Accounting 101 – Basic Concepts and Terms
Introduction to Fundamental Financial Bookkeeping Theory
Nov 8, 2009
Debits and credits are two terms that are the backbone of understanding basic accounting concepts. After grasping the concept of these two terms, an individual can then move on to understanding basic accounting concepts. Learn the progression from posting business financial transactions, to reporting profits and owner’s equity.
Accounting 101 - Debits and Credits
Financial business transactions are posted with debits and credits. The total dollar amount of debits must be equal to the total dollar amount of credits. If they do not equal, the transaction will be out of balance. Debits and credit represent an increase or decrease, depending on the financial account category. Understanding debits and credits is essential to grasping the concepts of accounting.
- Asset – debit increase, credit decrease
- Liability – debit decrease, credit increase
- Revenue – debit decrease, credit increase
- Expense – debit increase, credit decrease
- Equity – debit decrease, credit increase
Accounting 101 - Journals
The journals are like a log for business transactions. The logs, or journals are where the financial transactions are posted using debit and credits. Some of the typical accounting journals include:
- Sales Journal – Is where the sales activities are posted, usually from a sales invoice. Typical transaction include debit and credit postings to sales, cash, account receivables, cost of goods sold and inventory.
- Purchase Journal – is used when items are purchased on open account. This is the primary journal used to record accounts payable (liability) transactions. Purchases can include inventory and expense items, among other accounts.
- Check Register – is used to simultaneously write checks and post the transactions that affect cash (asset). When a check is written, cash is posted with a credit (decrease) and the opposite account is usually posted with a debit. For example, making a payment on account would be a debit (decrease) to accounts payable.
- General Journal – is used for making adjustment to accounts that aren’t covered by other journals. There can also be other types of journals that could be unique to a particular business or industry.
Accounting 101 – General Ledger Accounts
Each transaction that is recorded in a journal is then posted to a general ledger (GL) account. Usually at the end of each business day, the journals are totaled and posted to the respective general ledger. The general ledgers are generally separated into main categories of assets, liabilities, revenue, expense and equity. The actual GL accounts are the subcategories within the main categories. As an example, the GL accounts within the asset categories may include:
Asset General Ledger Accounts
- Cash
- Accounts Receivables
- Inventory
- Equipment
- Building
- Vehicles
- Furniture
Accounting 101 – Financial Statements
Usually at end of each month the financial statements are created to show the financial strength of the company. The income statement and balance sheet are the two main financial statements. The general ledger account totals for the month ending are transferred to the appropriate financial statements. The income statement reports the net profit (or loss) of the company. The balance sheet reports owner’s equity or the company’s net worth.
In summary, journals are used to post the business financial transactions with debits and credits. The total dollar amount for a particular journal posting must balance. The individual journal account totals are then transferred to the general ledgers. The general ledgers are then transferred to the appropriate financial statements.
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