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Easy Understanding of Bookkeeping - Part 2 - Debit and Credit

Accountants

Easy Understanding of Bookkeeping - Part 2 - Debit and CreditBy Raja Idris Kamarudin

When to Debit and when to Credit?

The most difficult and crucial part of the Double Entry System is to know what information or data is to be entered as a Debit and what information or data is to be entered as a Credit.

I have known students who when they were starting to learn accounting and bookkeeping would start by memorizing what to debit and what to credit.

The danger in this is, if they were to come across an item that they have not come across before and have not memorized it yet, they will not know what to do with it. Do I debit or credit?

Everyone that I have taught bookkeeping, I have always shown them a very simple way to remember this principle of what to debit and what to credit.

All you have to remember is the D in Debit.

Now think of nothing else in terms of debit and credit. Just relate D to DEPOSITS.

Right, now we take the example of the $100 Sales above.

When we receive the $100 cash what will we do?

We would of course DEPOSIT it into the bank. So, we would DEBIT Bank Account and since it is a sale we would Credit Sales.

Is that simple enough?

Expanding on this rule, we now can say, since cash is value, any value coming in would be a Debit.

We have seen the example of a cash sale. Now let us look at a cash purchase or expense.

When we purchase or spend on something, anything, the value coming in would be the item itself since cash is going out.

We therefore, debit the expense item Account and credit Cash Account.

So we would debit, goods purchases, electricity paid, wages and salaries, rental paid.

Sounds easy enough, however what happens when no Cash is transacted.

The rule still applies, however the value in or out no longer goes to Cash Account.

For example, if we were to sell goods to ABC Company on credit and no cash were to come in, we would simply debit ABC Company in place of Cash Account. Here Cash Account is substituted with what is known as a Debtor Account, in this case ABC Company.

In the next article I will discuss on The End Product of Bookkeeping - Final Accounts

My name is Raja Idris Kamarudin and I have more than 30 years experience in Senior Management positions, including as Board Member on Public Listed Companies and Multi National Companies.

I have been involved in accounting and bookkeeping since the 70s and IT since the 80s and have been managing companies for more than 30 years.

Since late 90s I began getting involved in the Internet and have merged all my expertise into a few internet businesses that I have set up, that include Spreadsheet based Accounting Software, Online Bookkeeping Services, Online Travel Booking System and Online Shopping Catalogue.

You can view all my products and services by going to my website at

http://www.your1stop.co.uk

If you want to subscribe to my FREE tutorial, "Easy Understanding of Bookkeeping"

or need more information on accounting or bookkeeping, just email me at

rajaidris@bookkeeper4u.co.uk

I will gladly assist the greatest that I can.

,

Easy Understanding of Bookkeeping - Part 3 - the Final Accounts

Accountants

Easy Understanding of Bookkeeping - Part 3 - The Final AccountsBy Raja Idris Kamarudin

The End Products of Bookkeeping - Final Accounts

In order to understand why we do certain things, which we do in the first instance, while doing our bookkeeping we need to examine and understand the end-products of bookkeeping.

The end-products of the bookkeeping and accounting cycle are what are known as The Final Accounts

Here I will explain briefly what these Final Accounts are (read section on Final Accounts to know how to prepare your Final Accounts).

The Final Accounts are:

1) The Trial Balance

The Trial Balance is a list of all the balances from your ledgers (read section on Ledgers to find out more on ledgers), these are the Debit and Credit balances (read section on Double Entry to find out more on Debit and Credit).

2) Income Statement

The Income Statement which is also known as the Trading Account and the Profit and Loss Statement is basically a statement that you prepare to calculate your Gross Trading Profit by calculating how much Sales you made, how much was your Purchases and Cost of Goods Sold.

After determining your Gross Trading Profit you would then deduct it from your Administrative and other expenses to calculate you Nett Profit or Nett Loss for the year.

3) Balance Sheet

The Balance Sheet is used to calculate and get a snapshot of your company's current financial position by listing all the Current and Fixed Assets, the Current and Long Term Liabilities, the Shareholdings and Capital and the Profit or Loss for the year and the Accumulated Profit or Loss of your company.

It will reflect what is known as your company'sNett Worth. A positive Nett Worth means that your company has more Assets than Liabilities and a not positive Nett Worth means that your company has more Liabilities than Assets and would be hard pressed to meet payments Creditors and banks.

I will go into more details in the Section on Final Accounts later in the Tutorial.

My name is Raja Idris Kamarudin and I have more than 30 years experience in Senior Management positions, including as Board Member on Public Listed Companies and Multi National Companies.

I have been involved in accounting and bookkeeping since the 70s and IT since the 80s and have been managing companies for more than 30 years.

Since late 90s I began getting involved in the Internet and have merged all my expertise into a few internet businesses that I have set up, that include Spreadsheet based Accounting Software, Online Bookkeeping Services, Online Travel Booking System and Online Shopping Catalogue.

You can view all my products and services by going to my website at

http://www.your1stop.co.uk

If you want to subscribe to my FREE tutorial, "Easy Understanding of Bookkeeping"

or need more information on accounting or bookkeeping, just email me at

rajaidris@bookkeeper4u.co.uk

I will gladly assist the greatest that I can.

,

Explanation of T-account, Debit and Credit, and Double-entry Accounting System

Accountants

Explanation of T-account, Debit and Credit, and Double-entry Accounting SystemBy Igor Voytsekhivskyy

All accountants know several terms that create basis for any accounting system. Such terms are T-account, debit and credit, and double-entry accounting system. Of course, these terms are studied by accounting students all over the world. However, any business person, whether an investment banker or a small business owner, will benefit from knowing them as well. They are easy to grasp and will be helpful in most business situations. Let us take a closer look at these accounting terms.

T-Account

Accounting records about events and transactions are recorded in accounts. An account is an individual record of increases and decreases in a specific asset, liability, or owner's equity item. Look at accounts as a place for recording numbers related to a certain item or class of transactions. Examples of accounts may be Cash, Accounts Receivable, Fixed Assets, Accounts Payable, Accrued Payroll, Sales, Rent Expenses and so on.

An account consists of three parts:

- title of the account

- left side (known as debit)

- right side (known as credit)

Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account. You could draw T accounts on a piece of paper and use it to maintain your accounting records. However, nowadays, in place of having to draw T accounts, accountants use accounting software (i.e., QuickBooks, Microsoft Accounting, Peachtree, JD Edwards, Oracle, and SAP, among others).

Debit, Credit and Account Balance

In account, the term debit means left side, and credit means right side. These are abbreviated as Dr for debit and Cr for credit. Debit and credit indicate on which side of a T account numbers will be recorded.

An account balance is the difference between the debit and credit amounts. For some types of accounts debit means an increase in the account balance, whilefor others debit means a decrease in the account balance. See below for a list of accounts and what a debit to such account means:

Asset - IncreaseContra Assets - DecreaseLiability - DecreaseEquity - DecreaseContribution Capital - DecreaseRevenue - DecreaseExpenses - IncreaseDistributions - Increase

Credits to the above account types will mean an opposite result.

Double-entry Accounting System

A double-entry accounting system requires that any amount entered into the accounting records is shown at least on two different accounts. For example, when a customer pays cash for your product, an account would show the cash received in the Cash account (as a debit) and in the Sales account (as a credit). All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.

Having a double-entry accounting system has benefits over regular, one-sided systems. One of such benefits is that the double-entry system helps identify recording errors. As I mentioned, if one amount is entered only once in error, then debits and credits won't balance and the accountant will know that one or more entries were not posted fully. Note, however, that this check will help spot errors, however will not identify all cases of errors. For example, equal debits and credits will not identify an error when an amount was posted twice, however was posted to wrong accounts. Keep this in mind when analyzing causes of errors in accounting records.

Igor Voytsekhivskyy is a CPA and CIA working in public accounting. He maintains a website SimpleStudies.com devoted to helping people learn accounting online for free.