The recording of a company’s (or any organization’s) transactions is known as bookkeeping. The double-entry technique of bookkeeping is the most popular. As a result, every transaction will have at least two consequences.
The company’s general ledger contains the accounts that include the transactions. The chart of accounts is a basic list of the general ledger accounts.
A small business’s transactions were manually documented in journals before computers and software became affordable. This is followed by a post-processing of the journal entries to the general ledger accounts. Today’s software has greatly reduced the amount of journaling and posting that needs to be performed. Today’s software, for example, automatically records two or more effects into the general ledger accounts when preparing a sales invoice.
In addition, the program is able to provide a vast quantity of extra information, ranging from client details to financial data.
Using double-entry bookkeeping
For example, with double-entry bookkeeping, every transaction will be recorded in two or more accounts. There must be a debit (recorded on the left-hand side of the account) and a credit (entered on the right-hand side of the account) (entered on the right side of the account).
In other words, the total of the debits must equal the amount of the credits in every transaction.
Let’s say a person spends $100,000 in exchange for 10,000 shares of a new corporation’s common stock to show double entry. The corporation will deduct $100,000 from the Cash account and credit $100,000 to the Common Stock account. If the stock does not have a par or declared value, we’ll assume so.
If the firm has hired a consultant at the cost of $3,000, the payment is due in 30 days. Accounts Payable will be charged $3,000, and Consulting Expense will be debited $3,000 by the firm.
The total of all account balances with debit balances will equal the total of all account balances with credit balances if all transactions are recorded with debit amounts equal to credit amounts, and there are no posting or arithmetic mistakes.
Equation for bookkeeping
A corporation’s bookkeeping services in Pasadena equation (or accounting equation) is:
Stockholders’ Equity = Liabilities + Assets
Under the double-entry accounting system, this equation must always be in balance. To better comprehend debits and credits, the accounting equation can be used as a guideline. Asset accounts, for example, usually have negative balances (and assets are increased with a debit entry). You’ll recall that the term debit refers to an account’s left side. Assets are also on the left side of the equal sign in the accounting equation.
It is important to note that liabilities are located on the right-hand side of the accounting equation Liability accounts often contain credit amounts, as we said previously (balances on the right side of the account). These accounts will also have credit balances.
Because the stockholders’ equity account Retained Earnings is typically in the positive, it follows that:
• Revenues will have credit balances since revenues will result in an increase in Retained Earnings (and hence stockholders’ equity).
• Expenses will have negative balances since they reduce Retained Earnings (and owners’ equity).
You’ll gain a better grasp of bookkeeping if you remember the following:
Shareholders’ equity rises as revenues rise, whereas stockholders’ equity falls as costs rise. In effect, the income statement shows how the corporation’s operations affected investors’ equity. (Other activities, such as issuing new shares of stock, declaring dividends, and other transactions, will also affect stockholders’ equity.)