Key Concepts of Accounting

Key Concepts of Accounting

In accounting, double-entry bookkeeping is a procedure of record keeping whereby each entry for a particular account requires a matching and opposite entry for another account. The double-entry consists of two equal and opposite sides called credit and debit. The left-side is the debit and the right-side is credit. This is considered the traditional method of keeping accounts. With the changing world economy and growing complexities in business today, the double-entry method is now regarded as a complex process that many businesses cannot afford to have two accountants for each of their accounts, one accountant for the finance department and one for the business operation department.

For those who are keeping their records manually, the double-entry bookkeeping equation is as follows: debit is less than credits. That means, if a certain amount is credited to the finance account, then the corresponding debit is also added. Therefore, the debits will exceed the credits by the number of entries. Hence, the balance of the accounts will always be positive. If there are more debits than credits in any one account, then the net effect of all the debits is zero, which is called the equilibrium of the accounts.

The traditional approach to the accounting process is also based on debit/credit ratios. Under the traditional approach, the debits are included in the total revenue figure while the credits appear separately on the balance sheet. The difference between the two figures is the net income and represents the operating revenue or the net income after deducting expenses from revenue. This may not be very accurate and may lead to wrong conclusions. Therefore, to make better sense of the figures, a more accurate way of computing it was introduced in the early twentieth century named the conventional or double-entry bookkeeping system.

With the use of the double-entry system, debits and credits can be separately reported for every business transaction. This was very helpful in the past when the recording of transactions was a labor intensive and error-prone process. However, with the developments in computer software for accounting, the task of recording transactions has become much easier today and practically eliminates the errors caused by manual bookkeeping practices.

With debit entry represents a credit entry, the company will only receive debits as a result of transactions entered by its customers. Debit represents a transaction where the customer pays an invoice but not the credit card issuer. Thus, debit represents a partial entry in the accounting records unlike credit entries which always represents an entire entry. This partial entry is assigned to a particular customer and his sales, costs and revenue are reflected accordingly.

On the other hand, general ledger accounts represent total debits and credits. General-ledger accounting records everything that has been debited or credited by an individual transaction, regardless of its date. The general ledger provides information on sales, costs and revenues and is generally divided into three categories: day traders, direct sellers and manufacturers and suppliers. The information reflected in the general ledger accounts is directly linked to the fiscal supply and demand of each category and is thus affected by the financial conditions of the economy.