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Exploring the Ins and Outs of Double Entry Accounting

Guest post by: Wayne Label

Article Overview: Leave intimidation behind by understanding how debits, credits, general journals and general ledgers work. Learn how to post an entry, record adjusting and closing entries and prepare a trial balance. These simple and important aspects of double entry accounting will give you more confidence when dealing with the financial aspects of your business.

Exploring the Ins and Outs of Double Entry Accounting

Accounting can seem confusing at times. Terms like "debits" and "credits," trial balances, ledgers and posting can seem almost overwhelming to the uninitiated. But with a little bit of knowledge and a simple set of rules, you can understand how to record your business transactions properly.

Debits and credits indicate which side an amount is entered in. Debits are entered in the left hand side and credits in the right hand side. You will enter an accounting transaction using both debits and credits and the two totals will balance. But how do you know where to put which number?

The basic accounting equation will help to make things clear. Remember Assets = Liabilities + Owner's Equity or A=L+OE for short. If a transaction involves an increase to an Asset (cash received for instance) it will be a debit. Assets are on the left side of the basic equation and are increased by debits in the left column. They are decreased by credits. Liabilities and Owner's Equity accounts (loans and Retained Earnings for example) are on the right side of the equation and so are increased by credits in the right column. They are in turn decreased by debits.

Double entry accounting involves recording debits and credits in the general journal, also known as the book of original entry. Transactions start here before being moved to the appropriate ledgers through posting.

In the general journal each transaction is recorded by date, account name and amount. Every entry will have an equal total in the debit and credit columns, ensuring that the accounting equation will be correct.

Each line of the transaction will then be recorded in a separate general ledger. The general ledger is a record of each account detailing the individual transactions that occurred. Each account also has a reference number. The ledgers contain both a debit and a credit column that pertains to that account.

Once an accounting period has passed and the transactions have been posted to the general ledger, a trial balance is prepared. This is a report listing all the account balances as recorded in the ledger. It will show whether debits equal credits and is used in the preparation of adjusting entries. If all of the transactions were properly recorded the trial balance will in fact balance and the accounting period is nearly ready to be closed.

Adjusting entries are necessary to record even though they don't have an exact date attached to them. Things like depreciation, prepaid insurance premiums and bad debts (accounts your business will not likely collect) are all taken care of through adjusting entries. At the end of an accounting period, after the initial trial balance works out, these entries will be recorded and posted to make sure the financial statements are as accurate as possible for the time spanned.

Closing entries are done to bring the revenue and expense accounts to zero and move the profit or loss to the Owner's Equity account. Expenses and revenues are temporary accounts that will show only the transactions that apply to each period. Closing entries allow that to happen.

For a more detailed description of these terms and reports, pick up a book with practice problems and examples. "Accounting for Non-Accountants" by Wayne Label is an easy to read guide with simple explanations. Dr. Label's blog and website have plenty of tests and practice transactions to give you practical experience with double entry accounting. You can also contact him directly at his email. Get more familiar with this important business concept and you're sure to understand accounting and your business better.

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Article Tags: accounting, accounting for nonaccountants, credits, debits, double entry accounting, general journal, general ledger, ledgers



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