How does a transaction travel from source document to ledger balance?
Record business transactions through journals and post them to ledger accounts to prepare a trial balance
Transactions flow from source documents into journals, are posted to ledger accounts, and are summarised in a trial balance. This is the recording cycle that produces reliable financial information.
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What this dot point is asking
You need to record transactions using the general journal, post them to ledger accounts, balance those accounts, and extract a trial balance.
The recording cycle
The accounting cycle for recording moves in a clear order:
- Source documents (invoices, receipts, cheque butts, bank statements) provide evidence of a transaction.
- Journals record the transaction in date order, showing the accounts debited and credited.
- Ledger accounts collect all entries for each individual account.
- Trial balance lists every ledger balance to check that debits equal credits.
This order matters because each step relies on the one before it. Recording from source documents satisfies the verifiability of information.
The general journal
A journal entry names the account debited first, then the account credited (indented), with a narration explaining the transaction. The debit total equals the credit total for every entry.
Posting to the ledger
Each journal line is posted to its ledger account. A ledger account (T-account) has debits on the left and credits on the right. After posting, each account is balanced: the larger side total is found, the difference (balancing figure) is entered on the smaller side to make both sides equal, and the closing balance is brought down.
The trial balance
A trial balance lists every ledger account and its closing balance in either a debit or credit column. Asset, expense and drawings accounts normally carry debit balances; liability, owner's equity and revenue accounts normally carry credit balances. The two columns must total the same amount.
What the trial balance can and cannot detect
A balanced trial balance confirms that for every transaction a debit equalled a credit. It does not prove the records are free of error. Errors of omission (a transaction left out entirely), errors of commission (right amount, wrong account of the same type), errors of principle (for example treating a capital purchase as an expense), and compensating errors can all leave the trial balance in balance. These limitations matter when interpreting the reliability of the records.
Exam-style practice questions
Practice questions written in the style of SACE Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
2023 SACE Stage 23 marksComplete the general journal entry for all elements of the sales transaction that occurred on 10 March (sold 5 sleeping bags on credit to E Bernard for $670 each, perpetual inventory system). Narrations are required.Show worked answer →
Under the perpetual system a credit sale needs two linked entries, because both revenue and the cost of the inventory are recorded at the point of sale.
Record the revenue and the receivable:
Dr Debtors control (E Bernard) 3,350.
Narration: "Credit sale of 5 sleeping bags to E Bernard at $670 each."Record the cost of the inventory sold (using the FIFO cost from the inventory card):
Dr Cost of goods sold; Cr Inventory control, for the cost of the 5 bags issued.
Narration: "Cost of 5 sleeping bags sold to E Bernard."
Markers reward both entries (selling price and cost), the debtors control account for a credit sale (not Cash), and meaningful narrations. A common error is recording only the sales entry and forgetting the COGS/inventory entry required under the perpetual system.
2024 SACE Stage 24 marksComplete the inventory control ledger account for Ground to Sky Electrical for June 2024 from the inventory card, with formal balancing required.Show worked answer →
The inventory control account in the general ledger summarises the totals from the inventory card.
Debit side (increases): opening balance, plus the cost of purchases (and the cost of any sales returns brought back into stock).
Credit side (decreases): the cost of goods sold on each sale, plus any inventory write-down for a stocktake discrepancy.
Formal balancing: total both sides, enter the closing balance on the credit side to make them equal, rule the account off, then bring the balance down on the debit side as the opening balance for the next period.
Markers reward correct debit and credit placement (purchases as debits, COGS as credits), agreement with the inventory card totals, and proper balancing with the balance carried down and brought down.
2021 SACE Stage 23 marksLindsey's Vinyl Revival uses subsidiary ledgers for inventory and debtors. Identify three advantages for a business of using subsidiary ledgers and control accounts.Show worked answer →
Any three of the following, each a distinct advantage:
- Control and accuracy. The control account balance in the general ledger should equal the total of the subsidiary ledger, so errors can be detected and isolated quickly.
- A tidy general ledger. One control account replaces hundreds of individual debtor or inventory accounts, keeping the general ledger and trial balance manageable.
- Division of labour. Different staff can keep the subsidiary ledger and the general ledger, which improves efficiency and provides an internal check that reduces fraud.
- Better information. Each debtor or inventory line has its own running balance, supporting credit control, debtor follow-up and reordering decisions.
Markers want three separate, clearly stated advantages rather than one idea reworded.