Automagic Accounting
Even though all accounting systems are double entry, on many computerized accounting systems we enter each number only once. How does it do that? The computer maintains a chart of accounts. The bookkeeper enters the transaction in one account (say, the bank’s checkbook) and then selects another account (perhaps a particular type of expense).When the bookkeeper clicks OK, the transaction is recorded in both accounts. The computer automagically takes care of the second entry, keeping the books in balance. Program instructions also block transactions that do not fit the accounting equation.
Try paying your rent out of your insurance account. It won’t work.
There are two big advantages of computerized accounting systems. One is that they make it hard to make errors. The other is that you enter the information once, and then see it in several different ways: as data entry screens, account ledgers, and reports.
Accounting is concerned with three basic concepts:
• assets
• liabilities
• equity.
Assets are w hat a business owns or is owed. Examples are real estate, equipment, cash, inventory, accounts receivable (tangible assets), patents and copyrights (intangible assets).
Liabilities are what a business owes. Examples are debt, taxes, overheads, accounts payable, and warranty claims.
Equity is c ash that owners or stockholders have put into the business plus their accumulated claims on the assets of the business. It is also known as owner’s equity or stockholder’s equity, depending on how the business is organized.
Account is a place where we record amounts of money involved in transactions. An account shows the total amount of money in one place as a result of all transactions affecting that account.
An account may be defined as a record of the increases, decreases, and balances in an individual item of asset, liability, capital, income (revenue),or expense.
The simplest form of the account is known as the “T” account because it resembles the letter “T.” The account has three parts:
1. the name of the account and the account number
2. the debit side (left side), and
3. the credit side (right side).
The abbreviations for debit and credit are Dr. and Cr., respectively. The increases are entered on the credit side of a T account, the decreases on the debit side. The balance (the excess of the total of one side over the total of the other) is inserted near the last figure on the side with the larger amount. If the excess of the total is on the credit side of the account (the balance is positive) they say that the account stays in the black. In case of the credit side total excess the account stays in the red.
|
|
|
The Journal
The journal, or day book, is the book of original entry for accounting data.
Afterward, the data is transferred or posted to the ledger, the book of subsequent or secondary entry. The various transactions are evidenced by sales tickets, purchase invoices, check stubs, and so on. On the basis of this evidence, the transactions are entered in chronological order in the journal. The process is called journalizing.
A number of different journals may be used in a business. For our purposes, they may be grouped into general journals and specialized journals.
Journalizing
The entries in the general journal have the following components:
1. Date. The year, month, and day of the first entry are written in the date column. The year and month do not have to be repeated for the additional entries until a new month occurs or a new page is needed.
2. Description. The account title to be debited is entered on the first line, next to the date column. The name of the account to be credited is entered on the line below and indented.
3. P.R. (Posting Reference). Nothing is entered in this column until the particular entry is posted, that is, until the amounts are transferred to the related ledger accounts.
4. Debit. The debit amount for each account is entered in this column.
Generally, there is only one item, but there could be two or more separate items.
5. Credit. The credit amount for each account is entered in this column.
Here again, there is generally only one account, but there could be two or more accounts involved with different amounts.
6. Explanation. A brief description of the transaction is usually made on the line below the credit. Generally, a blank line is left between the explanation and the next entry.
Posting
The process of transferring information from the journal to the ledger for
the purpose of summarizing is called posting and is ordinarily carried out in the following steps:
|
|
|
1. Record the amount and date. The date and the amounts of the debits
and credits are entered in the appropriate accounts.
2. Record the posting reference in the account. The number of the journal page is entered in the account.
Let’s use a series of T accounts to trace a small job all the way through a business. Let’s say you do some work for a customer and you take along a contractor as an assistant. You invoice the client; the client pays. Also, the contractor bills you.
How does this look in double-entry bookkeeping, illustrated with T accounts? Let’s walk through it one step at a time.
Your customer calls you and asks you to do the work. You plan the job, put it on the schedule, and arrange for the contractor to come with you. All of this is important business, but none of it shows up in accounting. No transaction has happened yet; if the appointment falls through, you will not get paid anything.
You go and do the work and the contractor comes with you.
The customer tells you he is happy with the work and looks forward to receiving your invoice, which he’ll pay promptly. The contractor says she’ll send you a bill and you promise to pay within one month. Still, no transaction has occurred. If no invoices are sent, and no one gets paid, then it’s as if you’d worked for free.
The next day, you write up an invoice for $1,000 and mail it to the customer. The invoice has gone out; now a transaction has occurred. In a pair of T accounts for writing a check to buy $100 of office supplies it looks like this:
Assets: Corporate Checking
| Debit | Credit |
| 6/7 $100 |
Expenses: Office Supplies
| Debit | Credit |
| 6/7 $100 |
Notice that we always record a date (6/7) for each transaction.
Income: Consulting Services
| Debit | Credit |
| 6/2 $1,000 |
Assets: Accounts Receivable
| Debit | Credit |
| 6/2 $1,000 |
What do these two diagrams mean?
The first one says that on June 2 the company received $1,000 in income. How is this possible, if you haven’t got a check yet? Because in accounting, we count the money as coming in when we bill it. Why? Because the money we are owed is an asset and we want to keep track of it. It is of value to our company. We could go to a bank and borrow against the money our customers are due to pay us. So, the value of the company has increased, from an accountant’s perspective.
|
|
|
It is worth $1,000 more than the day before, because income has come in. So we have a credit to income—money coming in. The balancing T account is a debit to assets. But if our assets have increased, why do we debit them? This is one odd aspect of accounting. Asset accounts are debit accounts. So a debit to an asset is an increase of money in the company.
But, in double-entry bookkeeping, all transactions are entered twice, so that all accounts are balanced. That is a fundamental rule of accounting. If the income account goes up (is credited) by $1,000, then a debit for $1,000 must show up somewhere else. It shows up in Assets—Accounts Receivable, as we see in the second T account diagram.
Accounts receivable is an account that shows all of the money that you are owed by everyone. Accounts receivable is an asset account. That is, it is one of the accounts that show how much money is in the company.
The next day, you receive a bill in the mail from your subcontractor.
This is another transaction. You enter the bill in your accounting ledger or system to show that you owe it the money. The T accounts look like this:
Expenses: Subcontractor
| Debit | Credit |
| 6/3 $200 |
Liabilities: Accounts Payable
| Debit | Credit |
| 6/3 $200 |
Together, these two T accounts say that your company has a $200 expense and owes a subcontractor $200. Even though you haven’t paid the bill yet, your company owes the money, so the value of the company is $200 less than it was.
At the end of the week, you receive a $1,000 check from your customer and deposit it into the corporate checking account. Again, two T accounts record this in your accounting system. These two diagrams may seem backwards. But remember: all asset accounts are debit accounts, so an entry in the debit column is an increase to the account and an entry to the credit column is a decrease.
|
|
|
Now you feel like your business is up and running. You feel so good that you want to pay your subcontractor’s bill. Only you can’t—the check from the customer hasn’t had time to clear by the bank. While you’re waiting for the check to clear, you ask those three basic questions all managers want to know:
• How much money came in?
• Where did the money go?
• How much money is left?
Since you’ve entered every transaction, your accounting system should be able to answer those questions. The questions are answered in reports called financial statements.
The Trial Balance
As every transaction results in an equal amount of debits and credits in the ledger, the total of all debit entries in the ledger should equal the total of all credit entries. At the end of the accounting period, we check this equality by preparing a two-column schedule called a trial balance, which compares the total of all debit balances with the total of all credit balances. The procedure is as follows:
1. List account titles in numerical order.
2. Record balances of each account, entering debit balances in the left column and credit balances in the right column.
3. Add the columns and record the totals.
4. Compare the totals. They must be the same.
If the totals agree, the trial balance is in balance, indicating that debits and credits are equal for the hundreds or thousands of transactions entered in the ledger. While the trial balance provides arithmetic proof of the accuracy of the records, it does not provide theoretical proof. For example, if the purchase of equipment was incorrectly charged to Expense, the trial balance columns may agree, but theoretically the accounts would be wrong, as Expense would be overstated and Equipment understated.
In addition to providing proof of arithmetic accuracy in accounts, the trial balance facilitates the preparation of the periodic financial statements.
Generally, the trial balance comprises the first two columns of a worksheet, from which financial statements are prepared.
Text 2
Дата добавления: 2016-01-04; просмотров: 133; Мы поможем в написании вашей работы! |
Мы поможем в написании ваших работ!