Double-Entry Bookkeeping, Debits & Credits

[Rich Shepard]

   With the forebearance of those of you who know, I'll provide this
explanation and quick reference to DB/CR so it will be in the archives. NB:
IANAA; that is, I am not an accountant. But, I've had two excellent ones in
the dozen years I've run my business.

Double-Entry vs. Single-Entry
-----------------------------

   When you maintain maintain a paper register in your checkbook you have two
options. Use a single line for each deposit, check, or debit card/atm
transaction or use two lines where you write a description of the
transaction on the second line.

   If you use a single line for each transaction you have the equivalent of
single-entry bookkeeping. The date, payee/source and amount is recorded, but
that's all the information you have. You cannot tell the purpose of the check
from that information. At least, not well.

   If you use two lines for each transaction you have the equivalent of
double-entry bookkeeping. You might record the deposit as "salary," "refund,"
or "miscellaneous." Checks could be annotated as for "medical expenses,"
"home repair," "telephone bill," or whatever is appropriate.

   The latter is just what you do with double-entry software such as gnucash.
You are required to explain, describe, or otherwise account for each
transaction using your chart of accounts. If you think about this for a
moment or three it will make a lot of sense.

   Want to know how much you spent at the supermarkets last year? Pull up an
account report for Expenses:Groceries (if that's what you call it), and there
it is. What were your medical expenses that might be deductable on your
federal income tax return? Again, an account report will tell you right away.
Alternatively, how much did you spend at Joe's Greasy Spoon Gourmet
Restaurant? A transaction report for that payee will give you the answer.

   It ain't just for accountants any more, it's for us reg'lar folks, too. I
cannot imagine keeping track of my finances any other way.

The Accounting Equation and T-Ledger
------------------------------------

   My first accountant clarified my reading of an introductory accounting made
easy book by helping me to construct my cheat-sheet that hangs right here at
the desk.

   The accounting equation is simply:

 										Assets		=			Liabilities + Capital
 									------------+----------------------------
                 		DEBIT     |				CREDIT
 				                      |

   Notice how the ASCII art looks a bit like a 'T'? Let's apply account
categories to this layout:

Asset Accounts:
 				Beginning Balance			|
 						and								|
 					Increases						|			Decreases

Liability & Capital Accounts:
 															|		Beginning Balance
 															|				and
 					Decreases						|			Increases

Revenue Accounts:
 					Decreases						|			Increases

Expense Accounts:
 					Increases						|			Decreases


   In summary, an INCREASE to an asset or expense account is a DEBIT while an
INCREASE to a liability, capital, or revenue account is a CREDIT. As a
non-accountant, I find it handy to keep the above for ready reference.

Hope this helps,

Rich

-- 
Dr. Richard B. Shepard, President
Applied Ecosystem Services, Inc. (TM)
<http://www.appl-ecosys.com>   Voice: 503-667-4517   Fax: 503-667-8863