double entry bookkeeping
Bookkeeping II
Vocabulary
| double | entry | bookkeeping |
| system | every | transaction |
| record (2) | to record (2) | account |
| side | debit | credit |
| each | column | date (3) |
| explain | change (2) | amount |
| involve | asset | liability |
| equity | balance | increase |
| decrease | procedure | reverse |
| that is (2) | i.e. | in other words |
| reflect (2) | expenditure | fundamental |
| equation | affect | different |
| way | must | always |
| equal | specific | period (3) |
| such as | determine | actual |
| each | begin | add |
| subtract | list | trial |
| trial balance | show (2) | another |
| unless | error | sum |
| equal | finance | financial statement |
| total | sheet | balance sheet |
| various | thus | reflect |
| position | give | given date |
| profitability | based on | expense |
Double-entry Bookkeeping
The most commonly used bookkeeping system is called double-entry bookkeeping. In this system, every business transaction is recorded in two entries, and every account has two sides.
One side is the debit side, and the other is the credit side. Each side has columns for dates, explanations of any changes, and the amount of money involved.
Asset, Liability, and Equity Accounts
For asset accounts, the beginning balance and all increases are recorded on the debit side. Decreases are recorded on the credit side.
This procedure is reversed for liability and equity accounts. That is, the beginning balances and all increases are shown on the credit side, and any decreases are recorded as debits.
Most transactions in income accounts are reflected as credits. Most transactions in expenditure accounts are debits.
Assets = Liabilities + Equity
The fundamental equation in double-entry bookkeeping is
Assets = Liabilities + Equity
A transaction can affect this equation in many different ways. But the two sides of the equation must always balance each other–that is, they must be equal.
Determining the Balance
At the end of a specified period of time, such as a month or a year, bookkeepers determine the actual balance in each account.
They do this by taking each beginning balance, adding increases, and subtracting decreases. The balance in each account is then listed in a record called a trial balance.
All debit balances are shown in one column and all credit balances in another. Unless an error has been made, the sum of all debit balances equals the sum of all credit balances.
Financial Statements
Accountants use the trial balance to prepare two financial statements–the balance sheet and the statement of income.
The balance sheet shows the totals from the various asset, liability, and equity accounts and thus reflects the organization’s financial position at a given date.
The income statement, based on the totals for incomes and expenses, reflects the organization’s profitability over a given time period.
Questions
1. What is the most commonly used bookkeeping system? The most commonly used bookkeeping system is….
2. Describe the format of double-entry bookkeeping.
3. What are the differences between asset, liability, and equity accounts?
4. Describe the procedures for asset, liability, and equity accounts.
5. The most important thing is that the asset-liability-equity equation must be equal. Yes or no?
6. What happens at the end of a month or year?
7. Define trial balance.
8. What do they say about credit and debit balances?
9. What do accountants do with trail balances?
10. The balance sheet shows…..
11. What does the income statement indicate?
A. All bookkeeping is computerized. Yes or no?
B. Do bookkeepers still use paper and pen?
