Every accounting system uses double-entry bookkeeping, recording each transaction with equal debits and credits so that the accounting equation always stays in balance. A debit is an entry on the left side of an account, increasing assets, expenses, and dividends while decreasing liabilities, equity, and revenue. A credit, on the right side, does the opposite. Every debit is matched by an equal credit in the same transaction. T-accounts are visual tools shaped like the letter T that help illustrate these effects, with debits on the left and credits on the right. Some entries involve more than two accounts; these compound journal entries still maintain equal debits and credits, and contra-asset accounts such as accumulated depreciation and the allowance for doubtful accounts carry balances opposite to their related assets.
The journey from transaction to financial statement follows a predictable accounting cycle. It begins in the journal, the book of original entry where transactions are recorded chronologically with debits and credits. From there, entries are posted to the general ledger, the complete record of all accounts and their balances. A trial balance is then prepared, listing all ledger accounts and their debit or credit balances; if total debits equal total credits, the books are arithmetically in balance.
At the end of each accounting period, accountants prepare adjusting entries to record accruals and deferrals, ensuring revenues and expenses fall into the correct period under accrual accounting. Once adjusted, a new trial balance is produced. Closing entries then transfer the balances of temporary accounts (revenues, expenses, and dividends) into retained earnings, leaving permanent accounts (assets, liabilities, and equity) to carry forward. A post-closing trial balance confirms that only permanent accounts remain and that debits still equal credits at the start of the new period. Many accountants use an accounting worksheet, a multi-column tool that combines trial balances, adjustments, and statement columns to organize this work. Outside the cycle, a bank reconciliation compares the company's cash records with the bank's statement to identify timing differences, errors, or possible theft.