Solid accounting allows a business to measure activities, beyond recording sales revenues and expenses. There are different accounting methods available, such as the general ledger approach. The general ledger or double-entry system records the double effect of a transaction using debits and credits.
You can develop a general ledger system by understanding a few concepts. For instance, every transaction that your business engages in will affect at least two accounts to create a debit and a credit. If you buy office supplies using cash, then the business increases its supplies while decreasing its cash. If you pay a debt, such as something purchased on credit, then the business decreases both cash and accounts payable (incurred expenses that have not been paid).
To record transactions through so-called T accounts, draw a T and select an account. The account title should be on the horizontal part along the top. Below the title, on the left side is where debits are recorded, and on the right side, where credits are recorded. The process of recognizing transactions as debits and credits is called posting. Accurate, consistent posting will help your business ledger remain balanced.
Debit always refers to the left side and credit to the right. For example, when working with the accounting equation, assets equals liabilities plus equity: debit refers to decreases in liabilities and equity and increases in assets; credits are decreases in assets and increases in liabilities and equity.
Consider if you receive $100,000 from an investor in exchange for equity or ownership in your business. To balance the accounting equation, you must credit the equity account or increase it by $100,000. Debit the asset account or increase it by $100,000 since you received cash. Another example is if you purchase land for your business using $50,000 cash. Credit the cash account or decrease it by $50,000. You also must debit the land account or increase it by $50,000. Both the credit and debit occur on the side--within the asset part of the equation since you are exchanging one asset for another.
ABCD Company pays $20,000 cash for land to expand its business. The purchase decreased cash, so the cash account must be credited. The purchase increased ABCD's asset land, so you must debit land to record the increase. Thus, under the accounting equation, assets are increased and decreased by $20,000. The purchase will not affect liability or equity accounts.
XYZ is a travel agency that organized a trip for its clients. The company received $10,000 in cash in return for its services. Thus, you will debit cash to record the increase in cash and credit service revenue to record the increase in revenue. To balance the accounting equation (assets equals liabilities plus equity plus revenues minus expenses), assets will increase by $10,000 and revenue will increase by $10,000.
JLKM company's expenses are $500 utilities, $2,000 employee salary and $5,000 office rent. The company pays its expenses using cash, so the cash account should be credited to reflect the decrease in cash. The expense account should be debited to reflect the increase in expenses. The accounting equation will not be affected if JLKM has one account titled expense or separate accounts, such as rent expense, salary expense and utilities expense.