Record transactions in the general journal and post them to ledger accounts.

What this dot point is asking

The recording process follows an orderly cycle so that information is captured once, accurately, and can be traced from start to finish. The steps are: source document, journal entry, ledger posting, and trial balance.

Source documents

Every entry should be supported by a source document, such as an invoice, receipt, cheque butt or bank statement. Source documents provide the evidence (objectivity) for the amounts recorded and the date the transaction occurred.

The general journal

The journal is the book of original entry. Each entry lists the date, the account(s) debited, the account(s) credited (indented), the dollar amounts in debit and credit columns, and a short narration explaining the transaction. The debit is always written first.

The ledger

The ledger is the collection of all individual accounts (Cash, Debtors, Sales, Wages and so on). Posting means transferring the debit and credit amounts from the journal into the matching ledger accounts. Each ledger account accumulates all the increases and decreases for that item, and its balance is the net figure.

Two common ledger formats are used:

• T-format: a two-sided account with debits on the left and credits on the right.
• Running balance format: columns for debit, credit and a running balance after each entry (the format used by most accounting software).

The trial balance

After posting, the balance of every ledger account is listed in a trial balance, with debit balances in one column and credit balances in the other. If the double-entry has been done correctly, the two columns are equal. A balanced trial balance confirms the arithmetic, but it does not prove there are no errors (for example, an entry posted to the wrong account of the same type will still balance).

Worked example

Balancing a ledger account

At period end each ledger account is balanced to find its closing figure. In a T-format account you add both sides, find the larger total, enter a balancing figure on the smaller side so both totals agree, and bring that balance down to the next period. An asset such as Cash normally has a debit balance brought down; a liability or revenue account normally has a credit balance. In a running-balance account the closing figure is simply the last balance in the balance column. These closing balances are exactly what the trial balance lists.

What a trial balance can and cannot do

A balanced trial balance confirms that total debits equal total credits, which catches one-sided postings and many arithmetic slips. It does not prove the records are error-free. Errors of omission (a transaction left out entirely), errors of principle (a cost posted to the wrong type of account), commission (right type, wrong account), original entry (the same wrong amount on both sides) and compensating errors all leave the columns equal. Knowing these limitations is why later checks - the bank reconciliation, the schedule of debtors, and the balance sheet balancing - are still needed.

From trial balance to reports

The trial balance is the bridge between recording and reporting. Once it balances, balance day adjustments are applied to produce an adjusted trial balance, and the figures are then sorted into the income statement (revenue and expense balances) and the balance sheet (asset, liability and equity balances). Because every report figure traces back through the ledger and journal to a source document, a clear, well-narrated trail makes errors easy to find and gives the reports their reliability.

Why this matters

Accurate journals and ledgers are the source of the financial statements. Errors made here flow straight through to the reports, so neat, well-narrated entries and a balanced trial balance are essential before any statements are prepared.