So, you want to learn Bookkeeping! – Part II
Bean Counter’s So, you want to learn Bookkeeping- Lesson 4
Recording Business Transactions
If you thought you we're going to be able to sit back and relax on the beach, I'm sorry to disappoint you. I'm the only one currently entitled to this luxury (I already know bookkeeping but you're getting there).
Let’s reflect a little on what we’ve covered so far.
In the Introduction we discussed the types of business organizations, types of business activities, users of financial information, bookkeeping systems, accounting rules, and the cash and accrual basis of accounting.
Lesson 1 introduced you to some of the terminology and definitions used in the accounting and bookkeeping language.
Lesson 2 explained Property & Property Rights, the Accounting Equation, double entry bookkeeping, and how business transactions affect the equation.
Lesson 3 introduced and explained Debits and Credits and how they affect the Accounting Equation and are used to record business transactions.
If you feel you need a refresher on any of these topics now would be a good time to review any
prior lessons before continuing on.
Type Of Accounts
In prior lessons, we mainly used “The Big Three” (Assets, Liabilities, and Owner’s Equity) and “Ma Capital’s (Owners Equity) Kids” (Revenue, Expense, Investment, and Draws) as our accounts” to learn how business transactions affect account balances.
These seven “big” type of accounts were defined in Lesson 1 as follows:
Formal Definition:The properties used in the operation or investing activities of a business.
Informal Definition:All the good stuff a business has (anything with value). The goodies.
Formal Definition:Claims by creditors to the property (assets) of a business until they are paid.
Informal Definition:Other’s claims to the business’s stuff. Amounts the business owes to others.
Owner’s Equity also called Owner’s Capital
Formal Definition:The owner’s rights to the property (assets) of the business; also called proprietorship and net worth.
Informal Definition:What the business owes the owner. The good stuff left for the owner assuming all liabilities (amounts owed) have been paid.
“Ma Capital’s (Owner’s Equity) Four Kids”
Formal Definition:The gross increase in owner’s equity resulting from the operations and other activities of the business.
Informal Definition:Amounts a business earns by selling services and products. Amounts billed to customers for services and/or products.
Formal Definition:Decrease in owner’s equity resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business.
Informal Definition:The costs of doing business. The stuff we used and had to pay for or charge to run our business.
Formal Definition: Decrease in owner’s equity resulting from withdrawals made by the owner.
Informal definition: Amounts the owner withdraws from his business for living and personal expenses.
Increase in owner’s equity (capital) resulting from additional investments of cash and/or other property made by the owner.
Additional amounts, either cash or other property, that the owner puts in his business.
In the real bookkeeping world, we want to know the detail types of assets, liabilities, equity (capital), revenues, expenses, and draws.
In Lesson 1 we discussed some of the detail types of assets, liabilities, equity, revenue, and expenses. Can You name a few ? I’ll help you.
Examples of Assets-Cash, Accounts Receivable, Notes Receivable, Buildings, and Equipment
Examples Of Liabilities-Accounts Payable, Notes Payable, and Mortgage Payable
Examples Of Revenue-Product Sales, Rental Income, and Service Revenue
Examples Of Expenses-Employee Wages, Building Rental, Telephone, Utilities, Advertising, Office Supplies
Types Of Accounts
Rules for Debits and Credits that we will use in this lesson were just covered in Lesson 3.
If you’ve slept since then, the following procedure is what you use in order to use and apply the Debit and Credit Rules when recording bookkeeping transactions.
All You Need To Know About Debits and Credits
Summarized In One Sentence :
Enter an amount in the Normal Balance Side of an Account to Increase the Balance of an Account and in the Opposite Side of an Account to Decrease the Balance of an Account.Additional Clarification:
Since A ssets, D raw, and E xpense Accounts normally have a Debit Balance , in order to Increase the Balance of an A sset, D raw, or E xpense Account enter the amount in the Debit or Left Side Column and in order to Decrease the Balance enter the amount in the Credit or Right Side Column.
Likewise, since L iabilities, O wner’s Equity (Capital), and R evenue Accounts normally have a Credit Balance in order to Increase the Balance of a L iability, O wner’s Equity, or
R evenue Account the amount would be entered in the Credit or Right Side Column and the amount would be entered in the Debit or Left Side column to Decrease the Account’s Balance.
How To Use and Apply The Debit and Credit Rules:
(1) Determine the type of account(s) the transactions affect-asset, liability, revenue, or expense account.
(2) Determine if the transaction increases or decreases the account’s balance.
(3) Apply the debit and credit rules based on the type of account and whether the balance of the account will increase or decrease.