This is very important step in your journey of learning the ins and outs of accounting. Actually a lot of CPA wannabes fail in the CPA Board because they have not taken to heart this concept of normal account balances. The other reason why Accountancy students have a hard time is because they did not do their Practice Set in either Accounting 1 or 2 in their lower years, where they would learn the Accountancy cycle by heart.
Well anyway, you are not here to take the CPA exam but to learn accounting for your business.
What the heck therefore is the concept of "normal account balances".
Normal account balance is the side (debit or credit) where the account would increase. Therefore an assets normal balance is debit because it is increases in the debit side. While a liability is credit because liabilities increases in the credit side.
Are you following me on this?
If not, well that's your problem :), just kidding.
If not, don't worry, I will explain it in further slowly.
Enter the term "Double Entry".
What does double entry mean?
You remember that debit and the credit concept. Picture a two column in MS Excel. Lets say you have a column A and a column B, and we write in the first row of column the word "debit" and in the first row of column B the word "credit".
We now have two columns debit and credit. In double entry, for every amount of transaction you entered in debit column, an equivalent amount should be entered for your credit column and vice-versa.
Did you follow me on that? Maybe I should show you a picture example for you to understand it better. Some of us are more of a visual type of individual .... isn't it? Life would be better if all teachers realize that ........ we would not have been so bored with all the concepts plugged in to our heads during our college days :)
Take a look at the Excel file 4-column example below:
As you can see in our picture above, in the first entry you have a credit sales transaction as shown in the particulars column. For purposes of illustration, lets say you have a sale given on credit in the amount of 100 in your currency. In this case, you have a collectible in the amount of 100 from your customer and an income of 100. So we entered 100 both under your debit and credit column, which in effect made your debit and credit obtain a balanced total. Since we entered the same amount totals in your debit and credit, then we have complied with the term "double entry".
The second transaction is just the same as the first, the only difference is the amount and the sales made was in cash.
However, the third transaction shown above in an Excel file example was a combination of both credit and sales. So as you can see, your debit column showed two entries, first recognizing the cash sales for 100 and in the second entry recognizing the credit sales for 200, thus the total sales is 300. In order two maintain the balance between debit and credit, we recognized the sales income under the credit column for 300.
In my next post, I will explain how create your "Chart of Accounts" which will explain the "Account Name" and "Account Code" columns in the above example.
Take a look at the Excel file 4-column example below:
As you can see in our picture above, in the first entry you have a credit sales transaction as shown in the particulars column. For purposes of illustration, lets say you have a sale given on credit in the amount of 100 in your currency. In this case, you have a collectible in the amount of 100 from your customer and an income of 100. So we entered 100 both under your debit and credit column, which in effect made your debit and credit obtain a balanced total. Since we entered the same amount totals in your debit and credit, then we have complied with the term "double entry".The second transaction is just the same as the first, the only difference is the amount and the sales made was in cash.
However, the third transaction shown above in an Excel file example was a combination of both credit and sales. So as you can see, your debit column showed two entries, first recognizing the cash sales for 100 and in the second entry recognizing the credit sales for 200, thus the total sales is 300. In order two maintain the balance between debit and credit, we recognized the sales income under the credit column for 300.
In my next post, I will explain how create your "Chart of Accounts" which will explain the "Account Name" and "Account Code" columns in the above example.
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