Two sides to every entry
Each transaction touches two places. Buying a laptop for the office with cash raises one asset, equipment, and lowers another, cash, by the same amount; taking out a bank loan raises cash and raises a liability. Recorded this way, the accounting equation, assets equal liabilities plus equity, holds after every single entry, and the debit balances across the whole ledger add up to the same figure as the credit balances. The trial balance is simply that comparison, run at the end of a period. When it fails to agree, something was posted on one side only or with mismatched amounts. When it does agree, the books can still be wrong, because an entry posted to the wrong account balances perfectly well.
- Assets grow with a debit and shrink with a credit: cash, receivables, equipment.
- Expenses also sit on the debit side, which is where rent, wages and stationery land.
- Liabilities grow with a credit and fall with a debit: loans, supplier balances, tax owed.
- Equity, the owners' capital plus retained profit, rises with a credit.
- Income, from sales to interest received, is recorded as a credit.
Five centuries of the same rules
The practice is old. ICAEW's library of historical accounting literature traces surviving examples to the commune of Genoa in the fourteenth century and to the methods of Venetian merchants, which the Franciscan mathematician Luca Pacioli described in print in 1494. The structure readers learn now is recognisably his. Double entry is the base layer of accounting and bookkeeping: the ledger it produces is what accruals adjust at the period end, what the financial statements summarise, and what explains any gap between profit and cash flow. Accounting software hides the mechanics without removing them, so someone who can reason in debits and credits can read any system, however its screens are labelled, and can find a misposted entry when the software cannot.