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Accounting is known as the language of business. With accounting, information is gathered about business transactions to generate a report, through a systematic series of steps. There are also many types of accounting, such as for small businesses, government, forensics, management, and corporations.
But why is accounting important? Accounting plays a crucial role in running a business because it helps track income and expenditures, ensures any requirements are completed, and provides management, investors, and government with specific financial information. In turn, this information can be used to make business decisions.
Within this blog, Select Training and Management Consultancy L.L.C. will provide basic accounting tips, which can be explored further in our accounting training courses.
Anytime an accounting transaction is created, there will always be a debit entry and a credit entry recorded, and the totals of all of the debits and credits must be equal. When this is done, there will also be at least two affected accounts. Without balance between debit and credits, financial statements would be inaccurate.
Generally, these types of accounts are increased with a debit:
Dividends (Draws) – Payments made by a company from its profit to its shareholders, paid in proportion to the individual’s shareholding.
Expenses – Money spent or costs incurred by a business, in their effort to generate revenues.
Assets – An item of property owned by a person or company, regarded as having value and being available to meet debts, commitments, or legacies.
Losses – A decrease in net income that is outside the normal operations of the business.
Generally, these types of accounts are increased with a credit:
Gains – Some of a company’s transactions which occur outside of the company’s main business activities.
Income – The revenue a business earns from selling its goods and services, or the money an individual receives in compensation for his or her labour, services, or investment.
Revenues – The income generated from normal business operations, including discounts and deductions for returned merchandise.
Liabilities – The obligations of a company or an organization. For example, amounts owed to lenders and suppliers.
Stockholders’ (Owner’s) Equity – The proportion of the total value of a company’s assets that can be claimed by its owners and shareholders.
To decrease an account, you do the opposite of what was done to increase the account. For example, an asset account is increased with a debit. Therefore, it is decreased with a credit. Below are some of Select’s examples of double entry:
Debit Machine (Increase in Asset)
Credit Cash (Decrease in Asset)
Debit Utility Expense (Increase in Expense)
Credit Cash (Decrease in Asset)
Debit Cash (Increase in Asset)
Credit Finance Income (Increase in Income)
Accountants often use T-accounts as a visual aid for seeing the effect of the debit and credit on the two (or more) accounts. T-accounts use the same debit and credit rules as journals, as it is the entries from the journals that are seen in the T-accounts. Below are some debit and credit rules, seen in t-accounts: