There are a few (and only a few) things you need to understand in order to make setting up your accounting system easier. They’re basic (trust me), and they will probably clear up any confusion you may have had in the past when talking with your CPA or other technical accounting types.
Debits and Credits
These are the backbone of any accounting system with Accountants in Slough. Understand how debits and credits work and you’ll understand the whole system. Every accounting entry in the general ledger contains both a debit and a credit. Further, all debits must equal all credits. If they don’t, the entry is out of balance. That’s not good. Out-of-balance entries throw your balance sheet out of balance.
Therefore, the accounting system must have a mechanism to ensure that all entries balance. Indeed, most automated accounting systems won’t let you enter an out-of-balance entry-they’ll just beep at you until you fix your error.
Depending on what type of account you are dealing with, a debit or credit will either increase or decrease the account balance. (Here comes the hardest part of accounting for most beginners, so pay attention.) Figure 1 illustrates the entries that increase or decrease each type of account.
Notice that for every increase in one account, there is an opposite (and equal) decrease in another. That’s what keeps the entry in balance. Also notice that debits always go on the left and credits on the right.
Let’s take a look at two sample entries and try out these debits and credits:
In the first stage of the example we’ll record a credit sale:
If you looked at the general ledger right now, you would see that receivables had a balance of $1,000 and income also had a balance of $1,000.
Now we’ll record the collection of the receivable:
Notice how both parts of each entry balance? See how in the end, the receivables balance is back to zero? That’s as it should be once the balance is paid. The net result is the same as if we conducted the whole transaction in cash:
Of course, there would probably be a period of time between the recording of the receivable and its collection.
That’s it. Accounting doesn’t really get much harder. Everything else is just a variation on the same theme. Make sure you understand debits and credits and how they increase and decrease each type of account.
Assets and Liabilities
Balance sheet accounts are the assets and liabilities. When we set up your chart of accounts, there will be separate sections and numbering schemes for the assets and liabilities that make up the balance sheet.
A quick reminder: Increase assets with a debit and decrease them with a credit. Increase liabilities with a credit and decrease them with a debit.
Identifying assets
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