Basics in Financial Reporting
Double-entry bookkeeping system is used for recording financial transactions.
Every entry to an account requires a corresponding and opposite entry to a different account.
Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits for all accounts in the general ledger
First we need to know the types of accounts used in financial books
Types of accounts
An item of property owned by a person or company having value and available to meet debts, commitments, or legacies.
e.g.: Land, Vehicle, Cash, Bank, Debtors etc.
An obligation, responsibility, or debt owned by a person or company.
e.g.: Loans, Creditors etc.
The cost incurred in or required for something; an amount of money spent by a person or company.
e.g.: purchases, costs, expenses, overheads
Money received, especially on a regular basis, for work or through investments
e.g.: sales, revenue
To understand the accounting, we need to just follow the rules
Rules of debit and credit
Debit increases in assets and Credit decreases in assets
Credit increases in capital and Debit decreases in capital
Credit increases in liabilities and Debit decreases in liabilities
Revenues or Incomes Accounts:
Credit increases in incomes and gains, and Debit decreases in incomes and gains
Expenses or Losses Accounts:
Debit increases in expenses and losses, and Credit decreases in expenses and losses
We will understand the entries with some examples: