Learning Outcomes
After reading this article, you will be able to apply the rules of debit and credit in double-entry bookkeeping, construct journal entries for a range of transactions, and write effective narrations. You will also distinguish between different account types and understand how journal entries integrate with the wider accounting process.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand how the double-entry bookkeeping system ensures accuracy and completeness in recording business transactions. Focus your revision on:
- The rules for debits and credits in different account types (assets, liabilities, capital, income, expenses)
- The format and use of journals within the accounting system
- Preparation of correct journal entries for various transactions and error corrections
- The use and purpose of clear narrations in journal entries
- Transferring information from source documents into the general ledger using journals
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Which side (debit or credit) increases an asset account?
- What is the double-entry for purchasing office equipment on credit?
- Why is a narration required in a journal entry?
- True or false? Crediting an expense account increases its balance.
- Prepare the journal entry (including a suitable narration) for receiving $800 from a credit customer.
Introduction
Accurate financial records depend on a systematic method of recording transactions. Double-entry bookkeeping uses a set of clear rules—debit and credit—that apply to every transaction. This ensures that the accounting equation remains balanced and that each event has an equal and opposite impact in two or more accounts. Journal entries provide a formal record of such transactions, especially for non-regular or correcting items, and always include a brief explanation, or narration, to clarify the nature of the record.
Key Term: double-entry bookkeeping
A system of accounting where every transaction affects at least two accounts, with equal debit and credit entries to maintain balance.
DEBIT AND CREDIT RULES
Each account in the general ledger falls into a category. The effect of debits and credits varies with each type:
- Assets: Debited to increase, credited to decrease
- Liabilities: Credited to increase, debited to decrease
- Capital/Equity: Credited to increase, debited to decrease
- Income: Credited to increase, debited to decrease
- Expenses: Debited to increase, credited to decrease
Key Term: debit
An entry recorded on the left side of an account, representing an increase to assets or expenses, or a decrease to liabilities, capital, or income.Key Term: credit
An entry recorded on the right side of an account, representing an increase to liabilities, capital, or income, or a decrease to assets or expenses.
The sum of all debits must always equal the sum of all credits for each transaction, keeping the accounting equation (Assets = Liabilities + Capital) balanced.
Worked Example 1.1
A business pays $250 to a supplier for materials by bank transfer. What are the debit and credit entries? Add an appropriate narration.
Answer:
Debit: Purchases $250
Credit: Cash at Bank $250
Narration: "Being payment to supplier for materials purchased by bank transfer."
How to Decide Debit or Credit
- Identify the accounts affected.
- Determine the type of each account (asset, liability, etc.).
- Is each account increasing or decreasing?
- Apply the debit and credit rule for that account type.
The Role of the Journal
The journal is a book of prime entry used mainly for non-routine transactions, corrections, or adjustments not originating from documents such as invoices. Journal entries include:
- The date
- Accounts to be debited and credited with amounts
- A concise narration
Key Term: journal
A record of transactions showing the accounts affected and the corresponding debits and credits, usually with a brief explanation.
Worked Example 1.2
On 10 May, a machine costing $4,000 is purchased. The supplier allows payment in 30 days. Prepare the journal entry and narration.
Answer:
Debit: Machinery $4,000
Credit: Trade Payables $4,000
Narration: "To record purchase of machinery on credit from supplier."
HOW TO WRITE A NARRATION
A narration is a short description added below a journal entry. It must be clear and informative, indicating the substance of the transaction. This avoids uncertainty during future reviews or audits.
Key Term: narration
A brief, explanatory note below a journal entry describing the nature and purpose of the transaction.
Exam Warning
Always provide a precise narration. Vague explanations or missing narrations can cost marks in the exam and cause confusion in practice.
COMMON JOURNAL ENTRIES
- Correction of errors
- Year-end adjustments (accruals, prepayments, depreciation)
- Non-cash transactions (irrecoverable debts written off, asset disposals)
- Owners' drawings or capital introduced not covered by regular documents
Worked Example 1.3
A business discovers that a utility bill of $375 paid last month has not been entered. Prepare the journal entry with narration.
Answer:
Debit: Utilities Expense $375
Credit: Cash at Bank $375
Narration: "To record omitted payment of utility bill by bank."
Summary
The debit and credit rules are the basis of double-entry bookkeeping. Correctly applying these rules ensures that every transaction keeps the general ledger in balance. Journal entries provide a vehicle for recording unusual or non-routine transactions, always accompanied by a clear narration for explanation and future reference.
Key Point Checklist
This article has covered the following key knowledge points:
- State and apply the debit and credit rules for all account categories
- Recognise transactions requiring journal entries and their format
- Prepare journal entries with correct narration and account codes
- Understand the essential role narrations play in journals and audit trails
Key Terms and Concepts
- double-entry bookkeeping
- debit
- credit
- journal
- narration