Accounting Basics - Double Entry | AccountingCoach

Double entry is a simple yet powerful concept: each and every one of a company's transactions will result in an amount recorded into at least two of the ... AccountingBasics(Explanation) PrintPDF Part1 IntroductiontoAccountingBasics,AStoryforRelatingtoAccountingBasics Part2 IncomeStatement Part3 BalanceSheet–Assets Part4 BalanceSheet–LiabilitiesandStockholders'Equity Part5 StatementofCashFlows,Double-EntrySystem,SampleTransaction#1 Part6 SampleTransactions#2-#3 Part7 SampleTransactions#4-#6 StatementofCashFlows ThethirdfinancialstatementthatJoeneedstounderstandistheStatementofCashFlows.ThisstatementshowshowDirectDelivery'scashamounthaschangedduringthetimeintervalshownintheheadingofthestatement.Joewillbeabletoseeataglancethecashgeneratedandusedbyhiscompany'soperatingactivities,itsinvestingactivities,anditsfinancingactivities.MuchoftheinformationonthisfinancialstatementwillcomefromDirectDelivery'sbalancesheetsandincomestatements. Note:Tolearnmoreaboutthestatementofcashflows,visit:ExplanationofCashFlowStatementandQuizforCashFlowStatement ThethreefinancialreportsthatMarilynintroducedtoJoe—theincomestatement,thebalancesheet,andthestatementofcashflows—representonesegmentofthevaluableoutputthatgoodaccountingsoftwarecangenerateforbusinessowners. MarilynnowexplainstoJoethebasicsofgettingstartedwithrecordinghistransactions. Confused?SendFeedback Double-EntrySystem Thefieldofaccounting—boththeoldermanualsystemsandtoday'sbasicaccountingsoftware—isbasedonthe500-year-oldaccountingprocedureknownasdoubleentry.Doubleentryisasimpleyetpowerfulconcept:eachandeveryoneofacompany'stransactionswillresultinanamountrecordedintoatleasttwooftheaccountsintheaccountingsystem. TheChartofAccounts TobegintheprocessofsettingupJoe'saccountingsystem,hewillneedtomakeadetailedlistingofallthenamesoftheaccountsthatDirectDelivery,Inc.mightfindusefulforreportingtransactions.Thisdetailedlistingisreferredtoasachartofaccounts.(Accountingsoftwareoftenprovidessamplechartsofaccountsforvarioustypesofbusinesses.) Asheentershistransactions,Joewillfindthatthechartofaccountswillhelphimselectthetwo(ormore)accountsthatareinvolved.OnceJoe'sbusinessbegins,hemayfindthatheneedstoaddmoreaccountnamestothechartofaccounts,ordeleteaccountnamesthatareneverused.Joecantailorhischartofaccountssothatitbestsortsandreportsthetransactionsofhisbusiness. Becauseofthedouble-entrysystemallofDirectDelivery'stransactionswillinvolveacombinationoftwoormoreaccountsfromthebalancesheetand/ortheincomestatement.MarilynlistsoutsomesampleaccountsthatJoewillprobablyneedtoincludeonhischartofaccounts: Note:Tolearnmoreaboutthechartofaccounts,visit:ExplanationofChartofAccountsandQuizforChartofAccounts BalanceSheetaccounts: Assetaccounts(Examples:Cash,AccountsReceivable,Supplies,Equipment) Liabilityaccounts(Examples:NotesPayable,AccountsPayable,WagesPayable) Stockholders'Equityaccounts(Examples:CommonStock,RetainedEarnings)IncomeStatementaccounts: Revenueaccounts(Examples:ServiceRevenues,InvestmentRevenues) Expenseaccounts(Examples:WagesExpense,RentExpense,DepreciationExpense) TohelpJoereallyunderstandhowthisworks,Marilynillustratesthedouble-entrysystemwithsomesampletransactionsthatJoewilllikelyencounter. Confused?SendFeedback SampleTransaction#1 OnDecember1,2021JoestartshisbusinessDirectDelivery,Inc.ThefirsttransactionthatJoewillrecordforhiscompanyishispersonalinvestmentof$20,000inexchangefor5,000sharesofDirectDelivery'scommonstock.DirectDelivery'saccountingsystemwillshowanincreaseinitsaccountCashfromzeroto$20,000,andanincreaseinitsstockholders'equityaccountCommonStockby$20,000.Bothoftheseaccountsarebalancesheetaccounts.Therearenorevenuesbecausenodeliveryfeeswereearnedbythecompany,andtherewerenoexpenses. AfterJoeentersthistransaction,DirectDelivery'sbalancesheetwilllooklikethis: MarilynasksJoeifhecanseethatthebalancesheetisjustthat—inbalance.Joelooksatthetotalof$20,000ontheassetside,andlooksatthe$20,000ontherightside,andsaysyes,ofcourse,hecanseethatitisindeedinbalance. MarilynshowsJoesomethingcalledthebasicaccountingequation,which,sheexplains,isreallythesameconceptasthebalancesheet,it'sjustpresentedinanequationformat: Theaccountingequation(andthebalancesheet)shouldalwaysbeinbalance. DebitsandCredits Didthefirstsampletransactionfollowthedouble-entrysystemandaffecttwoormoreaccounts?Joelooksatthebalancesheetagainandanswersyes,bothCashandCommonStockwereaffectedbythetransaction. Marilynintroducesthenextbasicaccountingconcept:thedouble-entrysystemrequiresthatthesamedollaramountofthetransactionmustbeenteredonboththeleftsideofoneaccount,andontherightsideofanotheraccount.Insteadofthewordleft,accountantsusetheworddebit;andinsteadofthewordright,accountantsusethewordcredit.(ThetermsdebitandcreditarederivedfromLatintermsused500yearsago.) Here'saTip Debitmeansleft. Creditmeansright. JoeasksMarilynhowhewillknowwhichaccountsheshoulddebit—meaningheshouldenterthenumbersontheleftsideofoneaccount—andwhichaccountsheshouldcredit—meaningheshouldenterthenumbersontherightsideofanotheraccount.MarilynpointsbacktothebasicaccountingequationandtellsJoethatifhememorizesthissimpleequation,itwillbeeasiertounderstandthedebitsandcredits. Here'saTip Memorizingthesimpleaccountingequationwill helpyoulearnthedebitandcreditrulesfor enteringamountsintotheaccountingrecords. Let'stakealookattheaccountingequationagain: Justasassetsareontheleftside(ordebitside)oftheaccountingequation,theassetaccountsinthegeneralledgerhavetheirbalancesontheleftside.Toincreaseanassetaccount'sbalance,youputmoreontheleftsideoftheassetaccount.Inaccountingjargon,youdebittheassetaccount.Todecreaseanassetaccountbalanceyoucredittheaccount,thatis,youentertheamountontherightside. Justasliabilitiesandstockholders'equityareontherightside(orcreditside)oftheaccountingequation,theliabilityandequityaccountsinthegeneralledgerhavetheirbalancesontherightside.Toincreasethebalanceinaliabilityorstockholders'equityaccount,youputmoreontherightsideoftheaccount.Inaccountingjargon,youcredittheliabilityortheequityaccount.Todecreasealiabilityorequity,youdebittheaccount,thatis,youentertheamountontheleftsideoftheaccount. Aswithallrules,thereareexceptions,butMarilyn'sreferencetotheaccountingequationmayhelpyoutolearnwhetheranaccountshouldbedebitedorcredited. Sincemanytransactionsinvolvecash,MarilynsuggeststhatJoememorizehowtheCashaccountisaffectedwhenatransactioninvolvescash:ifDirectDeliveryreceivescash,theCashaccountisdebited;whenDirectDeliverypayscash,theCashaccountiscredited. Here'saTip Whenacompanyreceivescash,theCashaccountisdebited.Whenthecompanypayscash,theCashaccountiscredited. MarilynreferstotheexampleofDecember1.SinceDirectDeliveryreceived$20,000incashfromJoeinexchangefor5,000sharesofcommonstock,oneoftheaccountsforthistransactionisCash.Sincecashwasreceived,theCashaccountwillbedebited. Inkeepingwithdoubleentry,two(ormore)accountsneedtobeinvolved.Becausethefirstaccount(Cash)wasdebited,thesecondaccountneedstobecredited.AllJoeneedstodoisfindtherightaccounttocredit.Inthiscase,thesecondaccountisCommonStock.Commonstockispartofstockholders'equity,whichisontherightsideoftheaccountingequation.Asaresult,itshouldhaveacreditbalance,andtoincreaseitsbalancetheaccountneedstobecredited. Accountantsindicateaccountsandamountsusingthefollowingformat: Accountantsusuallyfirstshowtheaccountandamounttobedebited.Onthenextline,theaccounttobecreditedisindentedandtheamountappearsfurthertotherightthanthedebitamountshowninthelineabove.Thisentryformatisreferredtoasageneraljournalentry. (Withthedecreaseinthepriceofcomputersandaccountingsoftware,itisraretofindasmallbusinessstillusingamanualsystemandmakingentriesbyhand.Accountingsoftwarehasmadetheprocessofrecordingtransactionssomucheasierthatthegeneraljournalisrarelyneeded.Infact,entriesareoftengeneratedautomaticallywhenacheckorsalesinvoiceisprepared.) Note:TolearnabouttherolesofaccountantsandCPAsvisitourtopicAccountingCareers. Confused?SendFeedback MarkPart5asComplete Previous 1 2 3 4 5 6 7 Next AccountingBasicsOutline 0% ReadourExplanation(7Parts)free Part1 Part2 Part3 Part4 Part5Youarehere Part6 Part7 TakeourPracticeQuizfree ReviewourQ&Afree ReviewourFlashcards SolveourWordScramblefree SolveourCrosswordPuzzle#1free SolveourCrosswordPuzzle#2free ReviewourCheatSheet TakeourQuickTest#1 TakeourQuickTest#2 0 CertificatesofAchievement Wenowoffer10CertificatesofAchievementforIntroductoryAccountingandBookkeeping.ThecertificatesincludeDebitsandCredits,AdjustingEntries,FinancialStatements,BalanceSheet,IncomeStatement,CashFlowStatement,WorkingCapitalandLiquidity,FinancialRatios,BankReconciliation,andPayrollAccounting.Clickheretolearnmore. 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ViewPROFeatures→ Pleaseletusknowhowwecanimprovethisexplanation SubmitFeedback NoThanks JoinPROorPROPlusandGetLifetimeAccesstoOurPremiumMaterials Readall2,238Testimonials PRO LifetimeAccess PROPlus LifetimeAccess VideoTraining Flashcards VisualTutorials QuickTests QuickTestswithCoaching CheatSheets BusinessForms AllPDFfiles ProgressTracking Certificate-DebitsandCredits Certificate-AdjustingEntries Certificate-FinancialStatements Certificate-BalanceSheet Certificate-IncomeStatement Certificate-CashFlowStatement Certificate-WorkingCapital Certificate-FinancialRatios Certificate-BankReconciliation Certificate-PayrollAccounting LearnMore LearnMore AbouttheAuthor HaroldAverkamp(CPA,MBA)hasworkedasauniversityaccountinginstructor,accountant,andconsultantformorethan25years.HeisthesoleauthorofallthematerialsonAccountingCoach.com.Readmoreabouttheauthor. AllTopics Bookkeeping Financial Managerial Suggested Alphabetical HowtoBegin(Video) 01.AccountingBasics 02.DebitsandCredits 03.ChartofAccounts 04.Bookkeeping 05.AccountingEquation 06.AccountingPrinciples 07.FinancialAccounting 08.AdjustingEntries 09.FinancialStatements 10.BalanceSheet 11.WorkingCapitalandLiquidity 12.IncomeStatement 13.CashFlowStatement 14.FinancialRatios 15.BankReconciliation 16.AccountsReceivableandBadDebtsExpense 17.AccountsPayable 18.InventoryandCostofGoodsSold 19.Depreciation 20.PayrollAccounting 21.BondsPayable 22.Stockholders'Equity 23.PresentValueofaSingleAmount 24.PresentValueofanOrdinaryAnnuity 25.FutureValueofaSingleAmount 26.NonprofitAccounting 27.Break-evenPoint 28.ImprovingProfits 29.EvaluatingBusinessInvestments 30.ManufacturingOverhead 31.NonmanufacturingOverhead 32.ActivityBasedCosting 33.StandardCosting AccountingCareers CertificatesofAchievement TaketheTour Join525,295subscribers Youarealreadysubscribed.Thisofferisnotavailabletoexistingsubscribers. 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