A Guide to Accounting (For Non-accountants)

Accounting is a way of tracking where money moves through-out time. This is done using accounts and ledgers.

Some Type of accounts:

Assets -> anything ‘owned’ by a company may be broken into “Fixed Assets” and “Current Assets”. Assets should return money to you. For example, if you have a car and rent it as a taxi, it can be considered an asset, but if you just use it to drive around in it would be a liability.

Expenses -> any outgoing payment paid by the business to another business or individual.

Liabilities -> anything ‘owed’ to another company.

An account can be viewed as a table (T) such that one side of the table shows LEFT shows DEBITS(DB) and the other side (RIGHT) shows  CREDITS (CR).

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Ledger Account 100 – CASH

When you group a series of related accounts, this is called a “Ledger”

The Ledger Total is the total  money in the ledger after all credits/debits have been applied.

CREDIT/DEBIT-ing and account means different things depending upon whether we are talking about Assets, Liability & Equity.

Memory Technique:  

DEBIT = LEFT SIDE OF TABLE = ASSET

CREDIT = RIGHT SIDE OF TABLE = EXPENSE/LIABILITY

Applying a CREDIT to an asset account DECREASES the amount in that account
Applying a CREDIT to an expense/liability account INCREASES the amount in that account

Applying a DEBIT to an asset account INCREASES the amount in that account
Applying a CREDIT to an expense/liability account DECREASES the amount in that account

A JOURNAL is a record of DEBITS and CREDITS assigned to various accounts. In a JOURNAL the total DEBITS and CREDITS MUST BE EQUAL. We say journal entries must balance.

General Ledger: The listing of all accounts used by the company. Usually these are divided as follows:

1xxx -> Cash Accounts
1xxx -> Accounts Receivable (in Particular one account will be called something like A/R Trade)

1xxx -> Fixed Assets, or Warehouses of materials (Assets)

(All the 1xxx are usually asset accounts)

2xxx -> Liabilities
2xxx -> Accounts Payable (in Particular one account will be called something like A/P Trade Liability)
2xxx -> Credit cards, loans, and other payables will be in here)

3xxx -> Equity -> This is what is left over after all Assets are Subtracted from all liabilities. (ie: If the company sold everything it had to pay everyone it owed, this is what would be left over for the owner ..  In Particular one account will be called something like Retained Earnings these are ‘profits’ not paid out to shareholders)

4xxx -> Revenue -> Money actually received from a customer for a sale or related activity. This may be broken up into various different product lines

5xxx -> Expenses -> any outgoing payment paid by the business to another business or individual. This may be broken up into various departmental expenses, in particular one or more COGS (Cost of Goods Sold) Accounts. These are the direct expenses incurred with producing (making) the product and would include parts and labour.

Sub-Ledgers:

These are sub-components (or departments) which affect the General Ledger

Accounts Payable:  Deals with the paying of suppliers (A/P Accounts)

Accounts Receivable:  Deals with receiving money from Customers.

Cash/Payroll: Deals with paying employees and other cash transacitons