What you’ll learn to do: Account for business transactions using double-entry bookkeeping
Let’s review what you have learned about bookkeeping so far:
- An account is a part of the accounting system used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders’ equity item, dividend, revenue, and expense. Firms set up accounts for each different business element, such as cash, accounts receivable, and accounts payable.
- A journal is a chronological (arranged in order of time) record of business transactions. A journal entry is the recording of a business transaction in the journal. A journal entry shows all the effects of a business transaction as expressed in debit(s) and credit(s) and may include an explanation of the transaction. A transaction is entered in a journal before it is entered into ledger accounts. Because each transaction is initially recorded in a journal rather than directly in the ledger, the journal is called a book of original entry.
- A ledger (general ledger) is the complete collection of all financial transactions of a company organized by account.
- The chart of accounts is a listing of the titles and numbers of all the accounts in the ledger.
These are the first three steps in the accounting cycle. Now, let’s add the fourth step: the unadjusted trial balance. We call it an “unadjusted” trial balance because later in the accounting cycle, we will be making adjustments to accounts in order to correct mistakes and to make sure everything is in compliance with Generally Accepted Accounting Principles (GAAP); but before we do that, we’ll complete the unadjusted trial balance.
Compared to analyzing transactions, creating journal entries, and posting to the ledger, the trial balance is easy. At the end of an accounting period, often at the end of a month, but certainly at the end of the year, all the ledger accounts are listed in order with ending balances. On this list, the total of all the debit balances must equal the total of all the credit balances. If they don’t, something happened in the posting process; but if they do, you will be ready to move on to adjusting journal entries, which we will explore in the next module.