double entry book-keeping

Trial balance

TheLawStudent

As I wrote in my post on double entry book-keeping, the dual nature of accounting transactions means that for every debit entry there is a matching credit entry and vice versa. It therefore follows that the total of all debit balances in the accounts must always be equal to the total of all credit balances.

To test this out, if we take all the balances on all of a business’s ledgers (i.e. the categories of transaction) as at the end of an accounting period and list them, showing debit balances in one column and credit balances in another column, the total of each of the two columns should be the same. This list is called a trial balance.

Preparation of a trial balance is beyond the scope of the LPC, as a trial balance is usually put together by the business itself or its accountants and forms the basis of information from which the financial statements, principally the Profit and Loss Account and Balance Sheet, are then compiled.

Double Entry Book-keeping

TheLawStudent

The principle of the double entry system of book-keeping is that every financial transaction that a business undertakes has a dual effect in its accounts. For example, if a business purchases some machinery for £15,000, there will be a reduction of £15,000 in the record of its cash and an increase of £15,000 in the record of the assets of the business.

For a particular transaction, once you have identified the types of account affected and whether there is an increase or reduction, the next step is to record the transaction in two places in the books of the business. One entry will be recorded as a ‘debit’ entry and the other as a ‘credit’ entry, this means that each individual debit will have a matching credit and vice versa. Therefore, over a particular accounting period, when all the debits/credits for all transactions are added together, the sum of the business’s debits should be equal to the sum of all its credits. This will be shown when you look at the Trial Balance for a particular accounting period.