From Transactions to Ledger Balances
A business rarely completes only one transaction before updating its records. A single operating period may include an owner contribution, a cash purchase, a credit sale, a customer collection, and a loan payment. The task is to record each event in order and carry its effect into the relevant ledger accounts without losing or duplicating an amount.
The journal records transactions chronologically. The ledger groups those same debit and credit entries by account, making it possible to determine each account’s balance after the sequence. This tutorial follows events from journal entries through ledger posting and checks the resulting balances using the accounting equation. It is aligned with the SOA VEE Accounting and Finance syllabus.
For an asset or expense account, a debit increases the balance and a credit decreases it. For a liability, owner’s capital, or revenue account, a credit increases the balance and a debit decreases it. Owner withdrawals increase with a debit. Each transaction must have total debits equal to total credits, but that equality alone does not guarantee that an entry uses the correct accounts.
A Reliable Posting Sequence
Use the same routine for every transaction. First identify the event and the accounts it affects. Then journalize it, including the amount on the debit or credit side. Finally, post each side to the matching ledger account and update that account’s running balance. Do not combine separate events just because they occur on the same day: for example, a customer collection is a separate event from the earlier credit sale.
Determine what the business received, gave up, earned, incurred, or now owes. Use the transaction facts rather than guessing from the direction of cash alone.
Name each account affected and determine whether its balance increases or decreases. Apply the debit and credit rules for that account type.
List the debit account or accounts and the credit account or accounts. Confirm that the debit total equals the credit total.
Transfer each journal amount to the same account in the ledger, then calculate that account’s new balance and normal balance side.
Check that later events have not been mistaken for new revenue or expenses, and verify that the ending account amounts satisfy the accounting equation.
The reason the accounting equation continues to hold is that each correctly journalized transaction has equal debits and credits. The debit-credit rules assign those equal amounts to accounts so that the change in assets equals the combined change in liabilities and equity. For instance, borrowing cash increases an asset and a liability by the same amount; repaying principal reduces both by the same amount. Posting transfers those entries—it does not change their effects.
Worked Examples
Worked Example: Posting a Mixed Sequence of Transactions
A new design studio begins with zero balances. During the month, its owner contributes $12,000 cash; the studio buys equipment for $3,500 cash; buys supplies for $900 on credit; earns $2,400 for services paid in cash and $1,600 for services on credit; collects $700 from customers; pays suppliers $400; borrows $5,000 by signing a note; repays $1,000 of loan principal; pays $300 for utilities; and the owner withdraws $800 cash. Journalize the events, find the ending balances, and check the accounting equation.
Method. Record each event in the order given, then post its debit and credit to the named accounts. The journal entries are:
- Owner contribution: debit Cash $12,000; credit Owner’s Capital $12,000.
- Equipment purchase: debit Equipment $3,500; credit Cash $3,500.
- Supplies bought on credit: debit Supplies $900; credit Accounts Payable $900.
- Cash services: debit Cash $2,400; credit Service Revenue $2,400.
- Credit services: debit Accounts Receivable $1,600; credit Service Revenue $1,600.
- Customer collection: debit Cash $700; credit Accounts Receivable $700.
- Supplier payment: debit Accounts Payable $400; credit Cash $400.
- Borrowing: debit Cash $5,000; credit Notes Payable $5,000.
- Principal repayment: debit Notes Payable $1,000; credit Cash $1,000.
- Utilities payment: debit Utilities Expense $300; credit Cash $300.
- Owner withdrawal: debit Owner’s Withdrawals $800; credit Cash $800.
Post the asset accounts. Cash has debits of $12,000, $2,400, $700, and $5,000, for total debits of $20,100. Its credits total $3,500 + $400 + $1,000 + $300 + $800 = $6,000. Thus Cash ends with a debit balance of $20,100 − $6,000 = $14,100. Equipment is $3,500 debit. Supplies is $900 debit. Accounts Receivable has a $1,600 debit and a $700 credit, leaving $900 debit.
Post the liability and equity accounts. Accounts Payable has a $900 credit less a $400 debit, leaving $500 credit. Notes Payable has a $5,000 credit less a $1,000 debit, leaving $4,000 credit. Owner’s Capital is $12,000 credit. Service Revenue is $2,400 + $1,600 = $4,000 credit. Utilities Expense is $300 debit, and Owner’s Withdrawals is $800 debit.
Check. Total assets are $14,100 + $3,500 + $900 + $900 = $19,400. Liabilities are $500 + $4,000 = $4,500. Equity is $12,000 + $4,000 − $300 − $800 = $14,900. Therefore, $19,400 = $4,500 + $14,900. The equation balances.
Common mistake avoided: The $700 collection reduces Accounts Receivable; it is not a second revenue entry. Likewise, repaying $1,000 of principal reduces Notes Payable and Cash; it is not an expense.
Worked Example: Posting to Accounts With Opening Balances
At the start of a period, a repair business has Cash of $4,200 debit, Accounts Receivable of $1,300 debit, Equipment of $6,000 debit, Accounts Payable of $900 credit, Notes Payable of $2,500 credit, and Owner’s Capital of $8,100 credit. During the period it collects $800 from customers, buys equipment for $1,200 cash, buys supplies for $500 on credit, pays suppliers $600, earns $1,400 cash revenue, pays $350 cash for an expense, borrows another $1,000, and the owner withdraws $200. Find the ending balances and verify the equation.
Method. Treat each opening balance as the starting point for that account’s running total. Journalize and post the events as follows:
- Collection: debit Cash $800; credit Accounts Receivable $800.
- Equipment purchase: debit Equipment $1,200; credit Cash $1,200.
- Credit supplies purchase: debit Supplies $500; credit Accounts Payable $500.
- Supplier payment: debit Accounts Payable $600; credit Cash $600.
- Cash revenue: debit Cash $1,400; credit Service Revenue $1,400.
- Cash expense: debit Expense $350; credit Cash $350.
- New borrowing: debit Cash $1,000; credit Notes Payable $1,000.
- Owner withdrawal: debit Owner’s Withdrawals $200; credit Cash $200.
Update the affected balances. Cash starts at $4,200 debit. Its increases are $800 + $1,400 + $1,000 = $3,200, and its decreases are $1,200 + $600 + $350 + $200 = $2,350. Ending Cash is $4,200 + $3,200 − $2,350 = $5,050 debit. Accounts Receivable is $1,300 − $800 = $500 debit. Equipment is $6,000 + $1,200 = $7,200 debit, and Supplies is $500 debit.
Accounts Payable starts at $900 credit, increases by $500, and decreases by $600, so it ends at $900 + $500 − $600 = $800 credit. Notes Payable ends at $2,500 + $1,000 = $3,500 credit. Revenue is $1,400 credit; Expense is $350 debit; Owner’s Withdrawals is $200 debit.
Check. Assets are $5,050 + $500 + $7,200 + $500 = $13,250. Liabilities are $800 + $3,500 = $4,300. Ending equity is $8,100 + $1,400 − $350 − $200 = $8,950. Since $4,300 + $8,950 = $13,250, the ending balances satisfy the equation.
Common mistake avoided: The opening balance is not discarded when posting new entries. Also, the $600 supplier payment decreases the existing payable; it does not reduce Supplies or Equipment.
Worked Example: Separating Cash, Credit, and Owner Events
A small field-services company begins with zero balances. The owner contributes $7,000 cash, and the company borrows $2,000. It buys equipment for $2,600, paying $1,000 cash and owing the remainder to the supplier. It earns $1,200 cash revenue and $1,800 revenue on credit, collects $900 from customers, pays the supplier $500, repays $400 of loan principal, pays $650 cash rent, buys $250 of supplies for cash, and the owner withdraws $300. Determine the ending balances of the affected asset, liability, revenue, expense, and owner accounts, then check the equation.
Method. The equipment purchase is a compound entry because it has two credits: Cash and Accounts Payable. Its debit must equal both credits combined. The journal entries are:
- Owner contribution: debit Cash $7,000; credit Owner’s Capital $7,000.
- Borrowing: debit Cash $2,000; credit Notes Payable $2,000.
- Equipment purchase: debit Equipment $2,600; credit Cash $1,000; credit Accounts Payable $1,600.
- Cash revenue: debit Cash $1,200; credit Service Revenue $1,200.
- Credit revenue: debit Accounts Receivable $1,800; credit Service Revenue $1,800.
- Collection: debit Cash $900; credit Accounts Receivable $900.
- Supplier payment: debit Accounts Payable $500; credit Cash $500.
- Principal repayment: debit Notes Payable $400; credit Cash $400.
- Rent: debit Rent Expense $650; credit Cash $650.
- Supplies purchase: debit Supplies $250; credit Cash $250.
- Owner withdrawal: debit Owner’s Withdrawals $300; credit Cash $300.
Post the accounts. Cash debits total $7,000 + $2,000 + $1,200 + $900 = $11,100. Cash credits total $1,000 + $500 + $400 + $650 + $250 + $300 = $3,100. Ending Cash is $8,000 debit. Accounts Receivable is $1,800 − $900 = $900 debit. Equipment is $2,600 debit, and Supplies is $250 debit.
Accounts Payable is $1,600 − $500 = $1,100 credit. Notes Payable is $2,000 − $400 = $1,600 credit. Service Revenue is $1,200 + $1,800 = $3,000 credit. Rent Expense is $650 debit. Owner’s Capital is $7,000 credit, and Owner’s Withdrawals is $300 debit.
Check. Assets are $8,000 + $900 + $2,600 + $250 = $11,750. Liabilities are $1,100 + $1,600 = $2,700. Equity is $7,000 + $3,000 − $650 − $300 = $9,050. Thus $2,700 + $9,050 = $11,750.
Common mistake avoided: The $1,600 still owed for the equipment is a liability, not another cash payment. The supplier payment later reduces that liability by $500, leaving $1,100 payable.
Why the Order and Account Labels Matter
Posting in chronological order helps preserve the connection between each event and its accounts. It is especially useful when one account is affected several times. Cash, for example, may receive debits from contributions, borrowing, revenue, and collections, while receiving credits for purchases, payments, expenses, and withdrawals. A running balance makes those repeated effects visible and makes arithmetic errors easier to locate.
Account labels matter just as much as the arithmetic. Receiving cash from a customer for work just completed may be revenue; receiving cash on an earlier receivable reduces Accounts Receivable. A loan proceeds entry increases Notes Payable, while repayment of principal decreases it. A purchase on credit increases Accounts Payable, and payment later decreases it. These events can all involve cash, but they do not have the same accounting effects.
Common Posting Traps
- Recording a collection as new revenue. If the revenue was already recorded when earned on credit, a later collection debits Cash and credits Accounts Receivable.
- Recording loan principal repayment as an expense. Repaying principal debits the loan liability and credits Cash. Interest, if specified, is a separate account effect.
- Posting only one side of an entry. Every debit and credit in the journal must be transferred to its corresponding ledger account.
- Ignoring opening balances. Posting updates a ledger account’s existing balance; it does not replace that balance with the latest transaction amount.
- Getting the net change right but the account wrong. A transaction can leave total assets unchanged while still requiring two distinct asset accounts, such as a cash purchase of equipment.
Arithmetic trap: Suppose Cash begins at $5,000, then receives $1,000, pays $300 for utilities, and pays $250 to a supplier. A tempting but incorrect calculation is $5,000 + $1,000 − $300 = $5,700, because it omits the supplier payment. The correct running calculation is $5,000 + $1,000 − $300 − $250 = $5,450. The supplier payment must be included even though it also reduces Accounts Payable.
Check Your Understanding
For each sequence, determine the requested ending balances. Treat each stated business as beginning with zero balances unless opening balances are provided.
- An owner contributes $4,500 cash. The business earns $900 cash revenue and $700 revenue on credit, collects $300 from customers, and pays a $120 phone bill in cash. What are ending Cash, Accounts Receivable, Service Revenue, and Phone Expense? (Answer: Cash $5,580 debit; Accounts Receivable $400 debit; Service Revenue $1,600 credit; Phone Expense $120 debit.)
- A business buys equipment for $2,400, paying $900 cash and owing the rest to the supplier. It then pays $500 toward that payable and buys $180 of supplies for cash. What are the ending Equipment, Accounts Payable, and change in Cash? (Answer: Equipment $2,400 debit; Accounts Payable $1,000 credit; Cash decreased by $1,580.)
- An owner contributes $8,000 cash; the business borrows $2,500, pays $400 for an expense, earns $1,200 cash revenue and $1,900 revenue on credit, collects $700, repays $600 of loan principal, and the owner withdraws $350. What are ending Cash, Accounts Receivable, Notes Payable, and total equity? (Answer: Cash $11,050 debit; Accounts Receivable $1,200 debit; Notes Payable $1,900 credit; total equity $10,350.)
- A business receives a $5,000 owner contribution, buys equipment for $1,400 cash, buys supplies for $600 on credit, earns $2,100 on credit, collects $800, pays its supplier $250, pays $180 cash for utilities, and the owner withdraws $300. What are ending Cash, Accounts Receivable, Accounts Payable, and total assets? (Answer: Cash $3,670 debit; Accounts Receivable $1,300 debit; Accounts Payable $350 credit; total assets $6,970.)
- An owner contributes $9,000, and the business borrows $3,000. It buys equipment for $2,200 cash, earns $2,400 on credit, collects $1,000, buys supplies for $700 on credit, pays the supplier $200, repays $500 of loan principal, and pays $400 cash rent. What are ending Cash, Accounts Receivable, Supplies, Accounts Payable, Notes Payable, and total assets? (Answer: Cash $9,700 debit; Accounts Receivable $1,400 debit; Supplies $700 debit; Accounts Payable $500 credit; Notes Payable $2,500 credit; total assets $14,000.)