Chart of Accounts - 1 min lecture
You have Assets , Liabilities and Stockholders Equity.
Double Entry Bookkeeping means you have to post everything in two accounts, one as a "Debit", one as a "Credit"
Assets are positive when the balance is a Debit.
Liabilities are positive when a Credit. Same with Equity.
Assets are all the Co owns. Liabilities are what they owe others. Equity is the difference, belongs to the shareholders. Therefore, Assets = Liabilities + Equity ......the Balance Sheet
It all works out nicely, thanks to the Eyetalians who invented it.
When you get a bill for an Office Desk, you post
Office Furniture and Equipment Dr $ 500.00 Accounts Payable Cr 500
One is an asset, the other a liability, the Co owes others.
When you pay the bill, You Credit Cash (it goes down) and debit A/P which then is zero again, you owe nothing, paid your debt.
When you pay Dividends, Cash goes down (a Credit) and the Stockholder's Equity goes down (a Debit)
You can see, there is always a Dr and a Cr entry. Each account has two Columns. By convention, Debit is the left side, Credit is the right side. Money coming into the bank goes into the left side, checks paid get posted to the right side. A reduction of the asset "bank account".
So, at the end of the month, in order to check whether you have always posted a Dr and a Cr, you add them all up. It is called the Trial Balance, lists all accounts and it MUST come out Zero !!
The Chart of Accounts designates names and a number to each Asset, each Liability and the various parts of Equity (Paid-in Capital, Retained Earnings etc) Income and Expenses are the other two major categories.
It has become a convention to have Asset account numbers to start with a "1" Liabilities with a "2" etc.
You look at your business and figure out what account designations are best designed to give you the picture of what happens in your business.
I believe I am correct in saying, you can call it anything, divide it up any way, as long as it follows those 5 categories.
This way you can your accounting as a tool, to tell you what goes on. Few people do that, rely on accountants who only want to satisfy the Auditor - unless they are told to kindly also satisfy YOU. Both can be done at the same time. No extra cost, except figuring out a meaningful Chart of Accounts ...once.
There are tricky ones, like "Accrued Interest" Where, if you post July and have a Bond paying Interest in November, you must post 31 days' worth of Interest Income in July and park the other side in "Accrued Interest" (also an asset !) until November when that gets cleaned out, against Cash.. So, that posting is an asset swap. Just as long as you post the same amount, once as Debit, once as Credit.
But you are reflecting correctly that you made interest income in July, even though the money will only arrive in November.
Did that take a minute ? Now, to remember what to post as a Debit (on the left side) and what as a Credit (in the right column) is not intuitive in the beginning, but accountants have it in their blood.
Except the fellow, who, when he came to work in the morning, unlocked his desk, pulled out the top left drawer, looked at something, then started to work.
This went on for 15 years and his co-workers always wondered, what was he looking at, first thing in the morning ?
Well, eventually he died. The key to his desk was retrieved from the family. Everybody was curious, what did he look at every morning?
They found a piece of paper in that drawer. It said :
“ Debit is window side “
Learn Double Entry Bookkeeping. I think you will understand the Financial Statements much better. As a matter of fact, get an accounting program (dirt cheap) and follow your investments , rigorously. I started that when I set up a fund for 5 kids' education. I had promised them 4 years each. Now I got my investments in an S-Corporation (which pays no taxes, but I have to)
Walter in HK |
