In simple terms
A friendly intro before the formal notes — no formulas yet.
The accounting system
Understand the complete accounting process, from source documents to financial statements. This lesson covers the core principles of double-entry bookkeeping (DEAD CLIC), the function of books of prime entry (day books), posting to ledgers, and the overall accounting cycle.
- 1
Every transaction affects two accounts.
- 2
For every debit entry, there must be a corresponding credit entry.
- 3
The accounting equation (A = C + L) must always remain in balance.
- 4
Use DEAD CLIC to remember the rules: Debit - Expenses, Assets, Drawings; Credit - Liabilities, Income, Capital.
What this topic covers
The official Cambridge syllabus points this lesson works through.
- 1.2.1.1
The principles of the double entry system to record business transactions
- 1.2.1.2
The accounting equation
- 1.2.1.3
The role of books of prime entry in the recording of business transactions – sales journal – sales returns journal – purchases journal – purchases returns journal – cash book – general journal
- 1.2.1.4
Preparation of ledger accounts
- 1.2.1.5
The purpose of a trial balance
- 1.2.1.6
The advantages and disadvantages of maintaining full accounting records
- 1.2.1.7
The accounting concepts underpinning the preparation of accounts: business entity, historic cost, money measurement, going concern, consistency, prudence, realisation, duality, materiality, objectivity, matching/accruals and substance over form
- 1.2.1.8
The use of computerised accounting systems in recording financial transactions
- 1.2.1.9
The advantages and disadvantages of introducing a computerised accounting system
- 1.2.1.10
The ways in which the security of data can be ensured within a computerised accounting system
Explore the concept
Use the live diagram and synced steps — play it or tap a step card to walk through.
At a glance — side by side
Compare key properties side by side — ideal for exam contrasts.
Comparison of General Journal and Specialised Journals
| Feature | General Journal | Specialised Journals (e.g., Sales Day Book) |
|---|---|---|
| Type of Transactions | Records non-routine, infrequent, and varied transactions (e.g., correction of errors, purchase of non-current assets on credit). | Records routine, high-volume, and similar transactions (e.g., all credit sales). |
| Format | Requires a detailed narrative for each entry explaining the reason for the debit and credit. | Tabular format with columns for date, invoice number, customer name, and amount. No narrative is needed for each entry. |
| Posting to Ledgers | Each individual transaction is posted separately to the relevant debit and credit accounts in the General Ledger. | Individual entries are posted to the subsidiary ledger daily. The total is posted to the General Ledger periodically (e.g., monthly). |
Type of Transactions
General Journal
Specialised Journals (e.g., Sales Day Book)
Format
General Journal
Specialised Journals (e.g., Sales Day Book)
Posting to Ledgers
General Journal
Specialised Journals (e.g., Sales Day Book)
Full topic notes
Formal explanation with the rigour you need for the exam.
The Foundation: The Dual Aspect and Double Entry
The entire accounting system is built upon the dual aspect principle, which states that every business transaction has two effects. This is captured in the accounting equation: Assets = Capital + Liabilities. To record these two effects, we use the double entry bookkeeping system. For every transaction, a debit entry is made in one account and a corresponding credit entry is made in another account. The total value of debits must always equal the total value of credits. Understanding which account to debit and which to credit is crucial. The mnemonic DEAD CLIC is an invaluable tool: Debit what you have (Expenses, Assets, Drawings) and Credit what you owe or own (Liabilities, Income, Capital).
Every transaction affects two accounts.
For every debit entry, there must be a corresponding credit entry.
The accounting equation (A = C + L) must always remain in balance.
Use DEAD CLIC to remember the rules: Debit - Expenses, Assets, Drawings; Credit - Liabilities, Income, Capital.
Stage 1: Books of Prime Entry (Day Books)
Books of prime entry are the first place a transaction is formally recorded. They are not part of the double entry system itself but act as chronological journals, grouping similar transactions before they are posted to the ledgers. This prevents the general ledger from becoming cluttered with excessive detail. Each book is a memorandum record, compiled from source documents like invoices and credit notes.
Sales Day Book: Records all credit sales. Double entry: DR Receivables Control, CR Sales.
Purchases Day Book: Records all credit purchases. Double entry: DR Purchases, CR Payables Control.
Sales Returns Day Book: Records goods returned by credit customers. Double entry: DR Sales Returns, CR Receivables Control.
Purchases Returns Day Book: Records goods returned to credit suppliers. Double entry: DR Payables Control, CR Purchases Returns.
Cash Book: Records all receipts and payments of cash and bank. It is unique as it is both a book of prime entry and part of the ledger.
General Journal: Records all other non-routine transactions not suitable for the other books.
The General Journal: The 'Catch-All' Book
When a transaction is non-routine and doesn't fit into any of the specialised day books, it is recorded in the General Journal. Unlike the tabular day books, each entry in the General Journal requires a date, the accounts to be debited and credited, the amounts, and a 'narration' - a short sentence explaining the transaction. It is essential for maintaining a complete accounting record.
Purchase/sale of non-current assets on credit.
Opening entries to set up accounts at the start of a new business or accounting period.
Correction of errors discovered in the accounts.
Writing off irrecoverable debts (bad debts).
Adjustments for accruals and prepayments at the end of a period.
Stage 2: Ledgers and Posting
The ledgers are the core of the double entry system, containing the accounts where the debits and credits are recorded. Information from the books of prime entry is posted to the ledgers. The system uses a General (or Nominal) Ledger and Subsidiary Ledgers. Periodically (e.g., monthly), the totals from the specialised books of prime entry are posted to the General Ledger. For example, the total of the Sales Day Book is debited to the Sales Ledger Control Account and credited to the Sales Account. Individual transaction details are posted to personal accounts in the Subsidiary Ledgers (the Sales Ledger and the Purchases Ledger). This system maintains a detailed record for each customer and supplier while keeping the General Ledger concise.
The General Ledger contains all accounts for the financial statements.
Subsidiary Ledgers (Sales and Purchases) contain the individual accounts of credit customers and suppliers.
Totals are posted from books of prime entry to the General Ledger.
Individual entries are posted to the relevant accounts in the Subsidiary Ledgers.
Examiners frequently test the link between books of prime entry and control accounts. Remember that the total from the Sales Day Book is posted to the Sales Ledger Control Account in the General Ledger, while the individual invoices are recorded in the individual customer accounts in the Sales Ledger.
The Complete Accounting Cycle
The accounting cycle is the systematic process of identifying, recording, and summarising a business's economic events. It begins with a transaction, evidenced by a source document (e.g., an invoice, receipt). This transaction is then recorded in the appropriate book of prime entry. From there, the information is posted to the relevant ledger accounts (both general and subsidiary). At the end of an accounting period, a trial balance is extracted from the general ledger to check the arithmetical accuracy of the postings. Necessary year-end adjustments are made (e.g., for accruals and prepayments). Finally, the financial statements – the statement of profit or loss and the statement of financial position – are prepared from the adjusted trial balance figures.
- Transaction occurs (evidenced by a source document).
- Recorded in a book of prime entry.
- Posted to ledger accounts (General and Subsidiary).
- Trial balance is prepared to check arithmetical accuracy.
- Adjustments are made for non-cash items (e.g. depreciation, accruals).
- Financial statements are produced.
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
A business makes a credit sale of goods for $800 to Customer X. State the book of prime entry used and the double-entry in the ledgers.
- 1
Book of prime entry: Sales Day Book — an entry is made to record the invoice of $800 to Customer X.
Alpha Traders purchased goods on credit for $1,500 from Beta Suppliers on 5 May (Invoice 789). On 20 May, Alpha Traders paid the full amount by bank transfer. Show the entries in the books of prime entry and the subsequent double entries.
- 1
1. Credit Purchase (5 May)
How it all connects
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Glossary
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Quick check
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Revision flashcards
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DEAD CLIC?
Debit: Expenses, Assets, Drawings. Credit: Liabilities, Income, Capital.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
- ✓
Every transaction affects two accounts.
- ✓
For every debit entry, there must be a corresponding credit entry.
- ✓
The accounting equation (A = C + L) must always remain in balance.
- ✓
Use DEAD CLIC to remember the rules: Debit - Expenses, Assets, Drawings; Credit - Liabilities, Income, Capital.
Practice — then mark it
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Mark an accounting system question
Mark an accounting system question
Extra simulations & links
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Checkpoint
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