Accounting Ledger Overview
Accounting ledger is summary of transactions which hold all your double-entry accounting. At first double entry might sound like twice as much work, but once the accounting ledger is build up with entries, you will learn to rely on the checks and balances that help you keep accurate records.
Double-entry accounting means every transaction affects and is recorded in at least two accounts. The total amount debit must equal the total amount credit. Therefore, the sum of the debits for all entries must equal the sum of the credits. Double-entry accounting helps to prevent errors by assuring that debits and credits for each transaction are equal. (This document is also available as pdf format. Click here: GENERAL LEDGER to view).
Having said that, if you go to the store and buy a hand saw? You are decreasing cash in the bank by $89 and increasing your expenses by same amount. That’s all there is to it, you just affected two accounts.
Debit Tools $89.
Credit Cash $89.
What puts a spin on this debit/credit business, is that most people think of credit as being negative or minus and debit being a positive or plus. But each account type is affected differently depending on the nature of the entry.
Assets are what the business owns and they are always a debit balance and liabilities are what the business owes and they are always a credit balance. Assets are positive and liabilities are negative because they need to be subtracted from each other to come up with the total value of the company.
When a liability account gets credited, you are adding a negative to a negative balance, which makes a bigger negative number. It increases your liability. Take the hand saw example. If, instead of paying cash you charged it on your account, the expense entry will remain the same but because you’re not taking money out of cash the accounts payable is affected with a credit.
Debit Tools $89.
Credit Accounts payable $89.
Let’s look at income and expenses. Income has a credit balance and expenses have a debit balance. Yes, I know we think of income as being positive and should have a debit balance but in the accounting world it’s the opposite. The way to remember this is, when you sell a product and customer pays you cash, you deposit the cash in bank and the bank is debited, therefore the income must be credited.
Expenses have a debit balance. You enter an expense as a positive (debit) number to increase your record of what you’ve purchased. Whenever you purchase an item, ex: office supplies, that goes to your expense account and gets debited. Expenses are positive and income is negative because they need to be subtracted from each other to come up with the total net income.
A little history – debit and credits are remnants of 18th-century English recordkeeping practices in which the terms debtor and creditor were used instead of debit and credit. The abbreviations, Cr. and Dr. use the first letter of there terms where Dr. resulted from debtor and Cr. from Creditor , just as we still do for Saint (St) and doctor (Dr).
The following chart shoes how debits and credits affect the different types of accounts.
|Account type||Debit (Dr)||Credit (Cr)|
Now, let’s start by entering some info into our double-entry ledger. Read the following examples, once you’ve figured out one side of the entry ex: debit side, the other must be the credit entry. (The pdf version of this document is available by clicking on this line here: General Ledger Document)
The T-accounts above are a helpful learning tool. It shows the effects of individual transactions on specific accounts. The T-account is so named because it looks like the letter T.
The left side of the T-account is always called the debit side often abbreviated Dr. The right side is always called the credit side, often abbreviated Cr. The difference between total debits and total credits for an account is the account balance. When the sum of debits exceeds the sum of credits, the account has a debit balance. It has a credit balance when the sum of credits exceeds the sum of debits. When the sum of debits equals the sum of credits, the account has a zero balance.
Please, see below a link to pdf version of this article. You can easily print it out and refer to at your pleasure time.
Thank you for your time,