Expect a question testing this concept.
True or False: A debit always increases an account. (False. A debit increases assets but decreases liabilities and stockholders' equity.)
Fill in the blank: In a journal entry, the ______ account(s) are listed first and the ______ account(s) are indented below. (Debit; credit)
True or False: If a trial balance is in balance, the books are guaranteed to be free of errors. (False. Certain errors, like posting to the wrong account, will not cause the trial balance to be out of balance.)
Fill in the blank: The process of transferring journal entry amounts to T-accounts or ledger accounts is called ______. (Posting)
True or False: In a T-account, debits and credits always total to the same amount. (False. They only equal each other if the account balance is $0.)
Q: A company pays $5,000 cash to a supplier for inventory purchased on credit. Write the journal entry.
A: Debit Accounts Payable (liability, decreasing) $5,000. Credit Cash (asset, decreasing) $5,000.
Q: The Cash T-account shows total debits of $90,000 and total credits of $62,000. What is the ending balance, and on which side does it fall?
A: The ending balance is $28,000 on the debit side ($90,000 minus $62,000). This is expected because Cash is an asset with a normal debit balance.
Q: A company receives $8,000 cash from a customer who owed money on account. Write the journal entry.
A: Debit Cash (asset, increasing) $8,000. Credit Accounts Receivable (asset, decreasing) $8,000. Both accounts are assets; one goes up, the other goes down by the same amount.
Q: Name one type of error that a trial balance will not detect.
A: Posting the correct amount to the wrong account. Both sides still balance, so the trial balance will not flag it.
Q: What is the difference between the general journal and the general ledger?
A: The general journal is a chronological list of all transactions (journal entries in date order). The general ledger is organised by account, with each account showing its own debits, credits, and running balance. The journal records what happened and when; the ledger shows the cumulative effect on each account.
The recording process covered here is the foundation for everything that follows in the course. Chapter 3 introduces adjusting entries, which are simply more journal entries posted at the end of a period to bring accounts up to date. The closing process (Chapter 4 in many syllabi) uses journal entries to zero out temporary accounts. Financial statement preparation relies on the ledger balances you build here. If the mechanics of debits, credits, and posting are solid, the rest of the course is layering new types of transactions on top of the same system.
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