Introduction to Bookkeeping
Introduction to Bookkeeping
Introduction to Bookkeeping
Before the widespread use of modern day computers, bookkeeping was done by an actual bookkeeper. The purpose of this person's day to day activities were to record every business transaction into a journal. This journal entry would include the name of the account(s) to be either debited or credited, the amount of the transaction, and the date the transaction occurred. The journal entires would than have to be posted; or rewritten, into the companies General Ledger, and all subsidiary ledgers. However with the writing and rewriting of so many amounts, as well as the manual calculations, it was realistic to assume that some errors would occur during the repetitive bookkeeping process. This potential for errors and miscalculation created the need to periodically "prove" that a company's accounts were "in balance," meaning the total from the debitbalance accounts was equal to the total of the creditbalance accounts. An internal document called a trial balancewas than designed to give that proof and legitimize the process. If the trial balance did not balance, the bookkeeper had to go back, transaction by transaction, to find and correct the cause of any inconsistency. Once the trial balance and computations were in balance, the bookkeeping process was completed and the books were turned over to the company's accountant for the preparation of financial statements. Now that we have examined thepre-computer era of bookkeeping one can recognize what tedious procedure it detailed. Lets now examine how computers have affected the profession of bookkeeping.
The entrance of computers, and computer based accounting software provides a much faster, efficient, and easier form of conducting bookkeeping. It reduces human error aspect of each task, since all of the journal entries are posted electronically and the account balances are calculated by computer automatically. As a brief example of how modern day bookkeeping is more efficient with the use of computer technologies; The following tasks are now preformed simultaneously during a sale when using accounting software:
A sales invoice is prepared
The general ledger accountsalesis credited
The general ledger account Accountsreceivableis debited
The customer's account in the subsidiary ledger is updated.
In some situations, the Inventoryaccount is updated.
Double Entry Accounting
Every business transaction involves two accounts, this is recognized as Doubt Entry Accounting. Double entry accounting requires that for each transaction, one or more account(s) must be debited, and one or more account(s) must be credited.
Every account has two sides, a Right side and a Left side. A "Debit" is the term given to an entry on the left side of an account, while a "Credit" refers to an entry on the right side of an account.Double entry bookkeeping requires that for every transaction, there is an entry to the left side of one (or more) account, and a corresponding entry to the right side of another account(s). Expenses are always recorded as a debit, Revenues are always recorded as credit. Also you always debit the Cash account when cash is received, while you always credit the Cash account when cash is paid out. The following are some facts that will help you determine which side of the account to use:
- A debit will always increase the following accounts:
+Assets (Cash, Accounts receivable, Land, Equipment, etc)
+Expenses (Rent Expense, Wages Expense..etc)
+ Losses (Loss from lawsuit, Loss on Sale of asset)
- A debit will always decrease the following accounts:
+ Liabilities (Notes payable, Accounts Payable, Interest payable)
+ Stockholders Equity (Common Stock, Retained Earnings)
- A Credit will always Increase the following accounts:
+ Liabilites (Notes payable, Accounts Payable, Interest Payable)
+ Revenues (Sales, Interest Revenues, Fees Earned..etc)
+ Gains (Gain on Sale of Asset, Gain from Retirement of bond)
- A Credit will always decrease the following account:
+ Assets (Cash, Accounts receivable, Inventory, Land..etc)
In addition,when using accounting software, it is important to notice that the two accounts are both involved in the transaction. The software often updates the two accounts automatically without an indication to the user.
Chart Accounts
A chart of accounts is a listing of all of the accounts available for recording, Generally a chart of accounts will be customized by an accountant in order to fit the requested needs of the company; this chart can be updated and re-customized at any point of time necessary. For example, if a new sports equipment is introduced to a sporting goods store, accounts can be added or modified to accommodate the change.
Within the chart of accounts you will find that the accounts are typically listed in the following order:
Balance Sheet Accounts
Assets
Liabilities
Owners Equity
Income Statement Accounts
Operating Revenues
Operating Expenses
Non-Operating Gains and Revenues
Non-Operating Losses and Expenses
Within the categories of Operating Revenues and Operating Expenses may be further subsidiary categories accounts organized by a certain business function. Also, a chart of accounts will likely be as large and complex and the entire company itself. For instance, a major international business may have several different devisions requiring thousands of accounts, whereas a small local retailer may need only a hundred accounts.
Introduction to Bookkeeping
By: KL671742
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