Chapter 3 — Recording Transactions: Debits, Credits, and the Trial Balance
The module's primary reading · ~40–50 minutes · Objective 2 (analyze business transactions with the accounting equation and record them in a journal using double-entry bookkeeping, post them to the ledger, and prepare a trial balance) · Read it first this week; the lecture, the tutorial, the quiz, and the Accounting Workshop all build on it.
In plain language
This week you learn how accountants write events down so the books stay in balance. Each item a business tracks, such as its cash or the money it owes, gets its own record called an account (one running list for one item). Every amount goes on the left or the right of an account; the left is called a debit (an amount on the left side) and the right a credit (an amount on the right side). Every event is written in a diary of entries called the journal (the first place an event is recorded), then copied into the accounts. At the end, a list called the trial balance (every account's balance in a left or right column) checks that the two sides agree.
Why you already care about this
Think about a group trip where four friends share costs. One pays for gas, one for groceries, one for the campsite. By the last day of the trip, nobody remembers who owes whom. The fix is a shared note: every time money moves, someone writes down who paid and who owes. A business has the same problem, only with hundreds or thousands of events a month.
Last week you tracked the illustrative bicycle shop's 12 Month 1 transactions in the accounting equation. That worked for 12 events. Picture doing it for thousands. You would need a separate running total for each item, a rule for which side each amount goes on, and a quick test that you did not slip. That is this week. The rule is old: Luca Pacioli's book, printed in Venice in 1494, contains the first published description of the method you are about to learn.
By the end of this chapter you will be able to:
- draw a T-account and place an amount on its debit or credit side;
- state the normal balance of any account in the bicycle shop's chart of accounts;
- write a balanced journal entry for a transaction;
- post journal entries to the ledger and find each account's balance;
- prepare an unadjusted trial balance and foot both columns;
- name three kinds of error a balanced trial balance cannot catch.
Carry this line with you: debit means left — not more, not less.
Where we are
- Already covered: Week 1 showed who reads financial statements and who sets the rules. Week 2 gave you the accounting equation and a four-question routine for analyzing any transaction.
- This week: the account, debits and credits, normal balances, double-entry bookkeeping, the journal, the ledger, and the trial balance.
- How they connect: every journal entry is the Week 2 analysis written in a new form, and the trial balance is a fast check that the equation still holds.
- Where we're going next: Week 4, Accrual Accounting and Adjusting Entries, updates these same accounts at month-end so revenue and expenses land in the right period.
Week 2 is the one this chapter leans on most. Recall the accounting equation: Assets = Liabilities + Stockholders' Equity. Every transaction keeps the two sides equal. Recall too that revenues raise retained earnings, while expenses and dividends lower it. You will meet all of those ideas again this week, now as rules about left and right. Week 1 matters too: lenders and investors outside the business rely on these records, so the records have to be complete and correct, not only balanced.
1. Give each item its own record: the account
Your phone keeps a separate thread for each person you text. You never scroll through one giant list of every message to find what a friend said. Accountants do the same with money. They keep one record for each item the business tracks.
That record is an account: the separate record a business keeps for one item, such as Cash or Service Revenue, showing every increase and decrease in that item and its balance.
The simplest picture of an account is the T-account. Draw a large letter T. Write the account's title across the top bar. The space left of the stem is the left side; the space right of the stem is the right side. Every amount you record goes on one side or the other.
The bicycle shop (illustrative) uses 12 accounts in Month 1: Cash, Accounts Receivable, Supplies, Prepaid Insurance, Equipment, Accounts Payable, Unearned Revenue, Common Stock, Dividends, Service Revenue, Rent Expense, and Wages Expense. Each one gets its own T.
Worked example — the Supplies T-account. On Day 3 the shop buys $900 of shop supplies on account. That is transaction 3. In the Supplies T-account, the $900 goes on the left side, with "3" beside it so you can trace it later. Nothing else touches Supplies in Month 1, so its balance is $900 at month-end. In words: the shop has $900 of supplies on hand that it has not used yet.
Misconception check. Students often think a T-account is a different set of books from the accounting equation. It is not. A T-account is a sketch of one line of the equation, opened up so you can see every amount that moved it. The cure: whenever you draw a T, name which part of the equation it belongs to, an asset, a liability, or equity.
2. Read the two sides: debit and credit
At a soccer game, the scoreboard has a home side and a visitor side. "Left" and "right" on the board tell you where a number goes, not whether the number is good news. Accounting uses two words for the two sides of every account.
- A debit is an amount written on the left side of an account or in the left amount column of a journal entry; whether it increases or decreases the account depends on the account's type.
- A credit is an amount written on the right side of an account or in the right amount column of a journal entry; whether it increases or decreases the account depends on the account's type.
That is the whole meaning. To "debit Cash" is to write an amount on the left of the Cash account. To "credit Common Stock" is to write an amount on the right of Common Stock. Neither word means increase, decrease, good, or bad on its own.
Worked example — one transaction, two sides. On Day 1 the founders invest $30,000 cash in exchange for 30,000 shares of common stock with a $1 par value. That is transaction 1. The shop writes $30,000 on the left of Cash and $30,000 on the right of Common Stock. Both accounts went up. One went up on the left and the other on the right. In words: the shop now holds $30,000 of cash, and the owners hold a $30,000 claim on the shop.
Here is a fresh case with no dollar amounts, from a campus bookstore's opening week. The bookstore pays its first month's rent in cash. Rent Expense goes up and Cash goes down. Rent Expense is debited, and Cash is credited. The debit made one account bigger. The credit made the other account smaller. The words did not tell you which; the type of account did.
Misconception check. Students often think "debit" means increase and "credit" means decrease, or that a credit is good news because a store credit or a credit score feels positive. Neither is true in the ledger. The cure: read debit as "left" and credit as "right", every time, and let the next section's rules tell you whether left or right makes an account grow.
3. Learn which side makes each account grow: normal balances
Think of two kinds of jars on a shelf. One kind fills from the left; the other fills from the right. Once you know which jar you are holding, you know which side adds to it and which side takes away. Every account is one kind or the other.
An account's normal balance is the side, debit or credit, on which it increases and on which its balance usually sits:
- Assets, expenses, and dividends increase with debits. Their normal balance is a debit.
- Liabilities, common stock, retained earnings, and revenues increase with credits. Their normal balance is a credit.
Why this pattern? It follows the equation. Assets sit on the left of Assets = Liabilities + Stockholders' Equity, so they grow on the left. Liabilities and equity sit on the right, so they grow on the right. Revenues raise retained earnings, so they grow on the right like equity. Expenses and dividends lower retained earnings, so they grow on the opposite side, the left.
Here are the shop's 12 accounts sorted by normal balance.
| Account | Type | Increases with | Normal balance |
|---|---|---|---|
| Cash | Asset | Debit | Debit |
| Accounts Receivable | Asset | Debit | Debit |
| Supplies | Asset | Debit | Debit |
| Prepaid Insurance | Asset | Debit | Debit |
| Equipment | Asset | Debit | Debit |
| Accounts Payable | Liability | Credit | Credit |
| Unearned Revenue | Liability | Credit | Credit |
| Common Stock | Stockholders' equity | Credit | Credit |
| Dividends | Reduces retained earnings | Debit | Debit |
| Service Revenue | Revenue | Credit | Credit |
| Rent Expense | Expense | Debit | Debit |
| Wages Expense | Expense | Debit | Debit |
One more kind of account belongs here. A contra account is an account that reduces another account and so carries the opposite balance. Accumulated Depreciation and Allowance for Doubtful Accounts are contra assets with credit balances. They sit beside an asset and pull its reported amount down. The shop has no contra account in Month 1. You meet the first one in Week 4.
Worked example — reading a direction. On Day 18 the shop does $1,800 of repairs for a delivery company on account. That is transaction 7. Accounts Receivable, an asset, goes up, so it is debited $1,800. Service Revenue goes up, so it is credited $1,800. In words: the delivery company now owes the shop $1,800, and the shop has earned $1,800 of revenue even though no cash has arrived.
Misconception check. Students often think that because Dividends lowers equity, it must carry a credit balance like equity does. It does not. Dividends grows on the debit side, because it works against retained earnings, and retained earnings grows on the credit side. The same logic explains expenses. The cure: ask "does this account add to equity or take away from it?" before you pick a side.
4. Keep debits equal to credits: double-entry bookkeeping
Picture a seesaw with a weight on each end. Add weight to one end and the seesaw tips, unless you add the same weight to the other end. Every transaction in accounting works like that. Something on the left always matches something on the right.
Double-entry bookkeeping is the method of recording every transaction in at least two accounts so that the total of its debits equals the total of its credits, which keeps the accounting equation in balance.
The method is old. Luca Pacioli's Summa de arithmetica, geometria, proportioni et proportionalita, printed in Venice in 1494, contains the first published description of double-entry bookkeeping. Pacioli described the method; he did not invent it. Merchants were already using it, and his book put it in print.
Worked example — checking the balance. On Day 30 the shop pays a $500 cash dividend to its shareholders. That is transaction 12. Dividends is debited $500 and Cash is credited $500. Debits $500 = credits $500. In words: $500 of cash left the shop as a distribution to the owners, and it is not an expense, because it did not help earn any revenue.
Sometimes one event touches three or more accounts. Such an entry is a compound entry: a journal entry that affects more than two accounts; it lists all of its debits before all of its credits, and its debits still total the same as its credits. All 12 of the shop's Month 1 transactions happen to touch exactly two accounts, so you will practice compound entries in later weeks.
Misconception check. Students often think "double entry" means each transaction is written down twice in the same place. It does not. It means each transaction has at least two parts, at least one debit and at least one credit, recorded once, with equal totals. The cure: count the sides, not the copies.
5. Record it in order: the journal, the chart of accounts, posting, and the ledger
A coach keeps a play-by-play log during the game and a season stat sheet for each player. The log comes first, in time order. The stat sheets are filled in from the log. Accounting keeps the same two kinds of record.
- The journal is the book of original entry, where each transaction is first recorded in date order as a journal entry with its debits, its credits, and a short explanation.
- A journal entry is the record of one transaction in the journal: the date or transaction number, each debited account and amount, each credited account and amount, and a one-line explanation, with total debits equal to total credits.
- The chart of accounts is the list of every account a business uses, usually in the order assets, liabilities, stockholders' equity, revenues, and expenses, so each account is always called by the same name.
- Posting is copying each amount from a journal entry to the same side of the named account in the ledger, with a reference back to the entry it came from.
- The general ledger is the full set of a business's accounts, each showing the amounts posted to it from the journal and its current balance.
A journal entry has a fixed layout. The debited account comes first, flush left, with its amount in the debit column. The credited account comes next, indented, with its amount in the credit column. A one-line explanation closes the entry.
Worked example — the shop's first entry. Transaction 1, Day 1, in journal form:
| Transaction | Account | Debit | Credit |
|---|---|---|---|
| 1 (Day 1) | Cash | $30,000 | |
| Common Stock | $30,000 | ||
| Founders invest cash for 30,000 shares of common stock. |
Then you post it. You find Cash in the ledger and write $30,000 on its left side, with "1" beside it. You find Common Stock and write $30,000 on its right side, with "1" beside it. The journal tells the story in time order; the ledger tells you where each account stands.
Here is a fresh case with no dollar amounts. A landscaping company borrows from a bank to buy a riding mower and signs a loan note. In its journal, Equipment is debited, because an asset went up, and Notes Payable is credited, indented, because a liability went up. The explanation line reads "Bought a mower with a bank loan." Both accounts come from the company's own chart of accounts, so the names never change from entry to entry.
Misconception check. Students often think the journal and the ledger are the same record, written twice for no reason. They are not. The journal is organized by time, one entry per event. The ledger is organized by account, one page per item. The cure: ask "am I looking for what happened on Day 22, or for how much cash the shop has?" The first question goes to the journal; the second goes to the ledger.
6. Journalize and post the running case
Now you record the whole month. This is the same Dataset A you analyzed last week, the bicycle shop's 12 Month 1 transactions (illustrative). Each row below is one journal entry, with its debit first and its credit indented.
| Transaction | Account | Debit | Credit |
|---|---|---|---|
| 1 (Day 1) | Cash | $30,000 | |
| Common Stock | $30,000 | ||
| 2 (Day 2) | Equipment | $12,000 | |
| Cash | $12,000 | ||
| 3 (Day 3) | Supplies | $900 | |
| Accounts Payable | $900 | ||
| 4 (Day 4) | Prepaid Insurance | $2,400 | |
| Cash | $2,400 | ||
| 5 (Day 6) | Cash | $1,200 | |
| Unearned Revenue | $1,200 | ||
| 6 (Day 15) | Cash | $3,500 | |
| Service Revenue | $3,500 | ||
| 7 (Day 18) | Accounts Receivable | $1,800 | |
| Service Revenue | $1,800 | ||
| 8 (Day 20) | Rent Expense | $1,500 | |
| Cash | $1,500 | ||
| 9 (Day 22) | Accounts Payable | $600 | |
| Cash | $600 | ||
| 10 (Day 25) | Cash | $1,000 | |
| Accounts Receivable | $1,000 | ||
| 11 (Day 28) | Wages Expense | $1,600 | |
| Cash | $1,600 | ||
| 12 (Day 30) | Dividends | $500 | |
| Cash | $500 |
Each entry's explanation is the Week 2 event you already know. In the first half of the month, the founders invest, the shop buys equipment and supplies, it prepays insurance, a cycling club pays in advance, and walk-in customers pay for repairs. In the second half, you bill the delivery company, pay rent, pay part of the supplier's bill, collect part of the delivery company's bill, pay the mechanic, and pay a dividend.
Next you post. Cash is the busiest account, so start there.
Worked example — the Cash T-account. You post all ten Cash amounts, each with its transaction number, then you total each side.
| Debit (left side) | Credit (right side) |
|---|---|
| 1: 30,000 | 2: 12,000 |
| 5: 1,200 | 4: 2,400 |
| 6: 3,500 | 8: 1,500 |
| 10: 1,000 | 9: 600 |
| 11: 1,600 | |
| 12: 500 | |
| Total: 35,700 | Total: 18,600 |
| Balance: 17,100 |
Step by step:
- Add the left side: 30,000 + 1,200 + 3,500 + 1,000 = $35,700 (transactions 1, 5, 6, and 10).
- Add the right side: 12,000 + 2,400 + 1,500 + 600 + 1,600 + 500 = $18,600 (transactions 2, 4, 8, 9, 11, and 12).
- Subtract the smaller side from the larger: 35,700 − 18,600 = $17,100, a debit balance.
Cash is an asset, so a debit balance is exactly where it should sit. In words: the shop took in $35,700 and paid out $18,600, leaving $17,100 of cash at the end of Month 1.
The other accounts with amounts on both sides work the same way:
- Accounts Receivable: 1,800 − 1,000 = $800, a debit balance.
- Accounts Payable: 900 − 600 = $300, a credit balance.
- Service Revenue has two amounts on the same side: 3,500 + 1,800 = $5,300, a credit balance.
Every other account has a single amount, so its balance is that amount on that side.
Misconception check. Students often think an account's balance is the total of its debits, or the bigger of its two totals. It is the difference between the two sides, on the side of the larger one. Cash's debit total is $35,700, but its balance is $17,100. The cure: always subtract, and then check that the balance sits on the account's normal side. A Cash balance on the credit side is a warning sign.
7. Check the totals: the trial balance
Before you hand in a group project, you check that every page is there. A trial balance is that check for the ledger. It does not judge each entry; it asks one quick question about all of them at once.
A trial balance is a list of every ledger account and its balance in a debit column or a credit column, used to check that total debits equal total credits; it does not prove that every transaction was recorded correctly. An unadjusted trial balance is the trial balance prepared from the ledger after the period's transactions are posted and before any end-of-period adjustments are recorded.
Worked example — the shop's unadjusted trial balance. List each account in chart-of-accounts order. Put each balance in the column of its side.
| Account | Debit | Credit |
|---|---|---|
| Cash | $17,100 | |
| Accounts Receivable | $800 | |
| Supplies | $900 | |
| Prepaid Insurance | $2,400 | |
| Equipment | $12,000 | |
| Accounts Payable | $300 | |
| Unearned Revenue | $1,200 | |
| Common Stock | $30,000 | |
| Dividends | $500 | |
| Service Revenue | $5,300 | |
| Rent Expense | $1,500 | |
| Wages Expense | $1,600 | |
| Totals | $36,800 | $36,800 |
Now foot each column yourself:
- Debit column: 17,100 + 800 + 900 + 2,400 + 12,000 + 500 + 1,500 + 1,600 = $36,800.
- Credit column: 300 + 1,200 + 30,000 + 5,300 = $36,800.
The two totals agree. In words: after posting all 12 entries, the shop's ledger holds $36,800 of debit balances and $36,800 of credit balances, so no entry was posted with one side missing.
Misconception check. Students often think the trial balance total is the size of the business, or the same as total assets. It is neither. The $36,800 includes expenses and dividends on the debit side and revenue on the credit side. Last week's total assets were $33,200, a different number for a different question. The cure: read the trial balance only as a check that the two sides agree.
8. Know what the check cannot catch
Spell-check finds a misspelled word. It does not notice that you typed "their" where you meant "there", because both are real words. A trial balance has the same blind spot. It catches an entry with unequal sides. It cannot see an entry that is balanced but wrong.
Three errors leave a trial balance in balance:
- An omitted entry: a transaction that never reaches the journal adds nothing to either column.
- A duplicated entry: a transaction recorded twice adds the same amount to both sides twice.
- A posting to the wrong account of the same type: moving an amount from one debit account to another debit account leaves the debit total unchanged.
Worked example — two balanced mistakes. First, suppose the shop never journalized transaction 9, the $600 payment to its supplier. Cash would be 17,100 + 600 = $17,700, and Accounts Payable 300 + 600 = $900. Each column would total 36,800 + 600 = $37,400. The columns still agree, but two balances are wrong.
Second, suppose transaction 11's $1,600 of wages were posted to Rent Expense instead. Rent Expense would show 1,500 + 1,600 = $3,100, and Wages Expense $0. Each column would still total $36,800. The totals are right, yet a reader would think the shop's rent was more than double what it really was.
Here is an honesty note about this check. The trial balance is a useful screen, and it is fast, but it is not an audit. A lender reading the shop's records needs every transaction recorded, recorded once, and recorded in the right account. Only careful review of each entry gives that.
So say it plainly. The shop's unadjusted trial balance shows $36,800 of debits and $36,800 of credits. That proves the ledger is in balance, but not that every transaction was recorded, recorded once, or recorded in the right account.
Pause and choose one of these to think through, whichever you prefer:
- (a) Describe a time you checked a total, such as a receipt or a bank app, that added up but still hid a mistake. Which of the three errors above was it most like?
- (b) Imagine you run the bicycle shop. Name one habit you would use each month to catch an omitted entry that the trial balance would miss.
Misconception check. Students often think a balanced trial balance proves the books are correct. It proves only that total debits equal total credits. The cure: treat a balanced trial balance as "no one-sided mistakes", never as "no mistakes". One caveat runs the other way too: an unbalanced trial balance tells you something is wrong, but not where.
Key terms
- account — The separate record a business keeps for one item, such as Cash or Service Revenue, showing every increase and decrease in that item and its balance. (first used: 1. Give each item its own record: the account)
- T-account — A simple sketch of one account shaped like the letter T: the account's title sits on top, debits are written on the left side, and credits on the right side. (first used: 1. Give each item its own record: the account)
- debit — An amount written on the left side of an account or in the left amount column of a journal entry; whether it increases or decreases the account depends on the account's type. (first used: 2. Read the two sides: debit and credit)
- credit — An amount written on the right side of an account or in the right amount column of a journal entry; whether it increases or decreases the account depends on the account's type. (first used: 2. Read the two sides: debit and credit)
- normal balance — The side, debit or credit, on which an account increases and on which its balance usually sits: assets, expenses, and dividends have debit normal balances, while liabilities, common stock, retained earnings, and revenues have credit normal balances. (first used: 3. Learn which side makes each account grow: normal balances)
- contra account — An account that reduces another account and so carries the opposite balance; Accumulated Depreciation and Allowance for Doubtful Accounts are contra assets with credit balances. (first used: 3. Learn which side makes each account grow: normal balances)
- double-entry bookkeeping — The method of recording every transaction in at least two accounts so that the total of its debits equals the total of its credits, which keeps the accounting equation in balance. (first used: 4. Keep debits equal to credits: double-entry bookkeeping)
- compound entry — A journal entry that affects more than two accounts; it lists all of its debits before all of its credits, and its debits still total the same as its credits. (first used: 4. Keep debits equal to credits: double-entry bookkeeping)
- journal — The book of original entry, where each transaction is first recorded in date order as a journal entry with its debits, its credits, and a short explanation. (first used: 5. Record it in order: the journal, the chart of accounts, posting, and the ledger)
- journal entry — The record of one transaction in the journal: the date or transaction number, each debited account and amount, each credited account and amount, and a one-line explanation, with total debits equal to total credits. (first used: 5. Record it in order: the journal, the chart of accounts, posting, and the ledger)
- chart of accounts — The list of every account a business uses, usually in the order assets, liabilities, stockholders' equity, revenues, and expenses, so each account is always called by the same name. (first used: 5. Record it in order: the journal, the chart of accounts, posting, and the ledger)
- posting — Copying each amount from a journal entry to the same side of the named account in the ledger, with a reference back to the entry it came from. (first used: 5. Record it in order: the journal, the chart of accounts, posting, and the ledger)
- general ledger — The full set of a business's accounts, each showing the amounts posted to it from the journal and its current balance. (first used: 5. Record it in order: the journal, the chart of accounts, posting, and the ledger)
- trial balance — A list of every ledger account and its balance in a debit column or a credit column, used to check that total debits equal total credits; it does not prove that every transaction was recorded correctly. (first used: 7. Check the totals: the trial balance)
- unadjusted trial balance — The trial balance prepared from the ledger after the period's transactions are posted and before any end-of-period adjustments are recorded. (first used: 7. Check the totals: the trial balance)
Summary
- Debit means the left side of an account and credit the right side; neither means increase or decrease on its own.
- Assets, expenses, and dividends grow with debits; liabilities, common stock, retained earnings, and revenues grow with credits.
- A contra account carries the opposite balance of the account it reduces.
- Every journal entry has equal debits and credits, the method Pacioli first described in print in 1494.
- The journal records events in time order; posting copies them into the ledger, one account at a time.
- An account's balance is the larger side minus the smaller side, and it should sit on the normal side.
- The shop's unadjusted trial balance shows $36,800 on each side.
- A balanced trial balance cannot catch an omitted entry, a duplicated entry, or a posting to the wrong account of the same type.
Check your understanding
Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.
- A dog-walking service buys a new set of leashes on account. Name the account debited and the account credited, and say whether each one goes up or down.
- A student club collects cash from members for a trip it has not run yet. Which account is credited, and what is that account's normal balance?
- A café's bookkeeper records the month's internet bill twice by mistake. Explain why the café's trial balance still balances.
- A friend says, "Credit Cash means the business got more cash." Explain what is wrong with the statement, using the normal balance of Cash.
Answers (worked reasoning — read after attempting)
- Leashes are a resource the service will use, so an asset account such as Supplies goes up. Assets grow with debits, so Supplies is debited. The service now owes the seller, so Accounts Payable, a liability, goes up. Liabilities grow with credits, so Accounts Payable is credited. Both accounts went up, one on each side.
- The club has been paid for work it has not done, so it owes the members the trip. That obligation is Unearned Revenue, a liability, and it is credited because liabilities grow on the credit side. Its normal balance is a credit. Cash is debited.
- A duplicated entry adds the same amount to the debit column (the expense) and to the credit column (Cash or a payable) a second time. Both totals rise by the same amount, so they still agree. The error is real, yet the trial balance cannot see it.
- Cash is an asset, and assets increase with debits. A credit to Cash goes on the right side, the decreasing side, so "credit Cash" means cash went out, not in. The statement reads "credit" as good news, which the ledger never does.
Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz; next week the adjusting entries rule moves revenue and expenses into the right period.
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