Bookkeeping Basics – An Introduction to Debits and Credits
Posted on June 11, 2011 | No Comments
Leo Thomas asked:
Bookkeeping is the process of recording financial transactions for a business. It comes in many guises including manual record keeping, spreadsheets, accounting software and online bookkeeping software, to name but a few. Double entry bookkeeping consists of two main entries, debits and credits. Each transaction has double effect like Newton’s third law, where every action has an opposite reaction; similarly every financial transaction in double entry bookkeeping has a debit side and credit side. There are always two accounts involved in double entry bookkeeping. One is where a debit entry is recorded and the other where credit entry is recorded.
Bookkeeping defines debits as those transactions that are recorded on the left hand side and credits are those which are recorded on the right hand side. It is crucial that the debits should always be equal to the credits.
There are fundamentally five accounts groups which need to be considered when assigning debits or credits. These are assets, liabilities, owner’s equity, income and expenditure. We can briefly see how debits and credits are applied to these accounts:
Assets: When there is an increase in any asset you debit the asset account and when there is a decrease you credit the same account. Liabilities: When there is an increase in a liability then you credit the account and when there is a decrease you debit the account. Owner’s Equity: When there is an increase in owner’s equity you credit the account and when there is a decrease you debit the account. Income: When there is an increase in income you credit the account and when there is a decrease in income you debit the account. Expenses: When there is an increase in expenditure you debit the account and when there is a decrease in you credit the account.
Once all the debit and credit transactions for a business have been recorded for the year, they can be summarised under the various account headings they relate to. This summary is known as a trial balance. A trial balance basically shows each account heading (e.g. each type of expense, income etc…) with the corresponding total debits or credits for the period relating to each heading. Indeed, the totals for the debits on are recorded on the left hand side of the trial balance and all the total credits are recorded on the right hand side. Both the sides of trial balance should be equal after all the items have been entered. Therefore the trial balance acts as a check that the double entry has been applied correctly throughout the year.
Lastly, a profit and loss account and balance sheet can be prepared from the trial balance, after any relevant journal adjustments. Again, when these two financial statements have been completed they should also balance in terms of the debit amounts and credit amounts.
In summary double entry bookkeeping underpins every aspect of making sure that the financial transactions of a business are complete, from the initial recording of individual transactions to presenting the year end information in the year end financial statements.
Kansieo.com
Bookkeeping is the process of recording financial transactions for a business. It comes in many guises including manual record keeping, spreadsheets, accounting software and online bookkeeping software, to name but a few. Double entry bookkeeping consists of two main entries, debits and credits. Each transaction has double effect like Newton’s third law, where every action has an opposite reaction; similarly every financial transaction in double entry bookkeeping has a debit side and credit side. There are always two accounts involved in double entry bookkeeping. One is where a debit entry is recorded and the other where credit entry is recorded.
Bookkeeping defines debits as those transactions that are recorded on the left hand side and credits are those which are recorded on the right hand side. It is crucial that the debits should always be equal to the credits.
There are fundamentally five accounts groups which need to be considered when assigning debits or credits. These are assets, liabilities, owner’s equity, income and expenditure. We can briefly see how debits and credits are applied to these accounts:
Assets: When there is an increase in any asset you debit the asset account and when there is a decrease you credit the same account. Liabilities: When there is an increase in a liability then you credit the account and when there is a decrease you debit the account. Owner’s Equity: When there is an increase in owner’s equity you credit the account and when there is a decrease you debit the account. Income: When there is an increase in income you credit the account and when there is a decrease in income you debit the account. Expenses: When there is an increase in expenditure you debit the account and when there is a decrease in you credit the account.
Once all the debit and credit transactions for a business have been recorded for the year, they can be summarised under the various account headings they relate to. This summary is known as a trial balance. A trial balance basically shows each account heading (e.g. each type of expense, income etc…) with the corresponding total debits or credits for the period relating to each heading. Indeed, the totals for the debits on are recorded on the left hand side of the trial balance and all the total credits are recorded on the right hand side. Both the sides of trial balance should be equal after all the items have been entered. Therefore the trial balance acts as a check that the double entry has been applied correctly throughout the year.
Lastly, a profit and loss account and balance sheet can be prepared from the trial balance, after any relevant journal adjustments. Again, when these two financial statements have been completed they should also balance in terms of the debit amounts and credit amounts.
In summary double entry bookkeeping underpins every aspect of making sure that the financial transactions of a business are complete, from the initial recording of individual transactions to presenting the year end information in the year end financial statements.
Kansieo.com