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An introduction to debits and credits.

If the words “debits” and “credits” sound like a foreign language to you, you are more perceptive than you realize-”debits” and “credits” are words that have been traced back five hundred years to a document describing today’s double entry accounting system. Don’t worry we have you understanding the rules of debits and credits within minutes. Our easy to use, debit and credit chart, will aid your understanding together with practical, debit and credit examples

What is Double-Entry

Under the double entry system every business transaction is recorded in at least two accounts. One account will receive a “debit” entry, meaning the amount will be entered on the left side of that account. Another account will receive a “credit” entry, meaning the amount will be entered on the right side of that account. The initial challenge with double entry is to know which account should be debited and which account should be credited.

Double-entry bookkeeping system ensures the integrity of the financial values recorded in a financial accounting system. It does this by ensuring that each individual transaction is recorded in at least two different nominal ledgers (sections) of the financial accounting system and so implementing a double checking system for every transaction. It does this by first identifying values as either a Debit or a Credit value. A Debit value will always be recorded on the debit side (left hand side) of a nominal ledger account and the credit value will be recorded on the credit side (right hand side) of a nominal ledger account. A nominal ledger has both a Debit (left) side and a Credit (right) side. If the values on the debit side are greater than the value of the the credit side of the nominal ledger then that nominal ledger is said to have a debit balance.

Each transaction must be recorded on the Debit side of one nominal ledger and that same transaction and value is also recorded on the Credit side of another nominal ledger hence the expression Double-Entry (entered in two locations) one debit and one credit. This ensures that when the nominal ledgers (sometimes known as accounts) are placed in a list which has two columns, the left column for listing nominal ledgers with Debit balances and the right column for ledgers with Credit balances, then the total of all the Debit values will equal the total of all the Credit balances. If this does not happen that may mean that one of the transactions was not recorded twice, i.e. once as a debit and once as a credit as required in the double-entry bookkeeping system.

The double entry system uses nominal ledger accounts. From these nominal ledger accounts a Trial balance can be created. The trial balance lists all the nominal ledger account balances sequentially. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.

From the Trial balance the Profit and Loss Statement and the Balance Sheet can then be produced. The Profit and Loss statement will contain nominal ledger accounts that are Income or Expense type nominal ledger accounts. The Balance Sheet will contain nominal ledger accounts that are Asset or Liability accounts.

Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true:

assets = liabilities + equity
In any period of time, revenue might not actually be equal to expenses. If so, the equation can be further expanded, so that the (extended) equation becomes:

assets = liabilities + equity + (revenue – expenses)

or

assets = liabilities + (capital – drawings) + (revenue – expenses)

A = L + C – D + R – E

Finally, the equation may be rearranged algebraically as follows:

A + E + D = L + R + C

This equation must be true, for any time period. If it is, then the accounts are said to be in balance. If the accounts are not in balance, an error has occurred.

For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in any transaction must equal the sum of all credits made. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.

Debits and credits are then defined as follows:

debit: A debit is recorded on the left hand side of a T account
credit: A credit balance is recorded on the right hand side of a ‘T’ account
Debit accounts = Asset and Expenses (also debit money received into bank accounts)
Credit accounts = Gains (income) and Liabilities (also credit money paid out of bank accounts)

The following accounts have a normal balance of debit:

Assets
Accounts receivable: debts promised by other entities but not yet paid
Drawings by the owners on equity
Expenses

The following accounts have a normal balance of credit:

Liabilities
Accounts payable and taxes payable, notes or loans payable: debts promised to outsiders but not yet paid
Revenue
Capital

Credit and debit items are summarized at the end of a recording period in a trial balance which is a list of all the debit and credit balances. The trial balance acts as a self checking mechanism for the correctness of entries in the individual accounts and also as a starting point for the preparation of the Final Account which is made up of the balance sheet and the trading, profit and loss account.

Examples of debits and credits:

Purchase of a new computer system

Debit Computer account (Fixed asset account) is increased.
Credit Creditors account (Liability account) is increased.

This then results in the following transactions:

Paying supplier for the computer

Debit Creditors account (Liability account) is reduced.
Credit Bank account (Asset account) is reduced.

In a society like ours, knowledge of bookkeeping is highly important to those people who are engaged in any kind of mercantile activities. Since every retail shop deals with never ending flow of cash and transactions, there is a great need to establish efficient accounting systems to monitor and record this huge financial data. The analysts have to look at numerous entries from every angle to insure the profitability of the existing business. In such a situation, flaws in transactions can affect the profitability of retail business; therefore, the retail merchant must try to establish a precise retail accounting system.

Since retail accounting follows single entry system, a day book can be maintained by the accountant to keep record of every sold entity. For shopkeepers day book is the most accurate way to manage their personal account. Daybooks are easily manageable and exhibit true state of account with every person with whom the firm has any dealing on credit. A busy place like retail shop demands extra concern and precision as several financial activities take place at a time. In spite of great attentiveness by shop owners, retail businesses often face the problems of flawed accounting data. Retail accounting someway carries more cluttered transactions; accounting professional who tally every transaction on daily basis find day book a better way to make record keeping simpler. It provides him with a convenient method of monitoring daily sales as well as stock available. In case of newly launched products, often companies offer a good incentive to shopkeepers on achieving target sale. A daybook also helps a shopkeeper in accomplishing this profitable task as it avail him a comprehensive detail about the sale of every individual product.

In retail accounting, there are many things that need to be analyzed regularly as it helps in managing the day-to-day business and decision making on every aspect. It includes records such as inventory, creditor book, defaulter book, sales books and profit and loss for the month; these records are further used to prepare final personal account. If the retailer is dealing with multiple wholesalers at a time then he must take note of every receipt and payment in cash book. Particulars of cash book also include default payments that help a retailer in deciding on reliability of wholesalers and agency representatives.

Like every wing of business, retail businesses are also using computerized retail accounting system so that they may maintain accuracy of every transaction without any delay. For retail shops, computerizes accounting is a great way to reduce work load and improve work efficiency. Definitely, computerized retail accounting system can reduce the monotony of accounting tasks. If you are a retail shopkeeper and planning to incorporate computerized system in your business then make sure that which accounting software you are going to use. In case your software is not according to the requirements of your retail accounting system, you may face problems in proper execution. Therefore, always do a little research whether the software is well matched to your requirement or not, as it will help you in choosing the best retail accounting software for your organization.

Most people consider purchasing an accounting software application when they start their own business. You may own a small business and want to get more organized or are just starting a web based business and want to keep track of your finances. Regardless of your reasons there are multiple accounting software programs to choose from.

Some software programs fit into the category of enterprise systems or financial management. These software programs tend to be more comprehensive than basic software application packages, which usually handle ordinary features including accounts payable, accounts receivable, general ledger and order entry. Some additional features you may want to look for include:

o Fixed assets

o Purchase order control

o Shipping and receiving

o Services

o Marketing

o Ecommerce

o Payroll

o Fixed Assets

o Customer Service Management

Customizable Features

Ecommerce is a relatively new application some software providers are offering so businesses can integrate their online business with their traditional business offerings. Most software programs offer comprehensive integrated financial solutions that help automate accounting functions. Look for an accounting software program that is customizable if possible. That way you can customize your applications to meet your specific business needs. Typically, even basic accounting software programs like QuickBooks offers some customizable functions, even if it is just customizing reports and invoices.

Depending on the size of your business keep in mind you may need to investigate an accounting software solution that will allow multiple user access and log in, so you can keep track of who is making entries when. This is a handy feature if you hire other people to handle data entry or process financial transactions in your business.

Like any other consumer I was really interested in knowing exactly what was being offered for free by QuickBooks. An old finance professor of mine in an introductory finance course taught us the “no free lunch theorem”, which basically states that, there are no free lunches. I think what we have here, is a quick lunch rather than a three course meal. This article will address the pros and cons of QuickBooks Online(QBO) free version which was launched in October 2009. Like any other optimist, I’ll begin with the pros before the cons concerning the QBO free version software.

Some of the positive aspects are as follows:
Easy set up which includes many sample chart accounts with different companies in different industries It is web-based which provides anytime and anywhere access and includes automatic backups at the Intuit’s servers. The ability to print expense checks. Basic financial statements with some other supplemental reporting capabilities iPhone compatible with read-only rights and the ability to invoice customers on the fly. Some of them that negative aspects are as follows:
It is only limited to five customers Lacks the ability to use form 1099s No statement of cash flows — this is important, because this financial statement portrays the sources and uses of your business’s cash from the beginning of the year to the end of the year Only one user access and your accountant does not have free online Internet access Does not export to Excel When you’re using this software you’re actually using the bare-bones version of QuickBooks which is called QuickBooks Online Simple Start. The setup is relatively easy, however there is one aspect that deserves discussion and a word of caution. The setup begins with a simple registration, completion of a company profile which includes selecting an industry, classifying your source of revenue as a customer,client, patient,etc… Towards the end of this process Intuit requests billing information, i.e. credit card information which they clearly state that it will not be used unless you purchase the software. To Intuit’s credit this is very clear on the website after you press the submit button and you receive a receipt indicating that the price is free. In summary, unless you have a very small business with less than five customers or it’s not important to track revenue by customer, then this version might be suited for your purposes. In addition, another use of the software would be to perform a write up of the accounting transactions which generally occurs after the fact, which means it’s not used for real-time purposes. An example of a write up, would be to prepare the year-end tax return or to prepare a financial statement long after the transactions have occurred.

Notwithstanding the above, since there is no expiration for the free use of the QBO Simple Start, it does provide a good mechanism to test and more importantly use QBO for more than 30 days. It should also be noted that QBO Basic and QBO Plus, both provide a 30 day free period to test drive the software. My experience is that 30 days may not be sufficient. So the remaining option is to either use the free 30 day period for QBO Basic and QBO Plus and if you need more than 30 days then purchase QBO Basic for $9.95 a month or QBO Plus for $34.95 a month. This is a viable option, since the software can be purchased on a month-to-month basis. The website clearly states “No contract, cancel anytime”.

Every business irrespective to its size, has its own set of strategies and requirements, following which they walk on the path of progress. But there one thing that is common with all kinds and sizes of business houses is the accounting. All organizations must posses a well planned accounting department for the better execution of their work ideology. However, it is an evident problem with the small business organization that they mostly fail to produce an efficient accounting department. This is mainly due to improper guidance and mismanagement. They concentrate more on the affairs related marketing and product development and forget the fact that the root of any business profit is its accounting resources. Improper maintenance of the financial statistics in any organization stands as a major hindrance in its development and growth. Therefore, small business accounting is as important as making profit for a company.

Accounting is a method to keep a hold on the performance of your business. Through analyzing your financial strategy, accounting data and transaction, you can easily predict the prospects for your company. Any inappropriate expense or loss can also be managed by periodical revision of the accounts. Secondly small business accounting is a great source of help for handling all the tax returns. Accounting is basically a conglomeration of all financial and economic dealings of a company. It includes everything from maintaining the record of a transaction to creating the annual financial reports. As a matter of fact, past a decade, many small business oriented firms have now understood the importance of a proficient accounting source, on the account for a wider exposure and awareness. Several small business accounting assistance including software and outsourcing services have greatly blessed the world of business through their presence.

Small business houses usually are low profile companies that cannot afford to recruit heavy account workforce. The small business accounting software is very popular as they are easily approachable and very cost effective. These softwares are specially designed according to the requirements of small business. They can create reports, perform calculations, store data and manage all your accounting details in the most planned way. Assistance comes from the individual professionals and outsourcing firms. Many CPAs work on the basis of contracts for several small firms. However, ensure that you hire competent and efficient accountants otherwise you may lose a lot on your money and time.

No business organization can afford to get inattentive or messy with the management of their financial records that are finally responsible for declaring the profit and loss of the company. One minor mistake in the account and the entire calculation will end up with a wrong result. Therefore to avoid such sort of mistakes, small business accounting is an absolute remedy. In addition to all these benefits, one can also avail the greater opportunities of financial solutions and aid whenever required. So now you have an easy way to create your daily report of the routine transactions and the client can get the detailed version of the entire account processing through online file transfers.