Many people have a hard time understanding how accounting works, but it’s actually not that difficult. This article will cover some basic accounting information.
Single-entry and Double Entry
The very first thing you must understand about accounting is the difference between double entry and single-entry bookkeeping. They are named as such because of the way they “enter” transactions into the accounts. Simply put, double-entry means two entries for each transaction – usually one debit and one credit to two different accounts.
Single entry means there is only one entry for each transaction – usually debit or credit but not both to the same account. Double Entry Accounting is considered more accurate by most experts mainly due to this reason- if there are any errors in your books, ‘ll show up with double-entry.
Accounts and Journals
The next thing you need to know is that there is a difference between accounts and journals. Accounts are the actual accounts that you have control over they’re all listed in your chart of accounts. Journals are simply lists of transactions – for example, if I purchase a new computer on my debit card I would record this transaction in my cash journal.
From there, it’ll transfer to the computer expense account (which is under assets) in the general ledger (the master list that ties all your transactions together). You can also think of this like bank statements – journals are like every transaction listed day by day along with where it was deducted from or deposited into; accounts are what those amounts mean to you i.e. how much money do I have in my savings account?
Debit and Credit
The last thing you need to know is what debit and credit mean. This will be the hardest concept for most people to understand, but it’s not that difficult. A debit is an increase in the balance of an asset, expense, or liability account while a credit does the opposite – it decreases the balance of any given accounts.
An easy way to remember this is that debits always go with credits – when you take money out of your bank account it increases your savings (assets) because there’s less money in checking (liabilities). If you go back into the bank and deposit more money into checking, then your liabilities have decreased so your assets must have increased by the same amount!
Another way to remember this is that debits are on the left side of an account (they’re listed first) and credits are on the right. For example, if you want to buy a new computer your assets will decrease by $500 because you just spent money. Your bank account would be credited with $500 because it’s helping increase the balance in there.
Then you’ll also see a debit for $500 under ‘computer’ (an expense) because you now own one! Notice that every time there is a credit all your accounts move over to the right; each time they’re debited, they move over to the left?
These concepts make up very basic accounting information- it gets much more difficult as you learn about debits and credits in other places, but overall it’s not that complicated!
As long as you remember the balance of every account must always equal zero (total debits = total credits) and once money is taken out of an account, its balance decreases (debit), and if more money is put into an account then its balance increases (credit), you’ll be good to go!
Note: This article should only be used for background information. No single source such as this can cover everything about accounting. Additional research will need to be done by the writer to fill in the gaps. For example, an actual journal entry includes a “code” that tells the accountant what type of transaction occurred.
Also, focus on how each transaction affects both sides of the balance sheet. For example, a purchase of a computer affects both the assets and the equity section on the balance sheet.
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