Principles of Accounting — Journal Entries, Posting and the Trial Balance

Chapter 1 showed that a transaction moves two sides of the equation at once. This chapter covers the procedure that carries that movement into the books: journal entry → posting → trial balance. The flow repeats throughout the period and, at year-end, continues into the adjusting and closing entries of chapter 3. The whole sequence is called the accounting cycle.

1. Accounts and normal balances

A. An account gathers increases and decreases of the same kind

A unit that collects increases and decreases of the same nature — cash, trade receivables, borrowings, sales — is an account. Each account has a left side (debit) and a right side (credit); because it looks like a T, it is called a T-account.

B. Which side to write on

Translating the eight elements of a transaction from chapter 1 into accounts gives the following rules. The side that records increases is the account’s normal balance side.

Expenses sit on the debit side because they reduce equity. A decrease in equity is a debit, so an expense that reduces equity is also a debit. Revenue, which increases equity, is a credit.

2. Journalizing: splitting a transaction into debits and credits

A journal entry decides for each transaction ① which accounts change, ② by how much and ③ in which direction. The book in which entries are gathered is the journal. The six March transactions from chapter 1 are journalized as follows.

Some transactions involve three or more accounts. If only ₩1 million of the ₩3 million equipment had been paid in cash and the rest on credit, the entry would be debit equipment 300, credit cash 100 and other payables 200. This is a compound entry. Total debits still equal total credits.

3. Posting: moving entries account by account

The journal is written in time order, so it is hard to see each account’s balance at a glance. The debit amount of each entry is therefore copied to the debit side of the relevant account and the credit amount to its credit side. This is posting, and the book of all accounts is the general ledger.

Accounting software finishes posting automatically the moment a voucher is entered. Knowing the structure of posting is still what lets you trace backwards on the ledger screen why a balance is the number it is.

4. The trial balance: gathering ledger balances on one page

A. Types of trial balance

• Totals trial balance: gathers each account’s total debits and total credits.
• Balances trial balance: gathers only each account’s balance.
• Combined trial balance: shows both.

The March balances trial balance shows on the debit side cash 1,200, receivables 300, equipment 300 and rent 100, for a total of ₩19 million. On the credit side it shows borrowings 400, share capital 1,000 and service revenue 500, also ₩19 million. The two sides agree.

B. The trial balance equation

In the trial balance, revenue and expense accounts have not yet been closed to retained earnings. The equation from chapter 1 therefore becomes:

With numbers, $1{,}800 + 100 = 400 + 1{,}000 + 500$. Once revenue and expenses are closed to retained earnings at year-end, the equation returns to $\text{Assets} = \text{Liabilities} + \text{Equity}$.

5. Errors a trial balance finds and errors it misses

If total debits and credits in the trial balance differ, there is a recording error: only one side was posted, an amount was miscopied on one side (e.g. 300 as 30), or a balance was carried to the wrong side.

6. Where the trial balance sits in the accounting cycle

Seen as one flow, recording during the period and closing at year-end look like this.

A. Vouchers and evidence

In practice, vouchers are used instead of a journal: a receipt voucher when cash comes in, a payment voucher when it goes out, and a transfer voucher when no cash moves. March transaction ④ (sales on credit) moves no cash, so it is a transfer voucher. Each voucher must be backed by evidence such as a tax invoice, a contract or a transfer confirmation. Vouchers without evidence are the first thing questioned in audits and tax investigations.

B. Accounts that are closed and accounts that are not

Revenue and expense accounts are temporary accounts that collect the performance of one period, so at year-end they are transferred to retained earnings and their balances set to zero. Asset, liability and equity accounts are permanent accounts, and their closing balances carry forward as the next period’s opening balances. Closing at the end of March, service revenue of ₩5 million and rent of ₩1 million disappear and retained earnings of ₩4 million appear.

Check your understanding

March transaction ⑤ (collecting ₩2 million of receivables) was wrongly journalized as Dr cash 200 / Cr service revenue 200. What are the debit and credit totals of the balances trial balance, and does it balance? Which accounts are distorted by the error?

Cash stays at ₩12 million. Receivables do not fall and remain at ₩5 million, and service revenue becomes ₩7 million. Total debits are $1{,}200 + 500 + 300 + 100 = 2{,}100$ and total credits $400 + 1{,}000 + 700 = 2{,}100$ (₩10,000), so it balances. But receivables and sales are each overstated by ₩2 million, and profit is inflated by ₩2 million. The trial balance alone cannot catch this error.

References

• Jerry Weygandt, Paul Kimmel and Donald Kieso, Financial Accounting with International Financial Reporting Standards, ch. 2–3
• Korea Accounting Standards Board, Conceptual Framework for Financial Reporting
• Korean Institute of Certified Public Accountants, Korean Standard on Auditing 500 (Audit Evidence)