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Lesson 2 of 13The Accounting Cycle: Service Business
Unit 2 · Lesson 2 of 13

Double-Entry Accounting

Every transaction is an exchange of value, so every transaction must be recorded with equal debits and credits — never just one side.

2 min read7 practice questionsInteractiveAsk AI about this →

Key things to remember

  1. 1Double-entry accounting: every transaction is recorded with equal total debits and total credits.
  2. 2A business transaction is always an exchange of things of value.
  3. 3The four-step analysis: identify accounts → classify each → decide increase/decrease → apply debit/credit rules.
  4. 4If total debits don't equal total credits on a transaction, there is an error to find before moving on.

A business transaction is always an exchange of things of value — cash for supplies, a promise to pay for work performed, a cheque for rent. Because two things of value change hands in every transaction, accounting records both sides of that exchange. Double-entry accounting requires that equal debit amount(s) and credit amount(s) be recorded for each transaction. If only one side were recorded, the accounting equation would fall out of balance — and it can never be allowed to.

The Four-Step Analysis

  1. Identify the two (or more) accounts affected by the transaction.
  2. Classify each account: is it an asset, liability, Capital, Drawings, Revenue, or Expense?
  3. Decide whether each account increased or decreased.
  4. Apply the debit/credit rules to translate "increase/decrease" into "debit/credit," then check that total debits equal total credits.
The golden check
In every correctly recorded transaction, the total dollar amount debited equals the total dollar amount credited. If they don't match, you have made an error — either in the amounts or in which side you used.
CashDebit (left)Credit (right)Jan 2 4 000Jan 9 1 200Jan 18 600Jan 5 900Jan 22 5005 800 footing1 400 footingBalance: 4 400 Dr(5 800 - 1 400, on the larger/debit side)
Fig 1Two T-accounts, always moving together: one debit, one credit, equal amounts.

Working Through Real Transactions

Let's apply the four-step analysis to Trillium Bike Repair's very first transactions of the year. On January 1, the owner, J. Reyes, invested $10,000 cash, $6,000 of equipment, and a $9,000 truck into the business, and the business took on a $8,000 bank loan used to help buy the truck and equipment.

AccountTypeChangeDebit or CreditAmount
CashAssetIncreaseDebit$10,000
EquipmentAssetIncreaseDebit$6,000
TruckAssetIncreaseDebit$9,000
Bank LoanLiabilityIncreaseCredit$8,000
J. Reyes, CapitalOwner's EquityIncreaseCredit$17,000
Total debits $25,000 = Total credits $25,000 — the transaction balances.
Loading interactive…
Practice analyzing transactions and building balanced journal entries.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
Trillium performs repair services and receives $850 cash immediately (March 5). Analyze and record this transaction.
Example 2
Trillium performs $1,200 of repair services for customer M. Tran, who will pay later (April 8, on account). Analyze and record this transaction.
Example 3
Trillium buys $600 of supplies on account from ABC Supply (March 3). Analyze and record this transaction.

Where marks get lost

  • Recording only the side of the transaction that feels obvious (e.g., only recording the cash received) and forgetting the other account entirely.
  • Debiting and crediting the same account instead of two different accounts.
  • Using the wrong amount on one side, so debits and credits don't match even though the right accounts were chosen.
  • Skipping the classification step and guessing debit vs. credit instead of applying the rules methodically.

Flashcards 5

Double-entry accounting
Business transaction
The golden check for any entry
Step 1 of transaction analysis
+ 1 more

Practice

1
Why does double-entry accounting require two sides for every transaction?
2
Trillium pays $700 cash for rent. By how much does Cash change (state as a negative number if it decreases)?
$
3
In the rent payment above, what is the correct entry?
4
What are the four steps of transaction analysis?
5
Match each transaction to its correct debit account.
Buy supplies on account
Perform services for cash
Pay wages in cash
Owner withdraws cash
6
Trillium collects $500 cash from M. Tran on account. What total dollar amount is debited in this entry?
$
7
What does it mean if, after recording a transaction, total debits don't equal total credits?

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