In order to understand accounting systems, knowledge of some basic accounting concepts is necessary.
First, the very basic definition of accounting is the study of how businesses track their income and expenses.
Second, there are two basic accounting practices: s ingle entry bookkeeping and double or dual entry bookkeeping.
Single entry bookkeeping is an accounting practice that can be employed by small organizations where a profit and loss statement or balance sheet is not required for financial control or tax purposes.
Double entry bookkeeping is an accounting technique to record the financial transactions of an organization where every transaction is entered twice, equal and opposite transactions. Double entry is required for all organizations that must produce both a profit and loss account and a balance sheet.
Double Entry Bookkeeping:
Understanding of debits and credits is the foundation of understanding accounting systems. Because every business transaction affects at least two accounts, each transaction is recorded using a double-entry system of debits and credits.
Debits are entered on the left side of the balance sheet. Credits are entered on the right side. Costs and Expenses are recorded as debits. Income is recorded as credits. Assets are recorded as debits. Liabilities are recorded as credit. Debits and credits must be equal for all entries in a double entry bookkeeping system.
A debit or credit will either increase or decrease the account balancedepending on what type of account you are working with.
For every increase in one account, there is an opposite (and equal) decrease in another. That's what keeps the entry in balance.
Rememberdebits always go on the left and credits on the right.
Single Entry Bookkeeping:
There are advantages and disadvantages of using a single entry bookkeeping system.
The main advantage is the simplicity. It involves the simplest form of keeping records of financial transactions. Essentially the organization makes two lists, one of income received and one of expenses incurred. This is beneficial for organizations with volunteers with virtually zero accounting or bookkeeping knowledge.
It is essentially like a check register. You credit (right side) your increases and debit (left side) your expensesall the while keeping a running daily balance.
I know this is opposite of your checking account, so think of it as a mirror image of your checking account. I could go into detail here how come it is opposite but I would probably confuse you even more than I already have. Just know that your checking account is opposite because it is a liability account for your bank.
The main disadvantage of single entry bookkeeping is the absence of financial control due to limited detailed records of asset and liability accounts.
It is also easier to make errors with. With double entry bookkeeping everything must balance.
Whether you use a double entry or single entry accounting, understanding basic accounting concepts are knowledge anyone doing the bookkeeping for your organization should have.
Vickey Boatright is a nonprofit fund accountant, church financial advisor, and editor of the websites: http://www.freechurchaccounting.com a resource for free financial spreadsheets, an internal audit checklist, church budgets, an annual contribution statement example, etc. and http://www.naturalremediesforbetterhealth.com a resource for home and herbal remedies.
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
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