This guide walks the full accounting cycle: designing the chart of accounts, recording and posting entries, balancing the ledger, making period-end adjustments, and producing the income statement and balance sheet. One set of worked transactions runs through every stage so you can see how an entry becomes a balance sheet line.
It applies to anyone who posts, reviews or approves ledger entries: bookkeepers, accountants, controllers and approvers. It covers manual journal entries and the review of system-generated postings (sales, purchases, payroll, bank feeds).
Out of scope: tax return preparation, financial statement presentation and the configuration of accounting software, which follow their own procedures.
Core concepts
Every entry must keep the accounting equation in balance: total debits always equal total credits.
Assets = Liabilities + Equity
The five account types that make up the equation, and the two that feed into it:
| Account type | Definition | Examples |
|---|---|---|
| Asset | A resource the business owns or controls that is expected to bring future economic benefit | Cash, bank balances, accounts receivable, inventory, prepaid expenses, equipment, vehicles, buildings |
| Liability | An obligation the business owes to others, settled in the future by paying cash, delivering goods or providing services | Accounts payable, accrued expenses, loans, credit card balances, deferred revenue, taxes payable |
| Equity | The owners' residual claim on the business: assets minus liabilities. It grows with owner contributions and profits, and shrinks with drawings, dividends and losses | Owner's capital, share capital, retained earnings, drawings (contra) |
| Revenue | Income earned from the business's normal activities, which increases equity. Recognised when earned, not when cash is received | Sales, service fees, rental income, interest income, commission |
| Expense | The cost of resources consumed to earn revenue, which decreases equity. Recognised when incurred, not when cash is paid | Rent, salaries, utilities, depreciation, cost of goods sold, bank charges |
| Drawings / Dividends | Withdrawals of value by the owners; reduce equity but are not an expense | Cash taken by the owner, dividends declared |
| Gains and losses | Increases or decreases in equity from events outside normal operations | Profit on sale of equipment, foreign exchange loss, write-off of an asset |
How they connect: assets are what the business has; liabilities and equity show who has a claim on it. Revenue and expenses are the moving parts of equity during a period, and their net result (profit or loss) rolls into retained earnings at year end.
Profit = Revenue − Expenses
Closing equity = Opening equity + Contributions + Profit − Drawings
| Term | Meaning |
|---|---|
| General ledger (GL) | The master record of every account and every posted transaction |
| Account | A named bucket in the GL that tracks one thing (Cash, Accounts Payable, Sales Revenue) |
| Chart of accounts (COA) | The numbered list of all accounts, grouped by type; new accounts are added only with controller approval |
| Journal entry | A single balanced transaction made of two or more lines, each hitting one account |
| Debit (Dr) | The left side of an entry; increases assets and expenses, decreases liabilities, equity and revenue |
| Credit (Cr) | The right side of an entry; the mirror of a debit |
| Posting | Recording the entry in the ledger so it affects account balances |
| Trial balance | A list of all account balances at a date; its debit and credit totals must match |
| Subledger | A detailed ledger that feeds a GL control account (AR, AP, fixed assets, inventory) |
| Accounting period | The month, quarter or year an entry belongs to; closed periods cannot be posted to |
A typical account numbering convention, which you should adapt to your own chart:
| Range | Account type | Examples |
|---|---|---|
| 1000–1999 | Assets | Cash, Accounts Receivable, Inventory, Equipment |
| 2000–2999 | Liabilities | Accounts Payable, Accrued Expenses, Loans Payable |
| 3000–3999 | Equity | Owner's Capital, Retained Earnings, Drawings |
| 4000–4999 | Revenue | Sales, Service Income, Interest Income |
| 5000–5999 | Cost of goods sold | Purchases, Freight In, Direct Labour |
| 6000–6999 | Operating expenses | Rent, Salaries, Utilities, Depreciation |
The accounting cycle
Every period follows the same eight stages, and each stage in this guide has its own section below.
- Design the chart of accounts: the list of accounts every transaction will be coded to.
- Identify and analyse transactions: gather source documents and decide which accounts move.
- Record journal entries: balanced debits and credits with description and support.
- Post to the ledger: update each account's running balance.
- Prepare the unadjusted trial balance: prove debits equal credits.
- Post adjusting entries: accruals, prepayments, depreciation, provisions; then the adjusted trial balance.
- Prepare financial statements: income statement, statement of changes in equity, balance sheet.
- Close the period: zero out revenue and expense accounts into retained earnings, lock the period, and start again.
Designing the chart of accounts
A good chart is short enough to code consistently and detailed enough to answer the questions management and the tax authority ask.
Structure. Number accounts by type (the 1000–6999 ranges above), leave gaps of 10 between accounts so new ones slot in, and keep the hierarchy to three levels: type → group → account. Track detail that varies by department, project or customer with dimensions, not with extra accounts.
Rules.
- One account per distinct kind of item; do not create an account per supplier or customer (that is the subledger's job).
- Every balance-sheet account must be reconcilable to something outside the ledger.
- Separate accounts for anything reported separately on the statements or tax return (sales tax, interest, depreciation, directors' pay).
- Name accounts by what they hold, not by who uses them ("Vehicle Running Costs", not "Ahmed's Car").
- Mark each account as active or inactive; never delete an account with history.
- New accounts, renames and deactivations need controller approval and a note of the effective date.
Minimum chart for a small trading or service business
| No. | Account | Type | Normal balance |
|---|---|---|---|
| 1010 | Cash on hand | Asset | Dr |
| 1020 | Bank – current account | Asset | Dr |
| 1200 | Accounts Receivable | Asset | Dr |
| 1250 | Allowance for Doubtful Accounts | Contra-asset | Cr |
| 1300 | Input Tax Receivable | Asset | Dr |
| 1400 | Inventory | Asset | Dr |
| 1450 | Prepaid Expenses | Asset | Dr |
| 1500 | Equipment | Asset | Dr |
| 1510 | Accumulated Depreciation – Equipment | Contra-asset | Cr |
| 1990 | Suspense | Asset | Dr |
| 2010 | Accounts Payable | Liability | Cr |
| 2100 | Accrued Expenses | Liability | Cr |
| 2200 | Output Tax Payable | Liability | Cr |
| 2300 | Deferred Revenue | Liability | Cr |
| 2500 | Loan Payable | Liability | Cr |
| 3010 | Owner's Capital | Equity | Cr |
| 3020 | Owner's Drawings | Equity (contra) | Dr |
| 3100 | Retained Earnings | Equity | Cr |
| 4010 | Sales Revenue | Revenue | Cr |
| 4020 | Service Income | Revenue | Cr |
| 4900 | Other Income | Revenue | Cr |
| 5010 | Cost of Goods Sold | COGS | Dr |
| 6010 | Rent Expense | Expense | Dr |
| 6020 | Office Supplies | Expense | Dr |
| 6030 | Utilities Expense | Expense | Dr |
| 6040 | Repairs and Maintenance | Expense | Dr |
| 6050 | Depreciation Expense | Expense | Dr |
| 6100 | Salaries and Wages | Expense | Dr |
| 6200 | Bank Charges and Interest | Expense | Dr |
Debit and credit rules by account type
Memorise the normal balance of each account type; an entry increases an account on its normal-balance side and decreases it on the other.
| Account type | Normal balance | Increase with | Decrease with |
|---|---|---|---|
| Assets | Debit | Debit | Credit |
| Expenses | Debit | Debit | Credit |
| Drawings / Dividends | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Equity / Capital | Credit | Credit | Debit |
| Revenue | Credit | Credit | Debit |
Contra accounts run opposite to their parent: Accumulated Depreciation (contra-asset) and Allowance for Doubtful Accounts carry credit balances; Sales Returns and Sales Discounts (contra-revenue) carry debit balances.
A quick mnemonic: DEAD CLIC. Debits increase Expenses, Assets and Drawings; Credits increase Liabilities, Income and Capital.
Anatomy of a ledger entry
An entry is incomplete, and must be rejected at review, if any required field below is missing.
| Field | Required | Rule |
|---|---|---|
| Entry number | Yes | Sequential, system-assigned; never reused |
| Transaction date | Yes | The date the economic event occurred, not the date you record it |
| Posting period | Yes | Must be an open period; prior-period items need controller approval |
| Account number and name | Yes | From the chart of accounts; no free-text account names |
| Debit amount / Credit amount | Yes | One side per line; total debits = total credits to the cent |
| Description | Yes | What happened, who, and why; readable by someone with no context ("Oct rent – Unit 4B – Khan Properties") |
| Reference | Yes | Invoice, receipt, contract or bank reference number |
| Supporting document | Yes | Attached or filed; no entry without evidence |
| Prepared by / Date | Yes | The person who entered it |
| Reviewed by / Date | Yes for manual entries | A second person; preparer may not approve their own entry |
| Cost centre / Department / Project | If used | Required when the account is tracked by dimension |
| Tax code | If applicable | Sales tax / VAT treatment per line |
| Currency and rate | If foreign | Original currency, rate used and rate source |
| Reversal flag and date | For accruals | Marks entries that auto-reverse next period |
Step-by-step entry procedure
Follow these nine steps for every manual entry; skipping the analysis in step 2 is the root of most posting errors.
- Gather the source document. Invoice, receipt, bank statement line, contract or approved memo. No document, no entry.
- Analyse the transaction. Ask three questions: Which accounts are affected? What type is each account? Does each one increase or decrease?
- Apply the debit/credit rules. Using the table above, decide which account is debited and which is credited. Check the entry balances.
- Confirm the date and period. Use the transaction date. If the period is closed, stop and route to the controller.
- Record the entry. Enter the header (date, reference, description), then each line: account, debit or credit, amount, dimensions, tax code. List debits first, then credits.
- Write a clear description. Someone reading it in three years should understand it without opening the attachment.
- Attach support and save. Link the document; save the entry as a draft or unposted.
- Submit for review. A second person checks accounts, amounts, period, support and approval. Preparer and reviewer are never the same person.
- Post and file. Once approved, post to the ledger. Confirm the affected account balances moved as expected.
Posting to the ledger
Posting copies each journal line into its account and updates that account's running balance; the ledger is the journal re-sorted by account.
Each ledger account shows, in date order: the date, the journal reference, the description, the debit or credit, and the balance after that line. Accounting software posts automatically on approval; in a manual system you post each line and tick it off in the journal.
Example: the Cash account after worked entries 1–5 below.
| Date | Ref | Description | Debit | Credit | Balance |
|---|---|---|---|---|---|
| 01 Oct | JE-001 | Owner investment | 50,000 | 50,000 Dr | |
| 08 Oct | JE-003 | Receipt from customer – INV-1042 | 12,000 | 62,000 Dr | |
| 12 Oct | JE-004 | Equipment deposit – Zed Machinery | 30,000 | 32,000 Dr | |
| 15 Oct | JE-005 | Oct rent – Unit 4B – Khan Properties | 11,500 | 20,500 Dr |
Subledgers. Accounts Receivable, Accounts Payable, Inventory and Fixed Assets each keep a detailed subledger (one record per customer, supplier, item or asset). The GL holds only the control account; its balance must equal the subledger total at every month end.
Posting checks. After each batch, confirm the number of lines posted matches the journal, the batch total is zero, and no line landed in suspense. Any suspense item is resolved within the same period.
Types of entries
Use the right entry type so the ledger shows why a balance moved, not just that it did.
| Type | When | Typical accounts | Rules |
|---|---|---|---|
| Standard | Day-to-day transactions: sales, purchases, payments, receipts | Cash, AR, AP, Revenue, Expenses | Dated on the transaction date; usually system-generated from subledgers |
| Adjusting | Period-end, to match revenue and expense to the right period | Accruals, prepayments, depreciation, bad debt, inventory | Posted on the last day of the period; always backed by a calculation schedule |
| Reversing | First day of the next period, to undo an accrual | Accrued Expenses, Accrued Revenue | Mirror image of the accrual; flag the original as auto-reversing |
| Closing | Year-end, to zero out temporary accounts | Revenue, Expenses, Drawings → Income Summary → Retained Earnings | Done once per fiscal year, by the controller, after the audit adjustments |
| Correcting | To fix a posted error | Whichever accounts were wrong | Never delete or edit a posted entry; reverse it, then re-enter correctly, with a description citing the original entry number |
| Reclassification | To move a balance between accounts | Any | Same period as the original where possible; explain the reason |
| Intercompany | Transactions between related entities | Due to / Due from accounts | Mirror entries in both entities; reconcile monthly |
Worked examples
Each example below shows the analysis first, then the entry; amounts are illustrative and in your base currency.
1. Owner invests cash in the business: 50,000
Cash (asset) increases → debit. Owner's Capital (equity) increases → credit.
| Account | Debit | Credit |
|---|---|---|
| 1010 Cash | 50,000 | |
| 3010 Owner's Capital | 50,000 |
2. Sale on credit: 12,000
Accounts Receivable (asset) increases → debit. Sales Revenue increases → credit.
| Account | Debit | Credit |
|---|---|---|
| 1200 Accounts Receivable | 12,000 | |
| 4010 Sales Revenue | 12,000 |
3. Customer pays the invoice: 12,000
Cash increases → debit. Accounts Receivable decreases → credit.
| Account | Debit | Credit |
|---|---|---|
| 1010 Cash | 12,000 | |
| 1200 Accounts Receivable | 12,000 |
4. Purchase of equipment, part cash, part loan: 80,000
Equipment increases → debit 80,000. Cash decreases → credit 30,000. Loan Payable (liability) increases → credit 50,000.
| Account | Debit | Credit |
|---|---|---|
| 1500 Equipment | 80,000 | |
| 1010 Cash | 30,000 | |
| 2500 Loan Payable | 50,000 |
5. Pay rent with sales tax: 10,000 + 15% tax
Rent Expense increases → debit. Input Tax Receivable (asset) increases → debit. Cash decreases → credit.
| Account | Debit | Credit |
|---|---|---|
| 6010 Rent Expense | 10,000 | |
| 1300 Input Tax Receivable | 1,500 | |
| 1010 Cash | 11,500 |
6. Month-end accrual of unbilled electricity: 2,400
Utilities Expense increases → debit. Accrued Expenses (liability) increases → credit. Flag to reverse on the 1st.
| Account | Debit | Credit |
|---|---|---|
| 6030 Utilities Expense | 2,400 | |
| 2100 Accrued Expenses | 2,400 |
7. Monthly depreciation: 1,333
Depreciation Expense increases → debit. Accumulated Depreciation (contra-asset) increases → credit.
| Account | Debit | Credit |
|---|---|---|
| 6050 Depreciation Expense | 1,333 | |
| 1510 Accumulated Depreciation – Equipment | 1,333 |
8. Correcting an error: 500 posted to Office Supplies instead of Repairs
Reverse the wrong account and post to the right one; cite the original entry number in the description.
| Account | Debit | Credit |
|---|---|---|
| 6040 Repairs and Maintenance | 500 | |
| 6020 Office Supplies | 500 |
Trial balance
The trial balance lists every account's closing balance in its normal column; if the two columns differ, stop and find the error before going further.
Prepare it twice each period: unadjusted (after routine entries) and adjusted (after period-end adjustments). The statements are built from the adjusted version only. Using worked entries 1–5 (routine) and 6–7 (adjusting), and ignoring entry 8 which only reclassifies:
| Account | Unadjusted Dr | Unadjusted Cr | Adjustments Dr | Adjustments Cr | Adjusted Dr | Adjusted Cr |
|---|---|---|---|---|---|---|
| 1010 Cash | 20,500 | 20,500 | ||||
| 1200 Accounts Receivable | 0 | 0 | ||||
| 1300 Input Tax Receivable | 1,500 | 1,500 | ||||
| 1500 Equipment | 80,000 | 80,000 | ||||
| 1510 Accumulated Depreciation | 1,333 | 1,333 | ||||
| 2100 Accrued Expenses | 2,400 | 2,400 | ||||
| 2500 Loan Payable | 50,000 | 50,000 | ||||
| 3010 Owner's Capital | 50,000 | 50,000 | ||||
| 4010 Sales Revenue | 12,000 | 12,000 | ||||
| 6010 Rent Expense | 10,000 | 10,000 | ||||
| 6030 Utilities Expense | 2,400 | 2,400 | ||||
| 6050 Depreciation Expense | 1,333 | 1,333 | ||||
| Totals | 112,000 | 112,000 | 3,733 | 3,733 | 115,733 | 115,733 |
If the columns do not agree, work through the difference: divisible by 9 suggests a transposition; equal to one entry's amount suggests a one-sided posting; equal to twice an amount suggests the wrong side.
Period-end adjustments
Adjusting entries bring the ledger onto an accrual basis so each period carries the revenue it earned and the costs it incurred, whether or not cash moved.
| Adjustment | Why | Entry | Evidence |
|---|---|---|---|
| Accrued expense | Cost incurred, invoice not yet received | Dr Expense / Cr Accrued Expenses | Estimate schedule, meter reading, contract |
| Accrued revenue | Work done, invoice not yet raised | Dr Accrued Revenue / Cr Revenue | Timesheets, delivery notes |
| Prepaid expense | Cash paid for a future period | Dr Prepaid Expenses / Cr Expense (or expense the used portion) | Invoice showing the period covered |
| Deferred revenue | Cash received before delivery | Dr Revenue / Cr Deferred Revenue (or recognise the earned portion) | Contract, delivery schedule |
| Depreciation | Spread asset cost over useful life | Dr Depreciation Expense / Cr Accumulated Depreciation | Fixed asset register |
| Bad debt provision | Some receivables will not be collected | Dr Bad Debt Expense / Cr Allowance for Doubtful Accounts | AR ageing and policy percentages |
| Inventory adjustment | Count differs from book | Dr/Cr Inventory / Cr/Dr Cost of Goods Sold | Stock count sheets |
| Foreign currency revaluation | Rates moved on open balances | Dr/Cr Monetary account / Cr/Dr FX Gain or Loss | Closing rate from a named source |
Each adjustment has a supporting schedule showing the calculation, is posted on the last day of the period, and accruals are flagged to reverse on the first day of the next period so the real invoice posts cleanly.
Income statement
The income statement reports revenue less expenses for the period; from the adjusted trial balance above, the business made a net loss of 1,733 for October.
Income Statement for the month ended 31 October 2026
| Amount | |
|---|---|
| Sales Revenue | 12,000 |
| Total revenue | 12,000 |
| Rent Expense | 10,000 |
| Utilities Expense | 2,400 |
| Depreciation Expense | 1,333 |
| Total expenses | 13,733 |
| Net profit / (loss) | (1,733) |
Present revenue first, then cost of goods sold and gross profit for a trading business, then operating expenses, then finance costs and tax. Group small accounts into one line; keep anything material or separately taxed on its own line.
Statement of changes in equity
This statement links the income statement to the balance sheet: it shows how the period's result and the owner's contributions and drawings move equity from opening to closing.
Statement of Changes in Equity for the month ended 31 October 2026
| Amount | |
|---|---|
| Opening equity, 1 October | 0 |
| Owner's contribution | 50,000 |
| Net profit / (loss) for the period | (1,733) |
| Drawings | 0 |
| Closing equity, 31 October | 48,267 |
Balance sheet
The balance sheet lists what the business has and who has a claim on it at the period end; it balances because the closing equity figure comes from the statement above.
Balance Sheet as at 31 October 2026
| Amount | |
|---|---|
| Assets | |
| Cash | 20,500 |
| Accounts Receivable | 0 |
| Input Tax Receivable | 1,500 |
| Total current assets | 22,000 |
| Equipment | 80,000 |
| Less: Accumulated Depreciation | (1,333) |
| Equipment, net | 78,667 |
| Total assets | 100,667 |
| Liabilities | |
| Accrued Expenses | 2,400 |
| Total current liabilities | 2,400 |
| Loan Payable | 50,000 |
| Total liabilities | 52,400 |
| Equity | |
| Owner's Capital | 50,000 |
| Retained earnings / (accumulated loss) | (1,733) |
| Total equity | 48,267 |
| Total liabilities and equity | 100,667 |
Checks before issuing. Total assets equal total liabilities plus equity; every line ties to a reconciled ledger balance; current versus non-current is split at 12 months; comparatives from the prior period are shown alongside; and the net result on the income statement equals the movement in retained earnings.
Closing the period. After the statements are approved, close revenue and expense accounts to Income Summary, close Income Summary and Drawings to Retained Earnings, lock the period, and roll the balance-sheet accounts forward as the next period's opening balances.
Controls, review and reconciliation
The ledger is only as reliable as the controls around it; the minimum set is below.
Segregation of duties. The person who prepares an entry never approves it, and the person who handles cash never records it. Small teams substitute owner review for a second accountant.
Approval thresholds. Set limits by role, for example: up to 5,000 reviewed by a senior bookkeeper; 5,000–50,000 by the accountant; above 50,000, any prior-period entry, and any entry to equity or intercompany accounts by the controller.
Reviewer checklist for every manual entry:
- Debits equal credits
- Accounts are correct for the nature of the transaction
- Date falls in the right, open period
- Description is clear and the reference matches the attachment
- Support is attached and sufficient
- Dimensions and tax codes are filled where required
- Amount agrees to the source document
- Approval is within the reviewer's threshold
Monthly reconciliations. Reconcile every balance-sheet account to independent evidence before closing the period:
| Account | Reconcile to | Owner | Due |
|---|---|---|---|
| Cash and bank | Bank statements | Bookkeeper | Day 3 after month end |
| Accounts Receivable | AR subledger ageing | Accountant | Day 5 |
| Accounts Payable | AP subledger and supplier statements | Accountant | Day 5 |
| Fixed assets | Fixed asset register | Accountant | Day 7 |
| Inventory | Stock count / inventory system | Operations + Accountant | Day 7 |
| Accruals and prepayments | Supporting schedules | Accountant | Day 7 |
| Tax payable / receivable | Tax returns filed | Accountant | Day 10 |
| Intercompany | Counterparty's ledger | Controller | Day 10 |
Period close. Run the trial balance, confirm it balances, clear suspense accounts to zero, post adjusting entries, then lock the period. Nothing is posted to a locked period without a controller-approved reopening.
Common errors and how to fix them
Most errors fall into one of the patterns below; the trial balance catches only the first two.
| Error | How it shows up | Fix |
|---|---|---|
| Unbalanced entry | Trial balance debit and credit totals differ | Software should block it; otherwise find the line with the missing side |
| Transposition (1,230 vs 1,320) | Trial balance difference divisible by 9 | Compare each line to the source document |
| Wrong account, same type | Trial balance balances; account balance looks odd | Reclassification entry citing the original |
| Wrong side (debit instead of credit) | Account balance moves the wrong way by twice the amount | Reverse and re-enter |
| Duplicate posting | Same reference appears twice; supplier or customer disputes balance | Reverse the duplicate; add a duplicate-reference check |
| Omitted entry | Bank or supplier statement shows an item the ledger lacks | Found in reconciliation; post with the original transaction date if the period is open |
| Wrong period | Expense or revenue lands in the wrong month | Reverse and re-post in the correct period, or accrue if the period is closed |
| Compensating errors | Two mistakes cancel out; trial balance balances | Found only by reconciling each account to evidence |
| Suspense account balance | Items parked and forgotten | Clear suspense to zero before every close |
| Vague description ("adjustment", "misc") | Reviewer or auditor cannot trace it | Reject at review; description must say what, who and why |
Never edit or delete a posted entry. A correction is always a new entry that references the original, so the audit trail stays intact.
Quick-reference checklist and glossary
Run this checklist before submitting any entry.
- Source document in hand and attached
- Transaction date and open period confirmed
- Accounts chosen from the chart of accounts
- Debit/credit sides follow the normal-balance table
- Total debits equal total credits
- Description states what, who and why
- Reference number matches the document
- Dimensions, tax code and currency filled where required
- Accrual flagged to reverse, if applicable
- Submitted to a reviewer other than yourself
Glossary
| Term | Definition |
|---|---|
| Accrual | Recording revenue or expense when earned or incurred, before cash moves |
| Prepayment | Cash paid in advance for a future-period expense; an asset until used |
| Deferred revenue | Cash received before the revenue is earned; a liability until delivered |
| Depreciation | Spreading the cost of a long-lived asset over its useful life |
| Contra account | An account that offsets the balance of a related account |
| Control account | A GL account whose balance equals the total of a subledger |
| Suspense account | A temporary holding account for items not yet classified; must be cleared each period |
| Trial balance | A listing of all account balances used to check that debits equal credits |
| Audit trail | The chain of documents and entries that lets a transaction be traced end to end |
| Materiality | The size above which an error would influence a reader of the financial statements |
| Cut-off | Ensuring transactions are recorded in the period they belong to |
| Fiscal year | The 12-month period used for financial reporting; may differ from the calendar year |
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