Tuesday, May 24, 2011

Accounting Tips:

Accounting tips:
Understand Double-Entry debit/credit accounting:
Definitions of credit/debit:
0) A debit or credit are both types of parts of a money transaction in a double entry bookkeeping system.

1) A credit always does the opposite to a particular account that a debit does.

2) In a complete transaction in a double entry bookkeeping system, the sum of the credits must equal the sum of the debits for the transaction to be in balance.

3) Since in the world there are only two kinds of accounts, your companies, and all the other companies in the world, credits and debits should act one way on your accounts, and exactly the opposite on other companies' accounts, so that money either flows from you to others or from others to you.

4) A chart of accounts represents both types of accounts, so that credits and debits must follow all the rules above.





1= your company




2 = rest of world




3 = rest of world




4 = rest of world




5-9 = your company



Notes on usage: The Assets and Expenses model the activity of your company. The Liabilities, Equities, & Revenues model the rest of the world that lose something when your company gains something. This is why the debits and credits act opposite on you versus your others. If you gain, someone else must lose unless you are just converting some kind of value into another type within your own company. For example: You can reduce your checking balance so as to increase an expense category. One must memorize this table so that any question like: What does a credit do to a liability? One must be able to answer immediately that the credit would increase the liability account. This is how one learns to think about a new complex transaction that your company is having for the first time. One can understand that this new complex transaction must have certain effects on certain accounts and then figure out what the remaining effects must be in terms of a debit or credit of which accounts since the over-riding rule is that in any one transaction in a double entry accounting system the total of all debits must equal the total of all credits.

The plus under the debit column to the left of the Assets account category means that a debit will increase the balance of any Asset account.


We know that the check will be deposited in the company checking account and that it must increase the checking account balance, right? What other account do I put the deposit to in my cash receipts area? The area where the original expense went is the place that you should put it to, but why and what effect will this have? Since we know that an increase in the checking account can only be caused by a debit because the account is an Asset account, we know that the expense account will be credited by the same amount. What does a credit do to your company's expense accounts. Looking at the chart, we see that the credit will decrease your company's expense. Doesn't that make sense? Make sense out of all your accounting packages transactions by understanding this chart and using it daily. Soon you will understand the Double Entry Accounting system.

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