edit] Abbreviations used in bookkeeping

A/C - Account A/R - Accounts Receivable A/P - Accounts Payable B/S - Balance Sheet c/d - Carried down b/d - Brought down c/f - Carried forward b/f - Brought forward Dr - Debit record Cr - Credit record G/L - General Ledger; (or N/L - Nominal Ledger) P&L - Profit & Loss; (or I/S - Income Statement) PP&E - Property, Plant and Equipment TB - Trial Balance GST - Goods and Services Tax VAT - Value Added Tax CST - Central Sale Tax TDS - Tax Deducted at Source AMT - Alternate Minimum Tax EBITDA - Earnings before Interest,Taxes, Depreciation and Amortisation. EBDTA - Earnings before Depreciation, Taxes and Amortisation. EBT - Earnings before Taxes. EAT - Earnings after Tax. PAT - Profit after tax PBT - Profit before tax Depr - Depreciation

Double-entry bookkeeping is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different accounts.[1] It was first codified in the 15th century. In modern accounting this is done using debits and credits within the accounting equation: Equity = Assets - Liabilities. The accounting equation serves as a kind of error-detection system: if at any point the sum of debits does not equal the corresponding sum of credits, an error has occurred. [edit] Significance
This section requires expansion. Double-entry bookkeeping has been considered a fundamental innovation and a cornerstone of Capitalism by such thinkers as Werner Sombart and Max Weber, Sombart writing in "Medieval and Modern Commercial Enterprise" that:[7] "The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts."

[edit] Accounts
Main article: Account (accountancy) An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. Financial Transaction Flows encompass primarily inflows on account of incomes and outflows on account of expenses. Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups i.e. assets, liabilities, and equity.[8] Within these primary groups each distinctive asset, liability, income and expense is represented by its respective "account". An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they represent only the inflows and outflows absorbed in the financial-position elements on completion of the time period.

[edit] Account types (nature)

Type Real Represent Physically tangible things in the real world and certain intangible things not having any physical existence Examples Tangibles - Plant and Machinery, Furniture and Fixtures, Computers and Information Processing Equipment etc. Intangibles - Goodwill, Patents and Copyrights Individuals, Partnership Firms, Corporate entities, Non-Profit Organizations, any local or statutory bodies including governments at country, state or local levels

Personal Business and Legal Entities

Temporary Income and Expenditure Accounts for recognition of Nominal the implications of the financial transactions during each fiscal year Sales, Purchases, Electricity Charges till finalisation of accounts at the end Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account). Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.

[edit] Account types (periodicity of flow)

The classification of accounts into real, personal and nominal is based on their nature i.e. physical asset, liability, juristic entity or financial transaction. The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year. Income is immediate inflow during the fiscal year. Expense is the immediate outflow during the fiscal year. An asset is a long-term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively, an asset could be valued at the present value of its future inflows. Liability is long term outflow with implications extending beyond the financial period and by the traditional view could represent unamortised expense Alternatively, a liability could be valued at the present value of future outflows. Type of accounts Long term inflows Long term outflows Short term inflows Short term outflows Real accounts Assets Personal accounts Assets Liability Nominal accounts Incomes Expenses Items in accounts are classified into five broad groups, also known as the elements of the accounts:[9] Asset, Liability, Equity, Revenue, Expense. The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept", since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.

[edit] Accounting entries

The double-entry accounting system records financial transactions in relation to asset, liability, income or expense related to it through accounting entries. Any accounting entry in the double-entry accounting system has two effects: one of increasing one account, the other of decreasing another account by an equal amount. If the accounting entries are recorded without error, at any point in time the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances. The double-entry bookkeeping system ensures that the financial transaction has equal and opposite effects in two different accounts. Accounting entries use terms such as debit and credit to avoid confusion regarding the opposite effect of the accounting entry e.g. If an accounting entry debits a particular account, the opposite account will be credited and vice versa. The rules for formulating accounting entries are known as "Golden Rules of Accounting". The accounting entries are recorded in the "Books of Accounts".

[edit] Books of accounts

It does this by ensuring that each individual financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system. The two entries have equal amounts and opposite signs, so that when all entries in the accounts are summed, the total is exactly the same: the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit record" (Dr.) in one account, and a "credit record" (Cr.) entry in the other account. The debit entry will be recorded on the debit side (left-hand side) of a General ledger

and the credit entry will be recorded on the credit side (right-hand side) of a General ledger account. A General ledger has a Debit (left) side and a Credit (right) side. If the total of the entries on the debit side is greater than the total on the credit side of the nominal ledger account, that account is said to have a debit balance..

An example of an entry being recorded twice for double-entry bookkeeping would be a supplier's invoice for stationery costing $100. The expense or Debit entry is Stationery Nominal Ledger a/c $100 Dr (showing that $100 has been spent on stationery) and the Credit entry is to the Supplier's Control Nominal Ledger a/c $100 Cr (showing that we now owe the supplier $100). This transaction has now been recorded twice in the financial accounting system and the total value is $100 for both Debit and Credit values. Double entry is used only in nominal ledgers. It is not used in daybooks, which normally do not form part of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct). (The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger. If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double-entry system.) However as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance. The double entry system uses nominal ledger accounts. From these nominal ledger accounts a Trial balance can be created. The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column. From the Trial balance the Profit and Loss Statement and the Balance Sheet can then be produced. The Profit and Loss statement will contain nominal ledger accounts that are Income or Expense type nominal ledger accounts. The Balance Sheet will contain nominal ledger accounts that are Asset or Liability accounts.

[edit] Bookkeeping process

The bookkeeping process refers primarily to recording the financial effects of financial transactions only into accounts. The variation between manual and any electronic accounting system stems from the latency [disambiguation needed] between the recording of the financial transaction and its posting in the relevant account. This delay, absent in electronic accounting systems due to instantaneous posting into relevant accounts, is not replicated in manual systems, thus giving rise to primary books of accounts such as Sales Book, Cash Book, Bank Book, Purchase Book for recording the immediate effect of the financial transaction. In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach. After a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. For example the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money) and a credit entry might be made in the account for "Sale of Class 2 Widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing, which is simply a process to arrive at the balance of the account. As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree - this agreement is not by chance - because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made either in the journals or during the posting process. The error must be located and rectified and the totals of debit column and credit column recalculated to check for agreement before any further processing can take place. Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule. For example, the "Inventory" account asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements. Finally financial statements are drawn from the trial balance, which may include:

the income statement, also known as the statement of financial results, profit and loss account, or P&L the balance sheet, also known as the statement of financial position the cash flow statement

the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity

[edit] Debits and credits

Main article: Debits and credits Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true: assets = liabilities + equity For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in any transaction must equal the sum of all credits made. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance. Debits and credits are then defined as follows:

Debit: A debit is recorded on the left hand side of a T account. it can also be defined as increase in asset and expenses while decrease in liability, revenue and capital. Credit: A credit balance is recorded on the right hand side of a 'T' account Credit can also be defined as increase in liability, revenue and capital and decrease in assets and expenses. Debit accounts = Asset and Expenses (also debit money received into bank accounts) Credit accounts = Gains (income) and Liabilities (also credit money paid out of bank accounts)

[edit] Double entry example 1

In this example the following will be used: Books of prime entry (Books of original entry) Sales Invoice Daybook (records customer Invoice Daybook) Bank Receipts Daybook (records customer & non customer receipts) Purchase Invoice Daybook (records supplier Invoice Daybook) Bank Payments Daybook (records supplier & non supplier payments)

The books of prime entry are where transactions are first recorded. They are not part of the Double-entry system. Ledger Cards Customer Ledger Cards Supplier Ledger Cards General Ledger (Nominal Ledger) Bank Account Ledger Trade Creditors Ledger Trade Debtors Ledger

[edit] Purchase invoice daybook

Purchase Invoice Daybook Date Supplier Name Reference Amount Electricity Widgets 10 July 2006 Electricity Company PI1 1000 1000 12 July 2006 Widget Company PI2 1600 1600 ------------------Total 2600 1000 1600 ==== ==== ==== Credit Debit Debit Trade Electricity Widgets Creditors G/L G/L control a/c a/c a/c Each individual line is posted as follows:

The amount value is posted as a credit to the individual supplier's ledger a/c The analysis amount is posted as a debit to the relevant general ledger a/c

From example above:

Line 1 - Amount value 1000 is posted as a credit to the Supplier's ledger a/c ELE01-Electricity Company Line 2 - Amount value 1600 is posted as a credit to the Supplier's ledger a/c WID01-Widget Company Amount total value 2600 posted as a credit to the Trade creditors control a/c Electricity total value 1000 posted as a debit to the Electricity General Ledger a/c Widget total value 1600 posted as a debit to the Widgets General Ledger a/c

The totals of each column are posted as follows:

Double-entry has been observed because Dr = 2600 and Cr = 2600.

[edit] Bank payments daybook

The payments book is not part of the double-entry system. Bank Payments Daybook Date Supplier Name Reference Amount Suppliers Wages 17 July 2006 Electricity Company BP701 1000 1000 19 July 2006 Widget Company BP702 900 900 28 July 2006 Owner's Wages BP703 400 400 ------------------Total 2300 1900 400 ==== ==== ==== Credit Debit Debit Bank Trade Wages Account Creditors control a/c control a/c Keys: PI = Purchase Invoice, BP = Bank Payment Each individual line is posted as follows:

The amount value is posted as a debit to the individual supplier's ledger a/c. The analysis amount is posted as a credit to the relevant general ledger a/c. Line 1 - Amount value 1000 is posted as a debit to the Supplier's ledger a/c ELE01-Electricity Company. Line 2 - Amount value 900 is posted as a debit to the Supplier's ledger a/c WID01-Widget Company. Amount total value 2300 posted as a credit to the Bank Account. Trade Creditors total value 1900 posted as a debit to the Trade creditors control a/c. Other total value 400 posted as a debit to the Wages control a/c.

From example above:

The totals of each column are posted as follows:

Double-entry has been observed because Dr = 2300 and Cr = 2300. The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.
[edit] Supplier ledger cards

Date 17 July 2006 31 July 2006

Date 19 July 2006 31 July 2006

Supplier Ledger Cards A/c Code: ELE01 - Electricity Company Details Reference Amount Date Details Reference Amount Bank Payments Daybook BP701 1000 10 July 2006 Invoice PI1 1000 Balance c/d 0 ------------1000 1000 ==== ==== 1 August 2006 Balance b/d 0 A/c Code: WID01 - Widget Company Details Reference Amount Date Details Reference Amount Bank Payments Daybook BP702 900 12 July 2006 Invoice PI2 1600 Balance c/d 700 ------------1600 1600 ==== ====

1 August 2006 Balance b/d [edit] Sales/customers

[edit] Sales daybook

700

Sales Invoice Daybook Date Customer Name Reference Amount Parts Service 2 July 2006 JJ Manufacturing SI1 2500 2500 29 July 2006 JJ Manufacturing SI2 3200 3200 ------------- ------Total 5700 2500 3200 ==== ==== ==== Debit Credit Credit Trade Sales Sales debtors Parts Service control a/c alabiebi a/c a/c Each individual line is posted as follows:

The amount value is posted as a debit to the individual customer's ledger a/c. The analysis amount is posted as a credit to the relevant general ledger a/c. Line 1 - Amount value 2500 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing. Line 2 - Amount value 3200 is posted as a debit to the Customer's ledger a/c JJM01-JJ Manufacturing. Amount total value 5700 posted as a debit to the Trade debtors control a/c. Sales-parts total value 2500 posted as a credit to the Sales parts a/c. Sales-service total value 3200 posted as a credit to the Sales service a/c.

From example above:

The totals of each column are posted as follows:

Double-entry has been observed because Dr = 5700 and Cr = 5700.

[edit] Customer ledger cards

Customer Ledger cards are not part of the Double-entry system. They are for memorandum purposes only. They allow you to know the total amount an individual customer owes you. CUSTOMER LEDGER CARDS A/c Code: JJM01 - JJ Manufacturing Date Details Reference Amount Date Details Reference Amount 2 July 2006 Sales invoice daybook SI1 2500 20 July 2006 Bank receipts daybook BR1 2500 29 July 2006 Sales invoice daybook SI2 3200 31 July 2006 balance c/d 3200 ------------5700 5700 ==== ==== 1 August 2006 Balance b/d 3200
[edit] General (nominal) ledger

Date 31 July 2006

Date 31 May 2006

GENERAL (NOMINAL) LEDGER Sales parts Details Reference Amount Date Details Reference Amount Sales invoice Balance c/d 2500 2 July 2006 SDB 2500 daybook ------------2500 2500 ==== ==== 1 August Balance b/d 2500 2006 Sales service Details Reference Amount Date Details Reference Amount Sales invoice Balance c/d 3200 29 July 2006 SDB 3200 daybook ------------3200 3200

==== 1 June 2010 Electricity Details Reference Amount Date Electricity Co. PDB 1000 30 May 2010 ------1000 ==== Balance b/d 1000 Water Details Reference Amount Date water Co. Pdb 1600 31 May 2010 ------1600 ==== Balance b/d 1600 Balance b/d

==== 3200

Date 10 May 2010

Details Reference Amount Balance c/d 1000 ------1000 ====

1 June 2010 Date 12 May 2010

Details Reference Amount Balance c/d 1600 ------1600 ====

1 August 2010 Date 28 July 2006

Other a/c Details Reference Amount Date Owner's Wages BPDB 400 31 July 2006 ------400 ==== Balance b/d 400

Details Reference Amount Balance c/d 400 ------400 ====

1 August 2006 Date 31 July 2006

Bank Control A/c Details Reference Amount Date Bank receipts BRDB 2500 31 July 2006 daybook 31 July 2006 ------2500 ==== Balance Details Balance Sales Invoice Daybook b/d 200

Details Reference Amount Bank payments BPDB 2300 daybook Balance c/d 200 ------2500 ====

1 August 2006 Date 1 July 2006 31 July 2006

Trade Debtors Control A/c Reference Amount Date b/d SDB 0 31 July 2006 5700 31 July 2006 ------5700 ====

Details Reference Amount Bank receipts BRDB 2500 daybook Balance c/d 3200 ------5700 ====

1 August 2006 Date 31 July 2006 31 July 2006

Balance

b/d

3200

Trade Creditors Control A/c Details Reference Amount Date Details Reference Amount Bank Payments BPDB 1900 1 July 2006 Balance b/d 0 Daybook Balance c/d 700 31 July 2006 Purchase Daybook PDB 2600 ------------2600 2600 ==== ==== 1 August Balance b/d 700 2006

The customers ledger cards shows the breakdown of how the trade debtors control a/c is made up. The trade debtors control a/c is the total of outstanding debtors and the customer ledger cards shows the amount due for each individual customer. The total of each individual customer account added together should equal the total in the trade debtors control a/c. The supplier ledger cards shows the breakdown of how the trade creditors control a/c is made up. The trade creditors control a/c is the total of outstanding creditors and the suppliers ledger cards shows the amount due for each individual supplier. The total of each individual supplier account added together should equal the total in the trade creditors control a/c. Each Bank a/c shows all the money in and out through a bank. If you have more than one bank account for your company you will have to maintain separate bank account ledger in order to complete bank reconciliation statements and be able to see how much is left in each account.

[edit] Bank account

Bank A/c Details Reference Amount Date Details Reference Amount Balance b/d 0 17 July 2006 Bank Payments Daybook BP701 1000 28 July 2006 Bank Payments Daybook BP703 400 31 July 2006 Balance c/d 200 ------------2500 2300 ==== ==== 1 August 2006 Balance b/d 200 Date 1 July 2006
[edit] Unadjusted trial balance

Trial balance as at 31 July 2006 A/c description Debit Credit Sales-parts 2500 Sales-service 3200 Widgets 1600 Electricity 1000 Other 400 Bank 200 Trade Debtors Control A/c 3200 Trade Creditors Control A/c 700 ------- ------6400 6400 ===== ===== Both sides must have the same overall total Debits = Credits. The individual customer accounts are not to be listed in the trial balance, as the Trade debtors control a/c is the summary of each individual customer a/c...... The individual supplier accounts are not to be listed in the trial balance, as the Trade creditors control a/c is the summary of each individual supplier a/c. Important note: this example is designed to show double entry. There are methods of creating a trial balance that significantly reduce the time it takes to record entries in the general ledger and trial balance.
[edit] Profit-and-loss statement and balance sheet

Profit and loss statement for the month ending 31 July 2006 Dr x Sales x Sales-parts 2500 x Sales-service 3200 x ------x 5700 x Widgets 1600 x ------x Gross Profit 4100 x Less expenses x Electricity 1000 x Other 400 x ------x 1400 x ------x Net Profit 2700 x ==== Balance sheet as at 31 July 2006 Dr x x Current Assets Bank A/c 200

x x x x x x x x x x x x x x x

Trade Debtors

3200 ------3400 700 ------700 ------2700 ==== 2700 ------2700 ====

Current Liabilities Trade Creditors

Net Current Assets Capital & Reserves Revenue Reserves a/c

[edit] Double Entry Example 2

[edit] Transactions XYZ Company is closing its books for the end of the month. Each of the daily journals has been summarized and the amounts are ready to be transferred to the general ledger. The amounts to be transferred are: Purchase raw materials on trade credit: $500,000 Pay workers from cash in bank to make goods: $1,500,000 Pay sales force from cash in bank to sell goods: $1,000,000 Sell goods for cash: $3,500,000

To close the books for the month, we will adjust expenses and revenue to zero by appropriately crediting and debiting the income summary and then closing the income summary to retained earnings (part of equity). These items are entered in the ledger below; each matching credit and debit have been numbered to make finding them in the ledger easier. [edit] Ledgers Transaction Balance forward 1 Raw materials 2 Labor 3 Sales costs 5 Income summary Total Revenue Balance forward 4 Revenue from sales 6 Income summary Total Cash Balance forward 2 Labor 3 Sales costs 4 Revenue from sales $ 1500 $ 1000 $ 3500 Total $ 3500 Accounts Payable $ 2500 $ 1000 $ 1500 $11000 $ 9500 $ 8500 $12000 General Ledger (in 000s) Debit Expenses $ 500 $ 1500 $ 1000 $ 3000 $ 3000 $ 3000 Credit Balance $ 500 $ 2000 $ 3000 -

$ 3500 $ 3500 $ 3500 $ 3500

$ 3500 -

Balance forward 1 Raw materials Total Income summary Balance forward 5 Expense -

$ 500 $ 500

$ 3000

$ 3000

6 Revenue 7 Retained earnings

$ 3500 $ 500 Total $ 3500 Retained earnings $ 3500

$ 500 -

Balance forward 7 Income summary Total Total all accounts:

$13500 $13500

$ 500 $ 500

$10000 $10500

The amount in equity (in the form of retained earnings) has changed with a net credit of $500,000. Since equity has a normal balance of credit, this means there is now $500,000 more in equity than at the beginning of the month. e that no errors have been made.