Edexcel IGCSE Accounting: Your notes

Introduction to Bookkeeping &

Accounting
Ledger Accounting
Contents
The Accounting Equation
The Double Entry System
Ledgers
Recording Sale Transactions
Recording Purchase Transactions
Recording Other Transactions
Balancing Accounts
Transferring Balances to the Income Statement
Interpreting Accounts & Their Balances

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 The Accounting Equation
Your notes
The accounting equation
What is the formula for the accounting equation?
The formula for the accounting equation is: Assets = Liabilities + Equity
The equation states that the assets of a business are always equal to the liabilities and
equity of the business
You can rearrange the equation so that you can find one of the three values if the other
two are known
Liabilities = Assets - Equity
Equity = Assets - Liabilities

The accounting equation

What are assets?

Assets are things owned by the business
Premises, inventory, motor vehicles, money in the bank, etc
Assets also include amounts that are owed to the business by other people or
businesses
Money owed to the business by credit customers
These are called trade receivables
Current assets are short-term assets that the business intends to liquidate within a
year
Trade receivables, inventory, money in the bank, etc
Non-current assets are long-term assets that the business intends to own for more
than a year and they are not easily liquated
Premises, motor vehicles, etc

What are liabilities?

Liabilities are the amounts that the business owes to other people or businesses
Bank loans, bank overdraft, etc
Money owed to credit suppliers by the business

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 These are called trade payables
Current liabilities are short-term liabilities which the business intends to pay within a
year Your notes
Trade payables, bank overdraft, etc
Non-current liabilities are long-term liabilities which the business intends to take
longer than a year to repay
Bank loans, etc
What is equity?
Equity is any resource provided by the owner to start up the business or keep it going
This is sometimes referred to as owner’s equity or capital
Equity is often in the form of money
However, it may also consist of other assets
Such as buildings, furniture, equipment, motor vehicles, goods, etc
The owner invests capital into their business
Technically the business owes these assets to the owner
If a business makes a profit then its equity increases
If a business makes a loss then its equity decreases

What are drawings?

Drawings refer to when an owner takes assets from the business for personal use
This could be money, goods, motor vehicles, etc
If the owner takes drawings from the business then the equity decreases

Examiner Tips and Tricks

You may be given examples of assets and liabilities and asked to calculate the missing
figure for equity.

Worked Example
The assets and liabilities are listed below for a business.

Premises 8 500

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 Equipment 7 000

Inventory 1 000 Your notes

Trade receivables 5 000

Trade payables 4 500

Bank overdraft 1 200

Calculate the equity of the business.

Answer
Firstly, calculate the total assets:

Premises 8 500

Equipment 7 000

Inventory 1 000

Trade receivables 5 000

Total assets 21 500

Secondly, calculate the total liabilities:

Trade payables 4 500

Bank overdraft 1 200

Total liabilities 5 700

Finally, apply the formula Equity = Assets - Liabilities

$21 500 - $5 700 = $15 800

Why is the accounting equation important?

The accounting equation may be shown in the form of a statement of financial position
The statement of financial position will be affected every time the business makes
changes to the assets, liabilities and equity
Every single transaction will result in at least two changes which balance out
Both sides of the equation could increase by the same amount
Both sides of the equation could decrease by the same amount
Both sides of the equation could stay the same

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 Your notes
Case Study
Hannah is the owner of a business. Some of her transactions are listed below. After
each transaction, the accounting equation still balances.

Transaction Effects on assets Effects on liabilities

or equity

A credit customer, Peter, pays the Assets increase by No change in

amount owed to Hannah by cheque $1 120 liabilities or equity
for $1 120
The money in the
bank increases
Assets decrease
by $1 120
The amount owed
by Peter decreases
Overall no change
to assets

Hannah pays the amount owed to a Assets decrease Liabilities decrease

credit supplier, Rizwan, by cheque for by $4 200 by $4 200
$4 200
The money in the The amount owed to
bank decreases Rizwan decreases

Hannah buys additional fixtures and Assets increase by Liabilities increase

fittings for $5 500 on credit from $5 500 by $5 500
FixFit Ltd
The value of The amount owed to
Hannah's assets FixFit Ltd increases
increases

Hannah takes goods worth $500 Assets decrease Equity decreases by

from the business for personal use by $500 $500
The amount of Hannah takes
inventory drawings from the
decreases business

Hannah transfers $1 000 from her Assets increase by Equity increases by

personal bank account into the $1 000 $1 000
business bank account
The money in the Hannah invests
bank increases $1 000 into the
business

Hannah makes $20 profit by selling Assets increase by Equity increases by

goods which cost $30 for $50 cash $50 $20

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 The amount of cash A profit has been
increases made
Your notes
Assets decrease
by $30
The amount of
inventory
decreases
Overall assets
increase by $20

Worked Example
A business pays one of its trade payables by cheque. Identify the effects on the
business' assets and liabilities.

Effect on assets Effect on liabilities

A Reduce bank Reduce trade payables

B Increase bank Increase trade payables

C Reduce trade payables Reduce bank

D Increase trade payables Increase bank

Answer
Money in the bank is an asset and trade payables is a liability. A payment made by
cheque would reduce the money in the bank, therefore reducing the asset. Trade
payable is a liability. The business debt would be reduced when payment is made.
The answer is A.

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 The Double Entry System
Your notes
The double entry system
What is the double entry system?
The double entry system is used by bookkeepers
The double entry system is used to improve the accuracy of financial statements
The double entry system is closely linked to the accounting equation
Assets = Liabilities + Equity
The equation is always balanced
Each transaction causes both sides of the equation to:
increase
or decrease
or remain the same
Each transaction is entered into two accounts
One is called a debit entry
One is called a credit entry

What is the layout of a ledger account?

Each account will be split into two sides
The debit entries appear on the left
This side is sometimes labelled as Dr
The credit entries appear on the right
This side is sometimes labelled as Cr
When you make an entry you need to include:
The date of the transaction
The details of the transaction
This is normally the name of the other account involved
The value of the transaction

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 Your notes

Example of a ledger account

What are the advantages of maintaining double entry

records?
It is straightforward to prepare financial statements
It can help give an accurate calculation of the profit or loss
It reduces the possibility of fraud
It gives easy access to information for the bank or other lenders

Debits & credits

What is a debit entry?
A debit entry is mainly used for:
Increasing the value of an asset
The left-hand side of the accounting equation increases
Decreasing the value of a liability or the equity
The right-hand side of the accounting equation decreases

What is a credit entry?

A credit entry is mainly used for:
Increasing the value of a liability or the equity
The right-hand side of the accounting equation increases
Decreasing the value of an asset
The left-hand side of the accounting equation decreases

Which accounts should I debit?

Debit an asset account when its value is increasing
You receive cash

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 Debit the cash account
A customer buys goods on credit
Your notes
Debit their trade receivables account
Debit a liability account when its value is decreasing
You make a repayment on a bank loan
Debit the bank loan account
You pay an invoice to a credit supplier
Debit their trade payables account
Debit other accounts when the transaction decreases the equity
You take out assets for personal use
Debit the drawings account
You pay an expense which decreases the profit
Debit the relevant expense account
Such as purchases, rent paid, discount allowed, etc
Which accounts should I credit?
Credit a liability account when its value is increasing
You take out a bank loan
Credit the bank loan account
You buy goods on credit from a supplier
Credit their trade payables account
Credit an asset account when its value is decreasing
You pay rent by bank transfer
Credit the bank account
A credit customer pays their invoice
Credit their trade receivables account
Credit other accounts when the transaction increases the equity
You put more personal assets (such as money) into the business
Credit the capital account
You receive income which increases the profit
Credit the relevant income account
Such as sales, rent received, discount received, etc

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How do I decide whether an account should be
debited or credited? Your notes
STEP 1
Identify the asset, liability or equity
Usually this is cash, trade receivables or trade payables
STEP 2
Determine whether its value is increasing or decreasing
STEP 3
Debit or credit that account
Debit the account if:
It is an asset account and its value is increasing
It is a liability or the equity account and its value is decreasing
Credit the account if:
It is an asset account and its value is decreasing
It is a liability or the equity account and its value is increasing
STEP 4
Put an equal entry on the opposite side for the second account

Debit and credit entries achieve specific purposes depending on the type of account

Do I debit or credit accounts for expenses & incomes?

When you pay an expense you will debit that account
This is because expenses decrease the profit
The equity will decrease
The other part of the double entry is to credit the cash or bank account

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 Your cash is decreasing
When you receive an income you will credit that account
Your notes
This is because income increases the profit
The equity will increase
The other part of the double entry is to debit the cash or bank account
Your cash is increasing
Do I debit or credit accounts for drawings & capital?
When the owner takes out money or goods from the business for themselves you will
debit the drawings account
This is because taking drawings decreases the equity
The other part of the double entry is to credit the cash or bank account
The company’s cash is decreasing
When the owner adds their own money to the business you will credit the capital
account
This is because introducing money increases the equity
The other part of the double entry is to debit the cash or bank account
The company’s cash is increasing

Examiner Tips and Tricks

To remember which side of an account to record a transaction, you can use the
acronym DEAD CLIC.
The transaction is on the debit side for expense, asset, and drawings accounts if
the account is increasing.
The transaction is on the credit side for liability, income, and capital (equity)
accounts if the account is increasing.
If the account is decreasing then the transaction is recorded on the opposite
side!

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 Your notes

Worked Example
Hina is a sole trader.
Complete the table below to show the accounts that Hina should debit and credit for
each of the following transactions.

Transaction Account to be Account to be

debited credited

Hina sells goods on credit to Priya

Hina receives a cash payment from Priya

Hina pays an electricity bill by cheque

Hina buys goods on credit from Dida

Hina repays some of a bank loan by bank

transfer

Hina takes ownership of a company vehicle

for her own use

Hina puts some of her own money into the

business bank account

Answer

Transaction Account to be Account to be

debited credited

Hina sells goods on credit to Priya Priya Sales

Hina is owed Sales is an
cash from Priya. income.
Priya is an asset

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 that is
increasing.
Your notes

Hina receives a cash payment from Priya Cash Priya

Hina receives Hina is owed
cash. less money
from Priya.
Cash is an asset
that is Priya is an asset
increasing. that is
decreasing.

Hina pays an electricity bill by bank transfer Electricity Bank

Electricity is an The cheque will
expense. use money from
the bank.
The bank is an
asset that is
decreasing.

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 Your notes

Hina buys goods on credit from Dida Purchases Dida

Purchases is an Hina owes
expense. money to Dida.
Dida is a liability
that is
increasing

Hina repays some of a bank loan by bank Bank loan Bank

transfer
The amount Hina is using
Hina owes less money from the
on her bank bank.
loan. The bank is an
The bank loan is asset that is
a liability that is decreasing.
decreasing.

Hina takes ownership of a company vehicle Drawings Vehicles

for her own use
Hina is taking an The company
asset from the owns fewer
business. vehicles.

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 Vehicles are an
asset that is
decreasing. Your notes

Hina puts some of her own money into the Bank Equity
business bank account
The business is The equity of
receiving the business is
money. increasing
The bank is an
asset that is
increasing.

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 Ledgers
Your notes
The ledger
What is the ledger?
The ledger is a collection of all the accounts for a business
It could be a book where each account is on a new page
It could be a spreadsheet file where each account is on a new sheet

The accounts in the ledger are referred to as ledger accounts

The ledger is divided into three separate ledgers
The receivables ledger
The payables ledger
The nominal (general) ledger

Why is the ledger divided into three sections?

Dividing the ledger means that the work can be shared amongst several people
It is easier to find and check information
The same types of accounts are kept together

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 It can help to reduce the possibility of fraud
If different people work with different ledgers then missing or incorrect information Your notes
will be easier to find
Receivables, payables & nominal Ledgers
What is the sales ledger?
The receivables ledger is a collection of the accounts for all of the credit customers
These are the trade receivables accounts
The sales account itself does not go into the receivables ledger
It goes in the nominal ledger

What is the payables ledger?

The payables ledger is a collection of the accounts for all of the credit suppliers
These are the trade payables accounts
The purchases account itself does not go into the payables ledger
It goes in the nominal ledger

What is the nominal (general) ledger?

The nominal ledger is a collection of all accounts of a business except for the accounts
for credit customers and credit suppliers
It is also known as the general ledger
The most common accounts in the nominal ledger are:
Sales account
Purchases account
Returns inwards account
Returns outwards account
Carriage inwards account
Carriage outwards account
Discount allowed account
Discount received account
An account for each other expense
An account for each other income
Cash and bank accounts
Equity account

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Drawings account
Inventory account Your notes
An account for each type of non-current asset
An account for each liability

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 Recording Sale Transactions
Your notes
Cash sales
What is a cash sale?
A cash sale is when a customer pays upfront for goods or services
The business issues the customer with a receipt
A copy of the sales receipt is used as the source document
The book of original entry is the cash book
Cash sales do not get recorded in the sales day book

How do I record a cash sale in the ledger accounts?

Debit the cash or bank account in the nominal ledger
This is because the business is receiving cash
The asset is increasing
Credit the sales account in the nominal ledger
Note that no entries are made in the trade receivables accounts
This is because the goods were paid for straight away
Therefore the customer does not owe the business any money

Worked Example
A business sells $500 worth of goods to Alex who pays in cash upfront on 1 January
2024. Record this transaction in the ledger accounts for the business.
Answer
Cash Account

Date Details $ Date Details $

2024
Jan 1 Sales 500

Sales Account

Date Details $ Date Details $

2024

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 Jan 1 Cash 500

Your notes
Credit sales
What is a credit sale?
A credit sale is when a customer pays later for goods or services
The business will issue the customer with an invoice
A copy of the sales invoice is used as the source document
The book of original entry is the sales day book

How do I record a credit sale in the ledger accounts?

Debit the trade receivable account in the receivables ledger
This is because the business is owed money by the credit customer
The asset is increasing
Credit the sales account in the nominal ledger
Note that no entries are made in the cash or bank accounts
No cash has been exchanged yet

Worked Example
A business sells $500 worth of goods to Alex on credit on 1 January 2024. Record this
transaction in the ledger accounts for the business.
Answer
Alex Account

Date Details $ Date Details $

2024
Jan 1 Sales 500

Sales Account

Date Details $ Date Details $

2024
Jan 1 Alex 500

Payments from credit customers

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How could a credit customer pay an invoice?
A credit customer could pay by: Your notes
Cash payment
Cheque
Bank transfer
Telephone transfer
Cheques and transfers are recorded in the bank account
Bank statements, cheques, remittance advice and receipts are used as source
documents
The book of original entry is the cash book

How do I record a payment from a credit customer in

the ledger accounts?
Debit the cash or bank account in the nominal ledger
This is because the business is receiving money
The asset is increasing
Credit the trade receivable account in the receivables ledger
This is because the customer owes the business less money
The asset is decreasing

Worked Example
On 4 January 2024, a business receives a cheque from Alex for $100 for an invoice.
Record this transaction in the ledger accounts for the business.
Answer
Bank Account

Date Details $ Date Details $

2024
Jan 4 Alex 100

Alex Account

Date Details $ Date Details $

2024

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 Jan 4 Bank 100

Your notes
Discount allowed
What is discount allowed?
A business might offer a cash discount for early repayment of an invoice
This is not a trade discount
The business is allowing a discount to a credit customer
The sales invoice is used as the source document
The terms of the cash discount will be detailed
The book of original original is the cash book

How do I record discount allowed in the ledger

accounts?
Credit the trade receivable account in the receivables ledger
This is because the business is owed less money from a credit customer
The asset is decreasing
Debit the discount allowed account in the nominal ledger
You will normally have to record the transaction for the receipt of payment at the same
time
Make sure that the sum of the debit entries equals the sum of the credit entries

Examiner Tips and Tricks

Questions will normally:
Tell you the percentage for the discount allowed
Tell you that a customer paid an amount in full settlement of their debt

Worked Example
A business allows Alex a 10% cash discount when they repay their $400 invoice early
on 4 January 2024 via bank transfer. Record this transaction in the ledger accounts for
the business.
Answer
The discount is 10% of $400, which is $40.

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 The amount Alex pays is $400 - $40, which is £360.
Discount Allowed Account Your notes
Date Details $ Date Details $

2024
Jan 4 Alex 40

Bank Account

Date Details $ Date Details $

2024
Jan 4 Alex 360

Alex Account

Date Details $ Date Details $

2024
Jan 4 Discount Allowed 40

Jan 4 Bank 360

Sales returns
What is a sale return?
A sale return is when a customer returns some goods
It is referred to as a return inwards
This could be because:
The goods were damaged
The goods were not what the customer wanted
The business will issue the customer with a credit note
A copy of the credit note issued is used as the source document
The book of original entry is the sales returns day book

How do I record a sale return in the ledger accounts?

Credit the trade receivable account in the receivables ledger
This is because the business is owed less money from a credit customer
The asset is decreasing
Debit the returns inwards (sales returns) account in the nominal ledger

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If the credit customer has already paid all of their invoices in full
Then the trade receivable account will have a credit balance Your notes
This means the business owes the customer money
This will be balanced when the business gives a cash refund

Worked Example
Alex returns $100 worth of goods to a business on 4 January 2024. Alex had not yet
paid the invoice for the goods. Record this transaction in the ledger accounts for the
business.
Answer
Returns Inwards Account

Date Details $ Date Details $

2024
Jan 4 Alex 100

Alex Account

Date Details $ Date Details $

2024
Jan 4 Returns inwards 100

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 Recording Purchase Transactions
Your notes
Cash purchases
What is a cash purchase?
A cash purchase is when the business pays the supplier upfront for goods or services
The supplier issues the business with a receipt
The receipt is used as the source document
The book of original entry is the cash book

How do I record a cash purchase in the ledger

accounts?
Credit the cash or bank account in the nominal ledger
This is because the business is spending cash
The asset is decreasing
Debit the purchases account in the nominal ledger
Note that no entries are made in the trade payables accounts
This is because the goods were paid for straight away
Therefore the business does not owe the supplier any money

Worked Example
A business buys $50 worth of goods from Halina on 5 January 2024. The business
pays in cash upfront. Record this transaction in the ledger accounts for the business.
Answer
Purchases Account

Date Details $ Date Details $

2024
Jan 5 Cash 50

Cash Account

Date Details $ Date Details $

2024

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 Jan 5 Purchases 50

Your notes
Credit purchases
What is a credit purchase?
A credit purchase is when a business pays a supplier later for goods or services
The business will receive an invoice from the supplier
The invoice is used as the source document
The book of original entry is the purchases day book

How do I record a credit purchase in the ledger

accounts?
Credit the trade payable account in the payables ledger
This is because the business owes money to the credit supplier
The liability is increasing
Debit the purchases account in the nominal ledger
Note that no entries are made in the cash or bank accounts
No cash has been exchanged yet

Worked Example
A business buys $300 worth of goods from Halina on credit on 10 January 2024.
Record this transaction in the ledger accounts for the business.
Answer
Purchases Account

Date Details $ Date Details $

2024
Jan 10 Halina 300

Halina Account

Date Details $ Date Details $

2024
Jan 10 Purchases 300

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Payments to credit suppliers
Your notes
How could a business pay an invoice to a credit
supplier?
A business could pay by:
Cash payment
Cheque
Bank transfer
Telephone transfer
Cheques and transfers are recorded in the bank account
Bank statements, cheque counterfoils, remittance advice and receipts are used to
record these payments
The book of original entry is the cash book

How do I record a payment to a credit supplier in the

ledger accounts?
Credit the cash or bank account in the nominal ledger
This is because the business is spending money
The asset is decreasing
Debit the trade payable account in the payables ledger
This is because the business owes the supplier less money
The liability is decreasing

Worked Example
A business pays Halina $100 toward an invoice by bank transfer on 11 January 2024.
Record this transaction in the ledger accounts for the business.
Answer
Halina Account

Date Details $ Date Details $

2024
Jan 10 Bank 100

Bank Account

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 Date Details $ Date Details $

2024 Your notes

Jan 10 Halina 100

Discount received
What is discount received?
A business might be offered a cash discount by a credit supplier for early repayment of
an invoice
This is not a trade discount
The business is receiving a discount from a credit supplier
The discount received will be recorded on the purchase invoice
The purchase invoice is used as the source document
The terms of the cash discount will be detailed
The book of original entry is the cash book

How do I record discount received in the ledger

accounts?
Debit the trade payable account in the payables ledger
This is because the business owes less money to a credit supplier
The liability is decreasing
Credit the discount received account in the nominal ledger
You will normally have to record the transaction for a payment at the same time
Make sure that the sum of the debit entries equals the sum of the credit entries

Examiner Tips and Tricks

Questions will normally:
Tell you the percentage for the discount allowed
Tell you that a customer paid an amount in full settlement of their debt

Worked Example

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 A business issues a cheque for $175 to Halina on 12 January 2024 in full settlement of a
debt of $200. Record this transaction in the ledger accounts for the business.
Your notes
Answer
Halina Account

Date Details $ Date Details $

2024
Jan 11 Discount received 25

Jan 11 Bank 175

Discount Received Account

Date Details $ Date Details $

2024
Jan 11 Halina 25

Bank Account

Date Details $ Date Details $

2024
Jan 11 Halina 175

Purchases returns
What is a purchase return?
A purchase return is when a business returns some goods to a supplier
It is referred to as a return outwards
This could be because:
The goods were damaged
The goods were not what the business wanted
The business will receive a credit note from the supplier
The credit note issued is used as the source document
The book of original entry is the purchases returns day book

How do I record a purchase return in the ledger

accounts?
Debit the trade payable account in the payables ledger

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 This is because the business owes less money to a credit supplier
The liability is decreasing Your notes
Credit the returns outwards (purchases returns) account in the nominal ledger
If the business has already paid all of their invoices in full
Then the trade payable account will have a debit balance
This means the business is owed money from the supplier
This will be balanced when the business receives a cash refund

Worked Example
A business returns goods to Halina on 12 January 2024 with a list price of $50. Record
this transaction in the ledger accounts for the business.
Answer
Halina Account

Date Details $ Date Details $

2024
Jan 12 Returns outwards 50

Returns Outwards Account

Date Details $ Date Details $

2024 50
Jan 12 Halina

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 Recording Other Transactions
Your notes
Purchase of a non-current asset
How do I record the purchase of a non-current asset in
the ledger accounts?
Debit the non-current asset account in the nominal ledger
Credit the cash, bank, or a liability account in the nominal ledger
Use the cash or bank account if the business pays upfront
Use a liability account if the business buys the asset on credit
The name will be the name of the lender
Note that a purchase of a non-current asset is not entered into the purchases account
This is because the purchases account is just for purchases of goods for trading

What other transactions are included in a non-current

asset account?
The only other transaction that is included in a non-current asset account is its sale or
disposal
It will be credited with the original cost of the non-current asset
A disposal account will be needed to show the profit or loss of the sale
Depreciation will be recorded in a provision for depreciation account

Taking out a loan

How do I record taking out a loan in the ledger
accounts?
Debit the bank account
The asset is increasing
Credit a loan account
The liability is increasing

How do I record interest on a loan in the ledger

accounts?
Loan interest is an expense
Credit the bank account
The asset is decreasing

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 Debit the loan interest account
Do not make any entries for this in the loan account Your notes
The amount borrowed has not changed
Receiving incomes & paying expenses
What types of income could a business receive?
A business will receive income from their sales of goods or services
A business can also receive other income such as:
Rent
Commission

How do I record the receipt of an income in the ledger

accounts?
Debit the cash or bank account
The asset is increasing
Credit the income account

What types of expenses could a business pay?

The purchase of goods is an expense to a business
A business can also incur other expenses such as:
Rent
Commission
Rates
Wages
General expenses
If a business receives income from rent and also pays rent then separate accounts are
used
Rent payable is the expense account
Rent receivable is the income account

How do I record the payment of an expense in the

ledger accounts?
Credit the cash or bank account
The asset is decreasing
Debit the expense account

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 Your notes
Worked Example
Frank is a sole trader. Frank rents a building for part of his business. Frank also owns a
building as part of his business and rents out a room to another sole trader, Karen.
On 1 February 2024, Frank pays $300 rent by a standing order.
On 3 February 2024, Frank receives $200 in rent from Karen by bank transfer.
Enter these transactions into Frank’s accounts.
Answer
Bank Account

Date Details $ Date Details $

2024 2024
Feb 3 Rent receivable 200 Feb 1 Rent payable 300

Rent Payable Account

Date Details $ Date Details $

2024
Feb 1 Bank 300

Rent Receivable Account

Date Details $ Date Details $

2024
Feb 3 Bank 200

Taking drawings & introducing capital

How do I record the owner taking drawings in the
ledger accounts?
The owner could take assets from the business for personal use:
Money
Goods
Non-current assets
Such as vehicles
Credit the relevant account

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 Bank account if money is taken
Purchases account if goods are taken Your notes
Non-current asset account if a vehicle or machinery is taken
Debit the drawings account
How do I record the owner introducing capital in the
ledger accounts?
The owner might put some of their own money into the business
Debit the cash or bank account
The asset is increasing
Credit the equity account

Worked Example
Ahmed is a sole trader.
On 1 January 2024, Ahmed puts $20 000 into the business bank account from his
personal bank account.
On 1 February 2024, Ahmed withdraws $5 000 from the business bank account
for personal use.
Record these transactions in ledger accounts for Ahmed’s business.
Answer
Bank Account

Date Details $ Date Details $

2024 2024
Jan 1 Equity 20 000 Feb 1 Drawings 5 000

Equity Account

Date Details $ Date Details $

2024
Jan 1 Bank 20 000

Drawings Account

Date Details $ Date Details $

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2024
Feb 1 Bank 5 000 Your notes

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 Balancing Accounts
Your notes
Balancing accounts
Why do businesses balance their accounts?
Businesses balance their accounts at regular intervals
Usually at the end of a month
Balancing accounts helps to:
Keep the accounts accurate
See the current balance of an account
Allow managers to monitor progress

How do I balance a ledger account?

STEP 1
Add up the entries on the debit side
STEP 2
Add up the entries on the credit side
STEP 3
Find the difference between the two totals
STEP 4
Put an entry with the difference on the side which has the smaller total
Put the date as the last day of that period
Usually the last day of the month
Call this entry balance c/d
c/d stands for carried down
STEP 5
Write the new totals on each side of the account
The totals should be in line with each other
Put a single line above the totals
Put a bold or double line underneath the totals
STEP 6
Put an entry of equal value to the balance c/d but on the other side after the totals
Put the date as the first day of the next period
Usually the first day of the month
Call this entry balance b/d

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 b/d stands for brought down
Example of balancing a trade receivable account
Your notes

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 Your notes

Worked Example
Milo is a sole trader. Milo buys goods on credit from SME Goods. The transactions
during February 2024 are shown below in the SME Goods account in the purchases
ledger. Balance the account on 29 February 2024.
SME Goods Account

Date Details $ Date Details $

2024 Balance b/d 200 2024 Purchases 800

Feb 1 Feb 2

Feb 8 Purchases returns 100 Feb 19 Purchases 1 500

Feb 16 Bank 650 Feb 27 Purchases 700

Feb 16 Discount received 50

Feb 29 Bank 800

Answer
The total of the debit entries is $1 800
The total of the credit entries is $3 000
The difference is $1 200
This goes on the debit side as that side has a smaller total
SME Goods Account

Date Details $ Date Details $

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2024 2024
Feb 1 Balance b/d 200 Feb 2 Purchases 800 Your notes
Feb 8 Purchases returns 100 Feb 19 Purchases 1 500

Feb 16 Bank 650 Feb 27 Purchases 700

Feb 16 Discount received 50

Feb 28 Bank 800

Feb 29 Balance c/d 1 200

3 000 3 000

Mar 1 Balance b/d 1 200

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 Transferring Balances to the Income Statement
Your notes
Transferring balances to the income statement
Which accounts do I need to transfer to the income
statement?
The income statement is part of the double entry system
It is used to calculate the profit or loss for the year
Therefore, the balances for expenses and incomes are transferred to the income
statement
Including sales, purchases, sales returns, and purchases returns
Expenses are debited to the income statement
Incomes are credited to the income statement
Accounts for assets, liabilities and equity are not transferred to the income statement
These do not directly affect the profit or loss

How do I transfer a balance on an account to the

income statement?
The process is very similar to balancing an account at the end of a month
The main difference is
The balance is not carried down to the next month
It is transferred to the income statement
The account should start the next accounting period with a zero balance
There are a few exceptions
Including accrued and prepaid expenses and income
Here is an example of a wages account
The income statement is being prepared for the year ending 31 May 2024
Wages Account

Date Details $ Date Details $

2023 2024
Aug 1 Bank 3 000 May 31 Income Statement 15 000

Nov 1 Bank 4 000

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 2024 Bank 4 500
Feb 1
Your notes
May 1 Bank 3 500

15 000 15 000

How do I transfer balances for inventory to the income

statement?
The starting balance will be on the debit side
This will be the value of the opening inventory
This will be brought down as the closing inventory from the previous year
At the end of the year
Transfer the balance of the opening inventory to the income statement
Debit the income statement
This is an expense for the current year
Credit the inventory account
The asset is decreasing
Total the inventory account to give a zero balance
Transfer the balance of the closing inventory from the income statement
Debit the inventory account
The asset is increasing
Credit the income statement
This is not an expense for the current year
It will be an expense for the following year
Balance the inventory account and bring down the balance
This will be the value of the closing inventory for the current year
This is the value of the opening inventory for the next year

Worked Example
On 1 April 2023, Hashim had an opening inventory of $4 500.
On 31 March 2024, Hashim had a closing inventory of $3 600.

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 Prepare the inventory account at 31 March 2024. Balance the account and bring down
the balance on 1 April 2024.
Your notes
Answer
Inventory Account

Date Details $ Date Details $

2023 2024
Apr 1 Balance b/d 4 500 Mar 31 Income Statement 4 500

4 500 4 500

2024 2024
Mar 31 Income Statement 3 600 Mar 31 Balance c/d 3 600

3 600 3 600

Apr 1 Balance b/d 3 600

In which account do I enter the profit or loss?

The income statement will show the profit or loss for the year
This balance is transferred to the equity account
Debit the equity account if it is a loss
Credit the equity account if it is a profit
The total equity can be calculated at the end of the year:
Transfer the balance on the drawings account to the equity account
This will be a debit entry
Balance the equity account

Worked Example
Zabir had $80 000 equity on 1 June 2023. Zabir made a profit of $40 000 for the year
ending 31 May 2024. During that year, Zabir took $15 000 from the business for
personal use.
Prepare the equity account at 31 May 2024. Balance the account and bring down the
balance on 1 June 2024.
Answer
Equity Account

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Date Details $ Date Details $

2024 2023 Your notes

Jun 1
May 31 Drawings 15 000 Balance b/d 80 000

2024 2024 Income statement 40 000

May 31 (Profit for the year)
May 31 Balance c/d 105 000

120 000 120 000

2024
Jun 1 Balance b/d
105 000

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 Interpreting Accounts & Their Balances
Your notes
Accounts for assets
How do I interpret ledger accounts for non-current
assets?
At the start of an accounting period, the balance on an asset account will be on the
debit side

Account is debited when: Account is credited when:

More of the non-current asset The non-current asset is sold

is purchased

How do I interpret ledger accounts for trade

receivables?
At the start of an accounting period, the balance on a trade receivables account will
usually be on the debit side
A trade receivable account could start on the credit side
If the credit customer has returned goods to the business
And the goods have already been paid for
But the business has not yet refunded the credit customer

Account is debited when: Account is credited when:

The customer buys more goods on credit The credit customer pays an
invoice to the business
Interest is charged for an overdue balance
Cash discount is allowed to the
A cheque received from a customer is customer by the business
dishonoured
The customer returns some
The business refunds the customer for goods
goods that have already been paid for

Accounts for liabilities

How do I interpret ledger accounts for liabilities?
At the start of an accounting period, the balance on a liability account will be on the
credit side

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Account is debited when: Account is credited when:
Your notes
The business repays some of its loan The business borrows more money
from the lender

How do I interpret ledger accounts for trade payables?

At the start of an accounting period, the balance on a trade payable account will usually
be on the credit side
A trade payable account could start on the debit side
If the business has returned goods to a credit customer
And the goods have already been paid for
But the credit supplier has not yet refunded the business

Account is debited when: Account is credited when:

The business pays an invoice to The business buys more goods on credit
the credit supplier
Interest is charged for an overdue balance
Cash discount is received by the
business form the supplier A cheque sent to a supplier is returned

The business returns some goods The supplier refunds the business for
goods that have already been paid for

Accounts for expenses & incomes

How do I interpret ledger accounts for expenses?
At the start of an accounting period, the balance on an expense account should be
zero
Unless there is an accrued or prepaid expense
There could be a starting balance on the debit side
if the business has made an early payment toward the expense for the current
period
This is called a prepaid expense
There could be a starting balance on the credit side
if the business still owes money for an expense for the previous period
This is called an accrued expense

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Account is debited when: Account is credited when:
Your notes
The business pays the expense The balance is transferred to the
income statement at the end of
the accounting period

How do I interpret ledger accounts for incomes?

At the start of an accounting period, the balance on an income account should be zero
Unless there is accrued or prepaid income
There could be a starting balance on the debit side
if the business is waiting for money that should have been received in the previous
period
This is called accrued income
There could be a starting balance on the credit side
if the business receives payments early for the current period
This is called prepaid income

Account is debited when: Account is credited when:

The balance is transferred to the income statement at The business receives

the end of the accounting period the income

Accounts for equity & drawings

How do I interpret ledger accounts for drawings?
At the start of an accounting period, the balance on the drawings account will be zero

Account is debited when: Account is credited when:

The owner takes money from The balance is transferred to the equity
the business for personal use account at the end of the accounting period
The owner takes goods from the
business for personal use

How do I interpret ledger accounts for equity?

At the start of an accounting period, the balance on the equity account will be on the
credit side

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Account is debited when: Account is credited when:
Your notes
A loss is transferred from the income The owner introduces money into
statement the business
The balance from the drawings account A profit is transferred from the
is transferred income statement

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