subject: Double-Entry Accounting and Preparing a Trial Balance Sheet [print this page] In today's world of economic instability, the proper use of information is the key to attaining success. Businesses depend on information that is relevant and reliable for better decision making. Accounting is the system which reports information such as income, assets, expenses, liabilities, and equity to guarantee economic regulation within a company. For this reason, accounting if often called "the language of business" because it is used to aid a company in their decision making process. In this article I will discuss the appropriate methods for double entry accounting and preparing a trail balance sheet.
In order to fully understand the concept of double-entry accounting you must first be able to understand how debts, credits, and ledger accounts affect the accounting process. A ledger account or (T-account) is used to understand the effects of one or more transactions on a balance sheet or income statement. These accounts are named due to their shape looking like a (T), with the account title on top, a left side, and a right side. The right side of the T-account is usually referred to as the credit side (CR) and subsequently the left side is called the debit side(DR). Thus to enter an amount on the right side is to credit the account and to enter an amount on the left side is to debit the account. Depending on the nature of the account, determines whether the debit or credit is an increase or decrease. For example: an asset T-account contains a debit as an increase and a credit as an increase; however an equity T-account is the opposite, in which the debit is decrease and the credit is increased.
Now that we have a general understanding of the way debits and credits affect the accounting process we can now gain an understanding of the ways to utilize these transactions, also known as double-entry accounting. Double-entry accounting is the process in which each transaction is recorded in at least two accounts. This results in a debit to one or more accounts and a credit to one or more accounts. It also means that the total amount credited must be equal to the total amount debited for each transaction made. The fact that the sum of each debited amount must equal the sum of each credited amount allows for accountants to quickly check accuracy within a business's records. There are four main double-entry account types, which are the asset account, liability account, income account, and expense account. The asset account involves property, or any item that retains economic value owned by a company or individual, which can also be converted into cash. The liability account deals with things that an individual or company owes, for example a credit card balance or mortgage loan. The income account involves money that is earned by the company or individual, while the expense account deals with money spent by the company or individual.
Since double-entry accounting requires the sum of all debit accounts to equal the sum of all credit accounts, a trial balance is required to verify correctness. The trial balance is a list of accounts and their balances at a point in time. When preparing a trial balance, three steps are needed:
You must list each account title and the amount accrued in the trial balance. If an account has a zero balance, just list it with a zero in the normal balance column.
Next you must calculate the total amount of the debit balance, as well as, the total credit balance.
Last you verify that the total debit balance is equal to the total credit balance.
If the total debit balance and total credit balance are not equal then there must be an error that needs correction. If the credits and debits do appear equal on the trial balance, it still does not guarantee that no errors were made. The main goal of the trial balance sheet is to report whether the account balances are reported in the appropriate debit or credit columns and to allow for future reference of financial statements.
Double-Entry Accounting and Preparing a Trial Balance Sheet
