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Accounting Basics
by Linda
Double-Entry Bookkeeping for Beginners
In accounting, double entry bookkeeping is known to be a system that records every business transaction that takes place. This system is given this name due to every entry in an account requiring a corresponding and opposite entry to a different account. At first glance, double bookkeeping appears complex, however, this system can be broken down to some straightforward rules and can be summarised to the following two points.
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All transactions have one entry in two different accounts
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All transactions have two equal and corresponding sides known as debit and credit. Credit is presented on the left-hand side and debit is on the right.
Therefore, by remembering both rules you should know that once you’ve made a debit entry then wherever the other entry is it must be a credit entry and vice versa. The account will always be split into two sides; however, it is vital that you enter the transaction in the correct account and the correct side.
Account Titles
Debit: Dr
Credit: Cr
Debit and Credit are often abbreviated as Dr. and Cr.
Different Types of Accounts in Bookkeeping
Assets, Liabilities and Capital are known to be three types of accounts.
Assets are known to be any resources that can potentially be used in a business. In other words, it is something you own; there are two types of assets:
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Current assets are owned for less than 1 year and the value of the current asset’s changes over a period.
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Non-current assets are owned for more than a year and are subject to depreciation. They are purchased to generate profit over a long period of time.
Liabilities refers to something that you owe. For example, any borrowings or any amounts owed to bank overdraft, suppliers etc.
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Current liability is a debt that must be repaid within one year.
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Non-current liability is a debt that will take more than one year to repay.
Capital refers to the value of resources put into the firm. It can also be referred to cash available to run the business daily.
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Assets - Liabilities = Capital
Remember that some items can be classified as both asset and capital, however, you would need to be able to distinguish the item and enter them in the correct account. For example, cash introduced into a firm can be classified as capital, on the other hand, cash could also be classified as an asset. By remembering the double entry rule, this will allow you to make better judgements.
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All transactions have two entries
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Each transaction has one debit and one credit
Balancing Off Accounts
The balance sheet refers to a list of balances arranged as assets, capital or liabilities, to depict the financial situation of the business on a specific date.
A firm may wish to balance its accounts off at the end of an accounting period. This allows the firm to see if they have made any profits and how much has been generated within that period. This process should not be rushed as one mistake can affect the whole balance sheet. In simpler terms the balance on each account refers to the difference in the totals of the debit and credit side of the account. For example, if the debit side has a total of £230 in the account but the credit side of the account added up to £470, this means that the account had a credit balance of £470 - £230 = £240.
For you to balance an account you need to remember the following:
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Both the Debit and Credit columns should be totalled up
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The totals for each column should always be on the same level on the page
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The balance brought down must always be on the opposite side to the balancing figure of the balance to be carried down.
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An account is not really finished until the balance has been brought down to the next period.
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