An accounting system is designed to show the increases and decreases in accounts in the financial statements.
5 major types of accounts in financial statements:
3. Owner's Equity
The rules of debit and credit apply to these accounts:
- Transaction takes place
- Determine whether an asset, a liability, owner's equity, revenue, or expenses is affected by a transaction
- Apply the rules of debit and credit
- Periodically, the journal entries are transferred to the accounts in the ledger
- Ledger contains accounts that the company has; the list of accounts is normally known as chart of accounts.
3. Trial Balance
- The trial balance is a list of account balances from the ledger
- At the end of each accounting period, company will prepare a trial balance.
- The trial balance must balance, i.e. the total of the debit balances must equal to the total of credit balances.