Post by admin1 on Jan 24, 2006 9:26:58 GMT -5
The Double Entry System. Now for the fun stuff. You're ready to learn the "double-entry system." At first it might sound like twice as much work, but over time you'll learn to love and rely on the built-in checks and balances that help you keep accurate records.
As you enter information in your books, you will always make two entries, which exactly balance one another. Each entry has a left side -- these are called debits, and a right side -- these are called credits. These two terms have mystified more people in the history of the world than any other. Just accept that they are part of the language of business and as you begin to use them the mystery will evaporate. So, I'll gratefully accept my chance to further confuse the issue and continue on.
For each entry you must enter at least one debit and one credit, and the total of the amounts on the right must equal the total on the left. Another "rule" is that debits are positive and credits are negative and if you add them all together, the total is "zero." Really, it's just that simple.
If you go to the store and buy a drill, you are decreasing your cash in the bank by $129.50. You are increasing your expenses by the same amount - and there you have your two entries. Cash gets the negative entry, or credit and small tools gets the positive entry, or debit.
What puts a spin on this debit/credit thing is that most people think of credits as minus and debits as plus, but various account types are affected differently because you have debit and credit accounts.
OK, I just lost you - but it's easier than it you think. First I'll provide a description of how each account type is affected by debits and credits, then conclude with a table that summarizes the "rules."
All your asset accounts (1000 series) are debit accounts, which means they are positive numbers. Makes sense, so far? An asset is a positive number in the system. The liability accounts (2000 series) are all credit accounts and they are negative numbers, but generally when you look at them on the balance sheet, you don't show the minus sign. Accounts payable, for example, is listed at $1,235. To the computer, however, liabilities are actually negative numbers - because they need to be subtracted from the assets to come up with the total value of the company. It's not something you have, it's something you owe.
So stay with me - if you credit a liability account, you are actually adding a negative number to a negative number. That just makes a bigger negative number. Increasing your liability. Take the drill example above. If, instead of paying cash, you charged that drill. The expense entry stays the same - the expense is increased, or debited. You aren't touching your cash account this time - instead, you're increasing your accounts payable. So, to increase a liability account, you credit it, because to increase the liability, which is a negative number, you have to add a negative number, or a credit. And, there you have your balancing entry - debit expense, credit accounts payable. Both times you had balancing entries, one debit, one credit - the credit just did different things each time. In the asset account, it decreased cash. In the liability account, it increased accounts payable.
The 3000 series is just something you have to remember somehow- sales are considered a credit account. A friend had a memory trick for learning this concept: " making a sale is a credit to you." Another way to consider it is by thinking of the simplest sale, where you sell something and get some cash. Cash, as you know, is a debit account. Make a sale, and you better increase your cash - debit cash. Positive entry. So the balancing entry has got to be a credit entry - crediting sales increases the amount you are listing in sales, because sales is a negative number, (credit), and you are adding a negative number - another credit. The number gets bigger.
The 4000 and 5000 series, the expense accounts, are all debit accounts. You enter an expense as a positive number (debit) to increase your record of what you've spent. Whenever you make a purchase of an item that goes to one of your expense accounts, you always increase your expense, which is a debit.
The following chart shows how debits and credits effect the different types of accounts:
Account Type Debit Credit
ASSETS Increases Decreases
LIABILITIES Decreases Increases
EQUITY Decreases Increases
INCOME Decreases Increases
EXPENSES Increases Decreases
So, now that you've got the basics of the double entry system, the next step is simply a matter of beginning to enter the info. As you enter checks you've written, they will mostly be simple entries - debit (increase) the correct account number, and credit (decrease) cash. This is going to be the drill for the majority of your entries, when you have paid cash for an item. Even those things you charge, if you are keeping your bills current, make your entry after you pay your bill, and the entry will always be credit cash, debit expense. To keep the process simple, when you receive a bill, go through it and total what part of the money due goes to which account, write it on the bill and use that when you make the entry into the system.
Regular exceptions to this process will be:
- When you buy a large tool or piece of equipment that needs to go on the asset page: credit cash and debit the proper asset account. As you make these entries, don't forget the information that you will need to set up your depreciation schedule.
- When you pay an expense that has been listed as a liability, like a bank payment on a loan: credit cash, but debit two accounts, debit the liability account you're paying on for the amount of principal, and debit interest for the amount of interest expense. Doing this will decrease what you owe on the loan by the principal amount you have paid, and it will increase the record of what you have paid in interest expense.
- When you make an addition to inventory: inventory is a cost you need to count as an expense only when you actually use it. Until then, it's an asset. So when you purchase inventory, credit cash and debit inventory - that will increase the value of your inventory. When you USE inventory, credit (reduce) inventory, and debit (increase) the appropriate expense account - materials, supplies, etc., or an inventory change account.
As you enter information in your books, you will always make two entries, which exactly balance one another. Each entry has a left side -- these are called debits, and a right side -- these are called credits. These two terms have mystified more people in the history of the world than any other. Just accept that they are part of the language of business and as you begin to use them the mystery will evaporate. So, I'll gratefully accept my chance to further confuse the issue and continue on.
For each entry you must enter at least one debit and one credit, and the total of the amounts on the right must equal the total on the left. Another "rule" is that debits are positive and credits are negative and if you add them all together, the total is "zero." Really, it's just that simple.
If you go to the store and buy a drill, you are decreasing your cash in the bank by $129.50. You are increasing your expenses by the same amount - and there you have your two entries. Cash gets the negative entry, or credit and small tools gets the positive entry, or debit.
What puts a spin on this debit/credit thing is that most people think of credits as minus and debits as plus, but various account types are affected differently because you have debit and credit accounts.
OK, I just lost you - but it's easier than it you think. First I'll provide a description of how each account type is affected by debits and credits, then conclude with a table that summarizes the "rules."
All your asset accounts (1000 series) are debit accounts, which means they are positive numbers. Makes sense, so far? An asset is a positive number in the system. The liability accounts (2000 series) are all credit accounts and they are negative numbers, but generally when you look at them on the balance sheet, you don't show the minus sign. Accounts payable, for example, is listed at $1,235. To the computer, however, liabilities are actually negative numbers - because they need to be subtracted from the assets to come up with the total value of the company. It's not something you have, it's something you owe.
So stay with me - if you credit a liability account, you are actually adding a negative number to a negative number. That just makes a bigger negative number. Increasing your liability. Take the drill example above. If, instead of paying cash, you charged that drill. The expense entry stays the same - the expense is increased, or debited. You aren't touching your cash account this time - instead, you're increasing your accounts payable. So, to increase a liability account, you credit it, because to increase the liability, which is a negative number, you have to add a negative number, or a credit. And, there you have your balancing entry - debit expense, credit accounts payable. Both times you had balancing entries, one debit, one credit - the credit just did different things each time. In the asset account, it decreased cash. In the liability account, it increased accounts payable.
The 3000 series is just something you have to remember somehow- sales are considered a credit account. A friend had a memory trick for learning this concept: " making a sale is a credit to you." Another way to consider it is by thinking of the simplest sale, where you sell something and get some cash. Cash, as you know, is a debit account. Make a sale, and you better increase your cash - debit cash. Positive entry. So the balancing entry has got to be a credit entry - crediting sales increases the amount you are listing in sales, because sales is a negative number, (credit), and you are adding a negative number - another credit. The number gets bigger.
The 4000 and 5000 series, the expense accounts, are all debit accounts. You enter an expense as a positive number (debit) to increase your record of what you've spent. Whenever you make a purchase of an item that goes to one of your expense accounts, you always increase your expense, which is a debit.
The following chart shows how debits and credits effect the different types of accounts:
Account Type Debit Credit
ASSETS Increases Decreases
LIABILITIES Decreases Increases
EQUITY Decreases Increases
INCOME Decreases Increases
EXPENSES Increases Decreases
So, now that you've got the basics of the double entry system, the next step is simply a matter of beginning to enter the info. As you enter checks you've written, they will mostly be simple entries - debit (increase) the correct account number, and credit (decrease) cash. This is going to be the drill for the majority of your entries, when you have paid cash for an item. Even those things you charge, if you are keeping your bills current, make your entry after you pay your bill, and the entry will always be credit cash, debit expense. To keep the process simple, when you receive a bill, go through it and total what part of the money due goes to which account, write it on the bill and use that when you make the entry into the system.
Regular exceptions to this process will be:
- When you buy a large tool or piece of equipment that needs to go on the asset page: credit cash and debit the proper asset account. As you make these entries, don't forget the information that you will need to set up your depreciation schedule.
- When you pay an expense that has been listed as a liability, like a bank payment on a loan: credit cash, but debit two accounts, debit the liability account you're paying on for the amount of principal, and debit interest for the amount of interest expense. Doing this will decrease what you owe on the loan by the principal amount you have paid, and it will increase the record of what you have paid in interest expense.
- When you make an addition to inventory: inventory is a cost you need to count as an expense only when you actually use it. Until then, it's an asset. So when you purchase inventory, credit cash and debit inventory - that will increase the value of your inventory. When you USE inventory, credit (reduce) inventory, and debit (increase) the appropriate expense account - materials, supplies, etc., or an inventory change account.