Frequently Asked Accounting Questions:
What does the term 'double-entry'
Each transaction in double-entry accounting systems has two parts: where the money came from and where the money goes. For example, when your business collects a payment, the money comes from your client and goes to your bank account. In double-entry systems you record two entries; one credits your client's account and the other debits your bank account. This dual entry of each transaction is what the term 'double-entry' refers to.
What do the terms 'debit' and 'credit' mean?
The terms debit and credit refer to the way money moves from one account to another account. One side of an individual transaction debits an account, and the other side credits another account. 'Taking from' an account is a credit, 'adding to' an account is a debit. On the surface this may sound backwards. Think of it this way: you take money from your petty cash account to buy gas. Your fuel account now 'owes a debt' (debit) to your petty cash account.
What is a 'journal'?
A Journal is where your transactions are entered for the very first time. In manual systems this would be a book with columns that hold the date, amount and accounts for each transaction. In computerized systems you will instead have a 'check' displayed on screen that you fill out when making payments, or an 'invoice' you fill out when making a new sale. Behind the scenes however, the details of your transactions are still held in a computerized version of the traditional accounting 'journal'.
What is a 'ledger'?
A Ledger is a book which takes your original entries from your journal (see previous answer) and sorts them into separate accounts. While a journal holds all your transactions by date, a ledger re-sorts all your transactions by account.
What does the term 'posting' mean?
You first enter your transactions into a journal by date. They are then copied and sorted into a ledger by account (see previous answer). The process of copying entries from journal to ledger is called Posting.
What is a 'trial balance'?
A Trial Balance is a list of every account balance. Accounts with credit balances are added together, and accounts with debit balances are added together. If the total credits equal the total debits, then the accounts are said to be balanced and a Balance Sheet can be generated (see next answer).
What is a 'Balance Sheet'?
A Balance Sheet is a summary statement of all accounts used in your business. Accounts with debit balances are shown on one side of the sheet in a column called 'assets' (what your business owns). Accounts with a credit balance are shown on the other column, called 'liabilities' (what your business owes). If you have correctly logged all transactions into the journal, and then correctly posted them to the ledger, and they are then correctly placed on the proper side of your balance sheet, the total on each side will be equal (assets will equal liabilities). This is why this kind of statement is called a 'balance sheet'. Balance sheets can be a useful analysis tool at any time in your business cycle, but are usually produced at the end of each business year.
What is a 'cash flow statement'?
A Cash Flow statement shows the flow of money in and out of your business over a defined time period. Your bank statement is a good example of a rudimentary cash flow statement. It shows every dollar in, and every dollar out of your bank account. In practice however, true cash flow statements contain greater detail on precisely what your money was spent on.
How can I learn more?
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