Double entry records each transaction through equal debit and credit entries, first in journals and then in ledger accounts.
Decreases are recorded on the opposite side. Every transaction affects at least two accounts and total debits must equal total credits.
Journal entries record daily transactions by date. Narrations explain why entries were made and help trace them to source documents. The general journal handles irregular transactions such as capital, drawings, loans and non-current assets bought on credit. Special journals handle repetitive transactions: credit sales, credit purchases, cash receipts/payments, sales returns and purchase returns.
Ledger accounts consolidate transactions for specific accounts. Asset, liability and capital balances can be brought down into the next period. Income and expense accounts close to income summary; income summary closes to capital for a sole proprietor or retained earnings for a company. Drawings close to capital and dividends to retained earnings.
A trade discount is given at the point of sale to encourage volume or frequency. It is not recorded separately; transactions use the lower invoice price. A cash discount encourages prompt payment and is recorded directly. Discount allowed is an expense; discount received is income.
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