Lesson 4 – The Double-Entry System and the Accounting Process
⊞ Financial Accounting
📅 April 20, 2026
Beginner
FAC1502 — Study Unit 4: The Double-Entry System and the Accounting Process
FAC1502 — Study Unit 4
The Double-Entry System and the Accounting Process
This is the most important study unit in FAC1502. Everything that comes before it is theory. This is where accounting becomes a working system — where transactions are analysed, recorded in ledger accounts, tested against the trial balance, and finally assembled into financial statements.
Every financial transaction affects at least two accounts. This is the foundation of the double-entry system: for every entry made, the BAE must remain balanced. The system works because of one immovable rule:
The cardinal rule: The total of all debit entries must always equal the total of all credit entries. If they don’t, an error has been made.
To make a correct double-entry, you need to:
Analyse the transaction — what is its effect on the BAE?
Identify which accounts are affected
Determine which account is debited and which is credited
Confirm that the debit amount equals the credit amount
Note the date and the contra account (the other account in the entry)
Contra account: In any ledger entry, the “details” column shows the name of the other account involved in the transaction. This is the contra account. It tells you where the other half of the entry went.
2. Types of transactions and their BAE effects
Every transaction falls into one of two broad categories: those that affect only assets, equity and liabilities — and those that also involve income or expenditure. We follow the Fix-‘n-Mat carpet-cleaning business through February 20.1.
Category A: Transactions affecting assets, equity and liabilities only
1
Capital contribution
1 Feb 20.1
T Tom withdraws R130 000 from personal savings and deposits it into Fix-‘n-Mat’s bank account as opening capital.
Debit (increase)
Bank +R130 000
Credit (increase)
Capital +R130 000
Bank
Dr
Cr
Capital130 000
Capital
Dr
Cr
Bank130 000
Asset increases → Debit the asset account. Equity increases → Credit the equity account. The BAE: A R130k = E R130k + L R0. ✓
2
Acquisition of a loan
2 Feb 20.1
Fix-‘n-Mat obtains a R25 000 bank loan from ABC Bank (repayable over more than a year). Paid into the business bank account.
Debit (increase)
Bank +R25 000
Credit (increase)
Loan: ABC Bank +R25 000
Bank
Dr
Cr
Loan:ABC Bank25 000
Loan: ABC Bank
Dr
Cr
Bank25 000
Asset up → Debit. Liability up → Credit. Both sides of the BAE increase equally. ✓
3
Purchase of asset for cash
6 Feb 20.1
Fix-‘n-Mat buys equipment from XY Furnishers for R100 000 and pays by cheque.
Debit (increase)
Equipment +R100 000
Credit (decrease)
Bank −R100 000
Equipment
Dr
Cr
Bank100 000
Bank
Dr
Cr
Equipment100 000
Asset swap: one asset up, another down. Total assets unchanged. Equity and liabilities unaffected. ✓
4
Buying an asset on credit
10 Feb 20.1
Fix-‘n-Mat buys furniture for R2 000 on credit from Joc Limited.
Debit (increase)
Furniture +R2 000
Credit (increase)
Creditors (Joc Ltd) +R2 000
Asset up → Debit. Liability up → Credit. Transaction recorded on the date of purchase, not when paid. This is the accrual principle. ✓
5
Payment to a creditor
11 Feb 20.1
Fix-‘n-Mat pays Joc Limited’s account of R2 000 in full.
Debit (decrease)
Creditors −R2 000
Credit (decrease)
Bank −R2 000
Liability decreases → Debit the liability account. Asset decreases → Credit the asset account. Both sides of the BAE decrease equally. ✓
6
Drawings by the owner
12 Feb 20.1
T Tom withdraws R1 000 from the business bank account for personal use.
Debit (increase)
Drawings +R1 000
Credit (decrease)
Bank −R1 000
Drawings ≠ Expense. Drawings are recorded in a separate Drawings account and reduce capital (equity). They are not a business expense and do not appear in the income statement. They reduce equity in the Statement of Changes in Equity.
Category B: Transactions involving income and expenditure
7
Income received in cash
13 Feb 20.1
Fix-‘n-Mat cleans carpets for client S Silver and receives a cheque for R1 000.
Debit (increase)
Bank +R1 000
Credit (increase)
Income (Fees) +R1 000
Income increases equity → Credit the income account. Asset received → Debit the asset account. ✓
8
Expenditure paid in cash
16 Feb 20.1
Fix-‘n-Mat pays wages of R800 by cheque.
Debit (increase)
Wages +R800
Credit (decrease)
Bank −R800
Expenses decrease equity → Debit the expense account. Asset paid out → Credit the asset account. ✓
9
Income earned on credit
18 Feb 20.1
Fix-‘n-Mat provides services worth R6 000 to C Canon on credit. Cash not yet received.
Debit (increase)
Debtors +R6 000
Credit (increase)
Income (Fees) +R6 000
Accrual principle: Income is recognised when earned (when the service is rendered), not when cash is received. C Canon is a debtor — a client who owes money to the entity.
10
Expenditure incurred on credit
21 Feb 20.1
Fix-‘n-Mat places an advertisement in a newspaper for R200. Payment due in 30 days.
Debit (increase)
Advertisements +R200
Credit (increase)
Creditors +R200
Accrual principle again: The expense is recorded on 21 February when incurred — not when the cash is paid in 30 days. The newspaper becomes a creditor.
11
Receipt from a debtor
28 Feb 20.1
C Canon settles part of his account — pays R2 000 of the R6 000 owed.
Debit (increase)
Bank +R2 000
Credit (decrease)
Debtors −R2 000
Asset swap again — cash up, debtors down. No income is recorded here because the income was already recorded on 18 Feb when the service was rendered. ✓
3. The debit and credit rules
These are the rules you must memorise absolutely. Every account has a left side (Dr — debit) and a right side (Cr — credit). The rules below determine when you debit and when you credit each type of account.
Assets
To increaseDebit (Dr)
To decreaseCredit (Cr)
Normal balance: Debit
Examples: Bank, Debtors, Equipment, Inventory, Vehicles
Equity & Liabilities
To increaseCredit (Cr)
To decreaseDebit (Dr)
Normal balance: Credit
Examples: Capital, Loan, Creditors, VAT payable
Income
To increaseCredit (Cr)
To decreaseDebit (Dr)
Normal balance: Credit
Examples: Fees earned, Sales, Rent received, Interest received
Memory shortcut: DEAD CRoW Debit = Expenses, Assets, Drawings | CRedit = owner’s equity (Capital), What you owe (Liabilities) + Income
4. Ledger accounts (T-accounts)
In practice, it is impossible to update the BAE table after every transaction — a large business might have thousands of transactions a day. Instead, we open a separate ledger account for every asset, liability, equity, income and expense item. Each account is known as a T-account because of its shape.
Account Name | Folio No.
Dr (Debit side)
Cr (Credit side)
Date & DetailsAmount
← Increases for assets & expenses
Date & DetailsAmount
Increases for equity, liabilities & income →
The folio number is the page or reference number assigned to each account in the ledger. The details column always shows the name of the contra account — the other account affected by the same transaction.
All ledger accounts together form the General Ledger — the master book of accounts for the entity. Every account in the trial balance comes from the general ledger.
5. Balancing an account
At the end of each period, every account is balanced — the difference between the total debits and total credits is calculated and carried forward.
c/d = carried down: the balance figure used to make both sides equal, placed on the smaller side
b/d = brought down: the same figure appears on the opposite side in the next period — this is the opening balance
Bank
Dr
Cr
Capital130 000
Loan25 000
Fees earned1 000
Debtors2 000
Total158 000
b/d Balance54 200
Equipment100 000
Creditors2 000
Drawings1 000
Wages800
c/d Balance54 200
Total158 000
Debtors (C Canon)
Dr
Cr
Fees earned6 000
Total6 000
b/d Balance4 000
Bank2 000
c/d Balance4 000
Total6 000
Key rule: The closing balance b/d of the previous period becomes the opening balance of the next period. The total on both sides must always be equal after balancing.
6. The general ledger
In the general ledger, all transactions relating to the same account are combined into a single account — not one T-account per transaction. The “details” column in each entry shows the contra account name.
Golden rules of the general ledger:
▸ Assets (e.g. Bank) increase on the Debit side and decrease on the Credit side.
▸ Equity & Liabilities (e.g. Capital, Creditors) increase on the Credit side and decrease on the Debit side.
▸ Income (e.g. Fees earned) is credited to the income account.
▸ Expenses (e.g. Wages) are debited to the expense account.
Income and expense accounts are called nominal accounts. They accumulate for the period and are then closed off to determine profit or loss. Asset, liability and equity accounts are real accounts — their balances carry forward indefinitely.
7. The trial balance
After all ledger accounts have been balanced, a trial balance is prepared. It is simply a list of all the balances brought down (b/d) from the general ledger, arranged in debit and credit columns.
Purpose of the trial balance: To test the arithmetic accuracy of the ledger. If the total of the debit column equals the total of the credit column, the double-entry has been recorded correctly — at least arithmetically.
The trial balance does NOT detect all errors — for example, recording the right amount in the wrong account would still produce a balanced trial balance.
FIX-‘N-MAT — TRIAL BALANCE AS AT 28 FEBRUARY 20.1
Account
Dr (R)
Cr (R)
Bank
54 200
—
Equipment
100 000
—
Furniture
2 000
—
Debtors control
4 000
—
Capital
—
130 000
Drawings
1 000
—
Loan: ABC Bank
—
25 000
Creditors control
—
200
Wages
800
—
Advertisements
200
—
Fees earned (income)
—
7 000
Totals
162 200
162 200
Which side does each account go on?
Assets and expenses → Debit column (they have debit normal balances).
Equity, liabilities and income → Credit column (they have credit normal balances).
Drawings → Debit column (it reduces equity).
8. Financial statements from the trial balance
The trial balance is the source document for all three financial statements. Each statement uses a different subset of accounts.
Statement of Profit or Loss
Uses only the income and expense accounts from the trial balance (the nominal accounts).
Fix-‘N-Mat
Statement of Profit or Loss and Other Comprehensive Income for the month ended 28 February 20.1
Revenue
Fees earned7 000
Distribution, administrative and other expenses
Wages(800)
Advertisements(200)
Profit for the period6 000
Other comprehensive income—
Total comprehensive income for the period6 000
Statement of Changes in Equity
Shows how equity moved from the opening balance to the closing balance during the period.
Fix-‘N-Mat
Statement of Changes in Equity for the month ended 28 February 20.1
Balance at 1 February 20.1130 000
Total comprehensive income for the period6 000
Drawings(1 000)
Balance at 28 February 20.1135 000
The closing equity balance (R135 000) must match the Capital figure in the Statement of Financial Position. This is the key cross-check between the two statements.
Statement of Financial Position
Uses the asset, liability and equity accounts. Note how assets are split into current and non-current, and liabilities likewise.
Fix-‘N-Mat
Statement of Financial Position as at 28 February 20.1
Assets
Non-current assets102 000
Property, plant and equipment (Equipment + Furniture)102 000
Current assets58 200
Trade and other receivables (Debtors)4 000
Cash and cash equivalents (Bank)54 200
Total assets160 200
Equity and Liabilities
Total equity135 000
Capital135 000
Non-current liabilities25 000
Long-term borrowings (Loan: ABC Bank)25 000
Current liabilities200
Trade and other payables (Creditors)200
Total equity and liabilities160 200
The flow from trial balance to financial statements:
Trial Balance → Income & Expense accounts → Statement of Profit or Loss → Profit/loss → Statement of Changes in Equity → Closing equity → Statement of Financial Position
9. Transaction analyser
Practice identifying the correct debit and credit for each transaction type.
Identify the double-entry
Scenario 1 of 6
10. Quick quiz
Twelve questions covering the full study unit. No notes — test yourself first.