In double entry accounting, a company's assets are equal to its liabilities plus owner's equity. This is known as the accounting equation.
Accounting Equation Quick Reference
Assets = Liabilities + Owner's Equity
Each action on one type of account must have an equal effect in the opposite column. For example, paying the monthly mortgage payment decreases assets. The equal effect on the opposite side is that it reduces the amount owed to the lender, subsequently decreasing the company's liabilities. Both of these effects are recorded and help the credits and debits equal out further into the accounting cycle.
It can be tricky to remember how to record transactions. It would seem logical to record an increase in assets, such as a cash payment, in the credit column. However, this is not so. Use the following three rules for quick reference when recording transactions in double entry accounting:
Assets
- Debit for increases, record on the left
- Credit for decreases, record on the right
Liabilities
- Debit for decreases, record on the left
- Credit for increases, record on the right
Owner's Equity
- Debit for decreases, record on the left
- Credit for increases, record on the right
Recording Transactions in Owner's Capital, Revenues, Expenses & Owner's Withdrawals
These four types of transactions all affect owner's equity. Increases in revenue or owner's capital increase the owner's equity. Increases in expenses or owner's withdrawals accounts cause owner's equity to decrease. These four rules are a quick reference to posting transactions in these types of accounts:
Owner's Capital
- Debit for decreases, record on the left
- Credit for increases, record on the right
Revenues
- Debit for decreases, record on the left
- Credit for increases, record on the right
Expenses
- Debit for increases, record on the left
- Credit for decreases, record on the right
Owner's Withdrawals
- Debit for increases, record on the left
- Credit for decreases, record on the right
How to Buy Accounting Software
Most accounting programs require only a single input, so the double-entry aspect is taken care of automatically. The decision to buy accounting software can be complicated. There are many brands and versions, all with unique features and different levels of support.
TopTenReviews.com rated the features of ten different accounting software options, complete with user reviews according to several different usability and support criteria. Many accounting software companies, such as Microsoft and Intuit Quickbooks, also offer free beginner versions or trials as free downloads.
Why Accounting Knowledge is Important
Understanding how and why accounting methods work helps business owners make good decisions, verify their records, and immediately spot problems or mistakes. Even when using computerized bookkeeping software, business owners and manager must understand the effects of everyday decisions and transactions on the company's finances.
It is easier than ever to brush up on business skills, with many schools now offering a variety of courses by distance education. Athabasca University offers 11 accounting courses, ranging from Introductory Accounting to more complex Strategic and Competitive Analysis or Principles of Auditing. Business owners with little accounting experience can take advantage of online or distance courses to help them succeed and prosper.
For more information on basic accounting principles, visit Suite101.com's Accounting Feature Writer James Hutchinson's blog.
