Typically a business will cater various daily transactions which require a device to record these items. These are called an Account (abbreviated as: a/c). Every balance sheet item has its own account. For example, the record where all changes to the item "premises" are shown is called the "Premises Account." All these accounts are kept within a ledger.

There are two types of account format, being the "T-account format" and the "Columnar format." Both are depicted below.

The T-Account method you can see forms a T shape, where two sides are used, one for debit and one for credit. This form is often used for manual transactions.

Read more: The Basics To Ledger Accounts

To understand every aspect of bookkeeping is to understand transaction analysis first and foremost. To not understand this core level is to be incapable of fault finding an account. Transaction analysis is the foundation to getting it right.

Debit vs. Credit

Using both the ALORE acronym and ledger accounts you will better understand debits and credits by utilising what is called a transaction analysis table. This is not used in daily accounting, instead used as a training aid to understand the full detail of a transaction. Master this and your ledger accounting falls into place.

Read more: Introduction to Transaction Analysis

Using the accounting equation and applying that to the balance sheet, you will prove mathematical accuracy in your financial data. The very basic principle is outlined below, though in a more realistic business determination you would find separate pages for accounts receivable, accounts payable, property, loans, etc.

Regardless whether manual or computer generated tools are utilised, the balance sheet is the combination of all these accounts and must balance to prove true financial account accuracy. If it did not balance it means you have an error elsewhere. The basic balance sheet using the accounting equation is illustrated below.

Read more: The Basics of The Balance Sheet (Financial Position)

The ALORE acronym, for training purposes, is a foundation to understand the required accounting entries to process a transaction. This method builds upon the accounting equation to determine more realistic business financial modelling.

• Assets
• Liabilities
• Owners Equity
• Revenue
• Expenses

ALO relate to the balance sheet, the RE relate to the profit and loss statement.

Read more: ALORE Acronym

The accounting entity convention is the basic principle that the personal transactions of the owner/s be kept separate from those of the business. The business is always viewed as a separate entity regardless whether the firm is a sole trader, partnership or company.

The equation reads:

Assets (A) = Liabilities (L) + Owners Equity (OE)

Read more: The Accounting Equation