Double entry accounting basics

Here is a really simple and useful accounting tutorial.

Double entry accounting system, although much feared by non-accountants, is a very simple but extremely powerful method of managing money.

SL does much of the double entry accounting itself linking all parts of the application through a chart of accounts. You need to know about double entry system only when you are going to make general ledger transactions. Basic Principle

Every business transaction affects at least two heads of accounts.

For example:

• When you buy a car, you cash is decreased and your assets are increased.
• When you sell a item on cash, your sale is increased and your cash is also increased.

There are five basic types of accounts which are given below:

1. Assets
2. Liabilities
3. Capital
4. Sales
5. Expenses

Assets (1) and Expenses (5) are increased by debit and decreased by credit

Liabilities (2), Capital (3) and Sales (4) are increased by credit and decreased by debit.

You invest $1000 to start a new business:

• Debit: Your bank account
• Credit: Capital account

You pay $100 check for office rent:

• Debit: Office rent expense account
• Credit: Your bank account

You build a website for a customer asking him to pay $200. Customer promises to pay after 20 days.

• Debit: Accounts Receivables (Debtors)
• Credit: Sales

Your customer pays you $200 after 20 days.

• Debit: Your bank account
• Credit: Accounts Receivables (Debtors)