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
