General ledger accounts and journal entries: formula sheet

Key formulas

Accounting equation

Assets = Capital + Liabilities

Capital here includes profit for the period less drawings. It must balance after every transaction.

Expanded equation

Assets = Opening capital + Income − Expenses − Drawings + Liabilities

Shows why income and expenses sit on the credit and debit sides in the way they do.

Debit rule

Debit: increase assets, increase expenses, decrease liabilities, decrease capital, decrease income

Debit entries go on the left of the ledger account.

Credit rule

Credit: increase liabilities, increase capital, increase income, decrease assets, decrease expenses

Credit entries go on the right of the ledger account.

Balance rule

Total debits = Total credits

True for every transaction and so for the whole ledger.

Drawings

Drawings: debit drawings, credit cash or bank

Drawings reduce the owner's capital, so they are a debit.

Sales day book posting

Dr Receivables control (gross total); Cr Sales (net total); Cr Sales tax payable (tax total)

Gross = net + sales tax. Post the totals, not each invoice, to the general ledger.

Purchase day book posting

Dr Purchases (net total); Dr Sales tax recoverable (tax total); Cr Payables control (gross total)

Use an expense or asset account instead of purchases if the item is not goods for resale.

Sales returns day book posting

Dr Sales returns (net); Dr Sales tax payable (tax); Cr Receivables control (gross)

Credit notes reverse the original sale.

Purchase returns day book posting

Dr Payables control (gross); Cr Purchase returns (net); Cr Sales tax recoverable (tax)

Credit notes received reduce what you owe.

Cash book posting

Receipts: Dr Bank, Cr the other account. Payments: Dr the other account, Cr Bank

Bank is an asset, so a receipt is a debit and a payment is a credit.

Ledger account balance

Balance c/d = larger side total − smaller side total

Insert balance c/d on the smaller side so both sides total the same. Show balance b/d below the totals on the side opposite to c/d, which is the larger side, as the first line of the next period.

Balancing rule

Balance = larger side total − smaller side total

Write it on the smaller side as c/d, so both sides total the same.

Brought down side

b/d goes on the opposite side to c/d

If c/d is on the credit side, b/d is a debit balance, and vice versa.

Debit rule

Debit: assets ↑, expenses ↑, liabilities ↓, equity ↓, income ↓

Use this to decide the side of each posting.

Credit rule

Credit: liabilities ↑, equity ↑, income ↑, assets ↓, expenses ↓

Every debit has an equal credit.

Trial balance check

Total debit balances = total credit balances

A match shows the ledger is arithmetically consistent. It does not prove every entry is correct.

Basic rule

Total debits = Total credits

Every journal entry must balance. Use it to check your answer.

Debit and credit effects

Debit: increase assets and expenses, decrease liabilities, equity and income. Credit: the opposite.

Use this to decide each side of the entry.

Journal layout

Dr Account A amount / Cr Account B amount / Narrative

Debit line first, credit line indented or second.

Opening entry

Dr Assets; Cr Liabilities; Cr Capital (balancing figure)

Capital = assets − liabilities.

Disposal of non-current asset

Profit or loss = Proceeds − Carrying amount

Carrying amount = cost − accumulated depreciation at disposal date.

Disposal entries

Dr Disposals cost; Cr Asset cost. Dr Accumulated depreciation; Cr Disposals. Dr Bank/Receivable; Cr Disposals.

The balance on the disposals account is the profit (credit) or loss (debit).

Capital expenditure rule

Asset bought or improved, or cost to bring it into use → Dr Non-current asset

Includes delivery, installation and legal costs. Shown in the statement of financial position and depreciated.

Revenue expenditure rule

Running cost or repair → Dr Expense account

Reduces profit in the period. Repairs restore an asset; improvements add capability and are capital.

Capital introduced (cash)

Dr Bank; Cr Capital

Increases equity. Not income, so no entry in profit or loss.

Drawings (cash)

Dr Drawings; Cr Bank

Closed to capital at the year end. Not an expense.

Drawings (goods)

Dr Drawings; Cr Purchases (or Inventory)

Use the cost of the goods, not the selling price.

Closing capital

Closing capital = Opening capital + Capital introduced + Profit − Drawings

Use a loss with a minus sign instead of profit.

Credit purchase and sale of goods

Purchase: Dr Purchases, Cr Payables. Sale: Dr Receivables, Cr Sales

Use Bank instead of Payables or Receivables if paid in cash.

Expense charge to profit or loss

Cash paid + closing accrual + opening prepayment − opening accrual − closing prepayment

Use this to find the P&L charge directly. Accruals at the end add to cost, prepayments at the end reduce it.

Income recognised

Cash received + closing accrued income + opening deferred income − opening accrued income − closing deferred income

Mirror of the expense rule. Check which side each balance sits on.

Accrual journal

Dr Expense; Cr Accruals (liability)

Reverse the logic for accrued income: Dr Accrued income (asset); Cr Income.

Prepayment journal

Dr Prepayments (asset); Cr Expense

For deferred income: Dr Income; Cr Deferred income (liability).

Irrecoverable debt write-off

Dr Irrecoverable debts expense; Cr Receivables

Debt recovered after write-off: Dr Bank; Cr Irrecoverable debts expense (or recovered account).

Allowance for receivables

Required allowance = receivables (after write-offs) × allowance %; charge = required allowance − existing allowance

An increase is Dr Expense, Cr Allowance. A decrease is Dr Allowance, Cr Expense. Never apply the percentage before deducting write-offs.

Quick revision

• Every transaction has at least one debit and one credit of equal value.
• Debit increases assets and expenses. Credit increases liabilities, capital and income.
• Debit decreases liabilities, capital and income. Credit decreases assets and expenses.
• Books of prime entry are where transactions are first recorded, before posting to the ledger.
• To balance an account, total the larger side, put the difference on the smaller side, then bring it down on the opposite side.
• A debit balance on an asset or expense account is normal. A credit balance on a liability or income account is normal.
• A journal shows the debit, the credit and a narrative. It is used for non-routine items.
• Capital expenditure buys or improves non-current assets. Revenue expenditure covers day-to-day running costs.
• An accrual is an expense incurred but not yet paid. Add it to the expense and show a liability.
• A prepayment is an expense paid in advance. Deduct it from the expense and show a current asset.
• Expense for the period = cash paid + closing accrual - opening accrual + opening prepayment - closing prepayment.
• Check the question wording: debit or credit, increase or decrease, and which account.

Common mistakes

• Thinking debit means decrease and credit means increase. Fix: Remember that the meaning depends on the account. For your own ledger, a debit to bank increases bank. Learn the rules by account type.
• Debiting income and crediting expenses when the business earns or spends. Fix: Cash is the asset and gets the debit. The income account is the other side and gets the credit. Expenses are the reverse.
• Treating day books as part of double entry and thinking each invoice is posted twice. Fix: Remember they are lists only. The double entry happens when you post the totals to the general ledger.
• Debiting sales and crediting receivables for a credit sale. Fix: Sales are income, so credit sales. The customer owes you, so debit receivables.
• Putting the balance c/d on the larger side. Fix: The balance c/d goes on the smaller side. It makes the two sides equal.
• Putting b/d on the same side as c/d. Fix: b/d is always on the opposite side to c/d. Check it matches the account type, such as a debit for an asset.
• Reversing debit and credit on a disposal or correction. Fix: Ask whether each account is increasing or decreasing, then apply the debit and credit rule.
• Forgetting to remove accumulated depreciation when an asset is sold. Fix: Always clear both the cost and the accumulated depreciation, then take the difference to disposals.
• Treating drawings as an expense in profit or loss. Fix: Drawings are a reduction in the owner's equity. They are never charged to profit or loss.
• Treating capital introduced as income or sales. Fix: Credit Capital. Income comes only from trading activities.

Exam tips

• Write the two account names first, then add Dr or Cr. It stops you reversing the entries.
• Watch for multiple-response questions that ask for two correct entries. Select exactly the stated number.
• Expect scenario questions where the debit or credit is hidden in wording such as 'owner withdraws cash' or 'expense paid in advance'.
• In number-entry questions, check whether the answer needs a sign or a balance side.
• If you are unsure, test the entry against the accounting equation: does it keep both sides equal?
• Section A questions often ask which book a transaction is first recorded in. Memorise which items go in each day book and that the journal holds the rest.
• For multiple response questions, read the number you must select and check each option against double entry rules separately.
• In number entry questions, check whether the figure asked is net, tax or gross before you calculate.