Double entry & the accounting equation
Everything in FA sits on debits and credits. If this is solid, depreciation, receivables, bank rec and full statements become much easier.
Learning outcomes
- State and apply the accounting equation: Assets = Liabilities + Equity
- Record transactions using double entry (debit and credit)
- Understand how books of prime entry feed the ledger and trial balance
Core rules (memorise these)
| Account type | Increase | Decrease |
|---|---|---|
| Asset | Debit | Credit |
| Liability | Credit | Debit |
| Equity / capital | Credit | Debit |
| Income / revenue | Credit | Debit |
| Expense | Debit | Credit |
Every transaction has at least one debit and one credit of equal amount. The trial balance lists all ledger balances — if it does not balance, there is an error in the books (or a transposition when listing).
Worked example
Owner starts business with Rs. 100,000 cash. Then buys inventory Rs. 20,000 on credit.
1) Capital introduced
Debit
Cash 100,000
Credit
Capital 100,000
2) Inventory on credit
Debit
Inventory 20,000
Credit
Payables 20,000
Equation after both: Assets 120,000 = Liabilities 20,000 + Equity 100,000.
Common exam traps
- Treating drawings as an expense (drawings reduce equity / are not SoPL).
- Confusing sales returns (debit revenue / credit receivables) with purchase returns.
- Balancing the TB but still having errors that cancel (e.g. both sides wrong by same amount).
Quick quiz
1. Purchase of a machine for cash — which is correct?
Debit Non-current assets (PPE), Credit Cash. Asset up (debit), asset cash down (credit).
2. Owner takes cash drawings. Effect on the accounting equation?
Assets decrease (cash) and equity decreases (drawings). Debit Drawings, Credit Cash.
3. Why can a trial balance still balance when there are errors?
Errors of omission, commission, principle, or compensating errors do not disturb the equality of total debits and credits.
Important references
- ACCA FA syllabus & study guide
- ACCA Study Hub (official digital text + quizzes)
- IASB Conceptual Framework (context for “why” we measure)