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

Asset account

Liability account

Expense account

Income account

Asset account:

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.

Liability account:

An obligation, responsibility, or debt owned by a person or company.

e.g.: Loans, Creditors etc.

Expense account:

   The cost incurred in or required for something; an amount of money spent by a person or company.

   e.g.: purchases, costs, expenses, overheads

Income account:

               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

Assets Accounts: 

Debit increases in assets and Credit decreases in assets


Capital Account: 

Credit increases in capital and Debit decreases in capital


Liabilities Accounts: 

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

INCREASE DECREASE
ASSET Debit Credit
EXPENDITURE Debit Credit
LIABILITY Credit Debit
REVENUE Credit Debit

We will understand the entries with some examples:

Example 1


A cellphone is purchased for $1500 using cash.

Here

An asset is increased: Cellphone is the asset.

Another asset is decreased: Cash is the asset.


So the entry would be:

Cellphone debit $ 1,500

Cash credit $ 1,500

Example 2


Cash is deposited to Bank 1 $100,000

An asset is increased: Bank1 is the asset.

Another asset is decreased: Cash is the asset.


So the entry would be:

Bank 1 debit $100,000

Cash credit $100,000

Example 3


A Television of $2000 is purchased from “ABC” Ltd as credit

An asset is increased: Television is the asset.

A Liability is increased: ABC is the liability


So the entry would be:

Television debit $2,000

ABC Ltd. Credit $2,000

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