The accounting equation, the dual aspect of every transaction, the rules of double entry for assets, liabilities, capital, income and expenses, and how to record transactions in ledger accounts and balance them off.

What this dot point is asking

AQA wants you to state the accounting equation, explain the dual aspect of every transaction, apply the rules of debit and credit to assets, liabilities, capital, income and expenses, and record transactions in ledger accounts and balance them off. This is unit 3.1.2, the engine room of the whole subject, and a recording or balancing task appears on almost every Paper 1.

The accounting equation and dual aspect

Capital represents what the business owes back to the owner, which is why it sits on the same side as liabilities: both are claims on the assets. When the owner pays $10{,}000$ cash into the business, the asset bank rises by $10{,}000$ and capital rises by $10{,}000$. When the business buys a $4{,}000$ van on credit, the asset van rises by $4{,}000$ and the liability trade payable rises by $4{,}000$. In every case two figures change by the same amount, so $\text{Assets} = \text{Capital} + \text{Liabilities}$ holds throughout.

Some transactions change two items on the same side of the equation. Buying $2{,}000$ of inventory for cash swaps one asset (cash falls) for another (inventory rises), so total assets are unchanged and the equation still balances. Recognising these "asset for asset" or "liability for liability" swaps is a frequent exam test.

The rules of debit and credit

The logic follows from the equation. Assets sit on the left of $\text{Assets} = \text{Capital} + \text{Liabilities}$, so they increase with a left-hand (debit) entry; capital and liabilities sit on the right, so they increase with a right-hand (credit) entry. Expenses reduce capital (they reduce profit, which belongs to the owner), so an increase in an expense is recorded the same way an asset increase is, by a debit. Income increases capital, so it is credited. Drawings reduce capital but are recorded by debiting a drawings account so the reduction is shown separately rather than netted against profit.

Every transaction is recorded with at least one debit and one credit of equal value, so total debits always equal total credits. This is the arithmetical guarantee that lets the trial balance act as a check.

Balancing off a ledger account

From ledgers to the trial balance

Once all accounts are balanced off, the closing balances are listed in the trial balance to check that total debits equal total credits before the financial statements are prepared. The trial balance does not prove the books are error-free, but a disagreement proves an arithmetical error exists, which is the link to unit 3.1.3.

Try this

Q1. State the accounting equation in both its forms. [2 marks] $\text{Assets} = \text{Capital} + \text{Liabilities}$, equivalently $\text{Capital} = \text{Assets} - \text{Liabilities}$.

Q2. A business pays $500$ rent by cheque. State the debit and credit entries. [2 marks] Debit rent (an expense increases) $500$; credit bank (an asset falls) $500$.