Double entry from zero

A business owns things and owes things. Accounting is the discipline of recording each change to those two lists so that, at any date, you can say what the business has, who has a claim on it, and how it got there. The method used everywhere, from a food truck to a listed bank, is double entry. Luca Pacioli described it in print in 1494, and the mechanics have barely changed.

The equation under every ledger

Assets = Liabilities + Equity

The IFRS Conceptual Framework defines an asset as "a present economic resource controlled by the entity as a result of past events" and a liability as "a present obligation of the entity to transfer an economic resource as a result of past events." Equity is what remains: the residual interest in the assets after deducting all liabilities. US GAAP uses the same structure, with its own wording in the FASB Concepts Statements.

Read the equation as a statement about claims. Everything the company holds is claimed by someone. Lenders and suppliers have a fixed claim (the liabilities). Owners have whatever is left (the equity). Because both sides describe the same pile of resources, they must always be equal.

Every transaction changes at least two things. When Northside's founders paid $60,000 for shares, cash went up by $60,000 and equity went up by $60,000. When the cafe bought its espresso machine and fit-out for $72,000, one asset (equipment) went up and another (cash) went down by the same amount. The equation held both times.

Equity also moves through the income statement. Revenue increases equity, expenses decrease it, and dividends hand some of it back to owners. So the expanded version is:

Assets = Liabilities + Share capital + Revenue − Expenses − Dividends

That expanded form is the whole reason the income statement and the balance sheet can be reconciled later in this module.

Debits and credits, mechanically

Debit means left side. Credit means right side. They carry no sense of good or bad. Each account has a normal side, the side on which it increases:

• Assets, expenses and dividends increase with a debit.
• Liabilities, equity and revenue increase with a credit.

The rule follows from the expanded equation. Items on the left of the equals sign (assets) increase on the left. Items on the right (liabilities, equity, revenue) increase on the right. Expenses and dividends reduce equity, so they sit opposite to equity and increase with a debit.

A bank statement uses the words the other way around, and that trips people up. When your bank "credits" your account, it is increasing its liability to you. On your own books the same deposit is a debit to cash.

Reading a journal entry

A journal entry lists the accounts affected, the debit amounts and the credit amounts. Debits are listed first; credits are indented. The total of the debits must equal the total of the credits, which is how double entry keeps the equation in balance one transaction at a time.

Northside's first three entries

Ref	Entry	Debit	Credit
J1	2025-01-01 Shares issued to the founders for cash
	1000 Cash	60,000
	3000 Share capital		60,000
J2	2025-01-02 Five-year bank loan received
	1000 Cash	40,000
	2500 Bank loan		40,000
J3	2025-01-03 Espresso machine, grinders and fit-out bought for cash
	1500 Equipment	72,000
	1000 Cash		72,000

Entry J3 swaps one asset for another and leaves equity untouched. Buying equipment is spending money, but it is not yet an expense. The cost becomes expense over the years the equipment is used, through depreciation, which lesson 1.3 covers.

Two habits make a journal useful to the person who reads it next year. Write a description that would make sense to an auditor with no context ("Five-year bank loan received" is clear; "loan" is not). Keep the source document, such as the invoice or loan agreement, linked to the entry. Canada's CRA expects records to be kept generally for six years from the end of the tax year they relate to, and the IRS gives its own retention periods, so the paper trail has a long life.

From journal to ledger to trial balance

Entries are posted to accounts in the general ledger, one running balance per account. At any point you can list every account balance in two columns, debits and credits. That list is the trial balance. If the columns are equal, every entry was posted with equal debits and credits.

A balanced trial balance does not prove the books are right. It cannot catch an entry posted to the wrong account on the correct side, an entry recorded twice, an entry left out entirely, or two errors that offset. It only proves arithmetic balance. That limit is the reason reconciliations exist (lesson 2.4).

Summary entries versus daily entries

Real books carry thousands of entries a year: every card batch, every supplier invoice, every payroll run. For teaching, Northside's year is compressed into eighteen summary entries plus seven adjustments at year end. The totals are the same as if you had posted each day separately, which is the point of double entry: the order and grouping of entries never changes the ending balances.