You are on page 1of 16

Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction(s) and vice versa.

Debits and credits are a system of notation used in bookkeeping to determine how to record any financial transaction. In financial accounting or bookkeeping, "Dr" (Debit) means left side of a ledger account and "Cr" (Credit) is the right side of a ledger account. [1] .

To determine whether one must debit or credit a specific account we use the modern accounting equation approach which consists of five accounting elements or rules. [2] An alternative to this approach is to make use of the traditional three rules of accounting for: Real accounts, Personal accounts, and Nominal accounts to determine whether to debit or credit an account. [3]

[edit] Aspects of transactions

Debits and credits form two opposite aspects of every financial transaction. For example, when a person deposits cash into his bank checking account, this financial transaction has two aspects:

the customer's cash-in-hand (the customer's asset) decreases and the customer's checking account balance (the customer's asset) with the bank increases. The decrease in the cash-in-hand asset is the customer's credit while the increase in the asset balance in the bank checking account is the customer's debit.

The bank views it differently. In this example, the bank's vault

 

Increase

Decrease

Asset

Debit

Credit

 

Liability

Credit

Debit

Income

Credit

Debit

Expense

Debit

Credit

Equity/Capital

Credit

Debit

cash (asset) increases which is a debit, and the corresponding increase in the customer's checking account balance (bank's liability) is a credit.

In summary: In the American system of financial accounting or bookkeeping, an increase (+) to an asset account is a debit. An increase (+) to a liability account is a credit. In the English system, the entries are reversed.

Conversely, in the American system of financial accounting or bookkeeping, a decrease (-) to an asset account is a credit. A decrease (-) to a liability account is a debit. In the English system, the entries are reversed.

[edit] Etymology

While the actual origin of the terms debit and credit is unknown, the first known recorded use of the terms is Venetian Luca Pacioli's 1494 work, Summa de Arithmetica, Geometria, Proportioni et Proportionalita (translated: Everything About Arithmetic, Geometry and Proportion). Pacioli devoted one section of his book to documenting and describing the double-entry bookkeeping system in use during the Renaissance by Venetian merchants, traders and bankers. This system is still the fundamental system in use by modern bookkeepers. [4]

In its original Latin, Pacioli's Summa used the Latin words debere (to owe) and credere (to entrust) to describe the two sides of a closed accounting transaction. When his work was translated, the Latin words debere and credere became the English debit and credit. The abbreviations Dr (for debit) and Cr (for credit) likely derive from the original Latin. [5]

[edit] Understanding

When dealing with one's own business, one must set up various accounts to record all transactions that may take place. When the owner of a business refers to their bank account, they are referring to the business account, not to their personal account. In addition, all accounts referred to in bookkeeping belong to the business, not to other businesses, regardless of their title. For instance, if my business expects to receive money from another person or company and the account is labeled "Receivable A", this does not imply that the account in question belongs to “Receivable A”. It is merely a recording of a current asset (a receivable) of one's own business. Therefore, when assessing any transaction, the transaction is from the point of view of one's own business.

All accounts must first be classified as one of the five types of accounts (accounting elements). To determine how to classify an account into one of the five elements, the definitions of the five account types must be fully understood i.e. the definition of an asset according to IFRS is as follows: An asset is a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity. [6] To understand this definition we can break it down into its constituent parts with an example:

Example: Classify what type of account the business "Bank account" is. The bank account of a business is "a resource controlled by the entity" as it belongs to the business. "As a result of past events" such as the opening of the business. "From which future economic benefits are expected to flow to the entity" - a business such as a grocery store can expect to make money due to the sale of their goods. This basic analogy can be applied to any asset account. All of the five accounting elements have their own definitions (discussed in other articles see:

asset, liability, equity, income and expense) that must be fully understood in order to classify an account correctly.

A business will most often have more than one asset account. An essential asset account in any business is the businesses bank account (see: "Accounts pertaining to the five accounting elements" below for more examples) The same applies to liability accounts i.e. if I have borrowed money from two sources (called creditors or payables), then I must open two accounts to represent this present liability, called 'Creditor/Payable A' and 'Creditor/Payable B'. In this manner I may have multiple, different accounts.

However all these accounts are all classified as one of the five types of accounts, therefore my entire business can be described in terms of its assets, expenses, liabilities, income and equity/capital (see extended accounting equation). This is the extent of "my" business in relation to accounts, regardless of

the business' practices (the business may be a retail franchise, furniture shop, restaurant etc

...

). With

respect to my business, each of the five accounting elements will have a monetary value, and this can be

used to assess the financial position of my business at any time (my success, failure, or any other attributes that I might need to know).

Traditionally, transactions are recorded in two separate columns of numbers (known as a ledger or "T- account"): debit transactions in the left hand column and credit transactions in the right hand column. Keeping the debits and credits in separate columns allows each column to be recorded and totalled

independently. Accounts within the general ledger are known colloquially as "T-accounts" due to the "T" shape that the table resembles. Each column of a ledger account lists transactions affecting that account.

[edit] Terminology

independently . Accounts within the general ledger are known colloquially as "T-accounts" due to the "T"[ edit ] Terminology This section may require copy-editing . The words debit and credit are both used differently depending on whether they are used in an accounting sense, or non-accounting sense. In a non-accounting sense, according to knol , a "debit" is:  a written note on bank account or another financial record of a sum of money owed or spent, or  a sum of money taken from a bank account. In a non-accounting sense, according to wordnet , "credit" is  money available for a client to borrow. Thus, in a non-accounting sense, "credit" is money that a creditor makes available to a client to borrow. However, "credit" in this sense is not an accounting term, although this word comes up regularly in business and therefore accounting. In the academic field of accounting (bookkeeping), such dictionary definitions are misleading and the words "debit" and "credit" as used in accounting have little connection with the layman's understanding of "debit" and "credit". This may seem confusing at first, but one will find when studying accounting that "debit" and "credit" are essential for the double-entry system of bookkeeping. When recording numbers in accounting, a debit value is placed on the left side of a ledger for a debited account and a credit value is placed on the right side of a ledger for a credited account. A debit or a credit either increases or decreases the total balance in each account, depending on what kind of accounts they are. Each transaction (say, of value £100) is recorded by a debit entry of £100 in one account and a credit entry of £100 in another account. When people say "debits must equal credits" they do not mean that the two columns of any ledger account must be equal. If that were the case, every account would have a zero balance (no difference between the columns) which is often not the case. The rule that total debits equal the total credits applies when all accounts are totalled. More than two accounts may be affected by the same transaction. A transaction for £100 can be recorded as a £100 debit in one account and as multiple credits that total £100 in other accounts. Example : I owe creditors A and B £100 each. Thus my liability account for Creditor A has a credit balance of £100 and the same for Creditor B. I pay them off from my bank checking account, which from my point of view is an asset. I withdraw £200 from my bank account and split it to pay off the two liabilities. In my records, "Bank" is one account, "Creditor A" is another account, and "Creditor B" is a third account. The following transactions affect all three ledger accounts: " id="pdf-obj-2-12" src="pdf-obj-2-12.jpg">

This section may require copy-editing.

The words debit and credit are both used differently depending on whether they are used in an accounting sense, or non-accounting sense.

In a non-accounting sense, according to knol, [5] a "debit" is:

a written note on bank account or another financial record of a sum of money owed or spent, or

a sum of money taken from a bank account.

In a non-accounting sense, according to wordnet, [7] "credit" is

money available for a client to borrow.

Thus, in a non-accounting sense, "credit" is money that a creditor makes available to a client to borrow. However, "credit" in this sense is not an accounting term, although this word comes up regularly in business and therefore accounting. In the academic field of accounting (bookkeeping), such dictionary definitions are misleading and the words "debit" and "credit" as used in accounting have little connection with the layman's understanding of "debit" and "credit". This may seem confusing at first, but one will find when studying accounting that "debit" and "credit" are essential for the double-entry system of bookkeeping.

When recording numbers in accounting, a debit value is placed on the left side of a ledger for a debited account and a credit value is placed on the right side of a ledger for a credited account. A debit or a credit either increases or decreases the total balance in each account, depending on what kind of accounts they are.

Each transaction (say, of value £100) is recorded by a debit entry of £100 in one account and a credit entry of £100 in another account. When people say "debits must equal credits" they do not mean that the two columns of any ledger account must be equal. If that were the case, every account would have a zero balance (no difference between the columns) which is often not the case. The rule that total debits equal the total credits applies when all accounts are totalled.

More than two accounts may be affected by the same transaction. A transaction for £100 can be recorded as a £100 debit in one account and as multiple credits that total £100 in other accounts.

Example:

I owe creditors A and B £100 each. Thus my liability account for Creditor A has a credit balance of £100 and the same for Creditor B. I pay them off from my bank checking account, which from my point of view is an asset. I withdraw £200 from my bank account and split it to pay off the two liabilities. In my records, "Bank" is one account, "Creditor A" is another account, and "Creditor B" is a third account. The following transactions affect all three ledger accounts:

Dr: Creditor A (100) Dr: Creditor B (100) Cr: Bank (200)

When I write two cheques totalling £200, the balance in my bank account is reduced by £200. In my records, my "Bank" ledger account has an asset debit balance, which is reduced by the credit for £200. Amounts in my records for the two creditors are liabilities, which are reduced by the two debits totalling

£200.

Therefore for this transaction, the total amount debited = 200 and the total amount credited = 200. When all three accounts are totalled, the total debits equal the total credits.

At the end of any financial period (say at the end of the quarter or the year), the total debits and the total credits for each account may be different and this difference of the two sides is called the balance. If the sum of the debit side is greater than the sum of the credit side, then the account has a "debit balance". If the sum of the credit side is greater, then the account has a "credit balance". If the two sides do equal each other (this would be a coincidence, not as a result of the laws of accounting), then we say we have a "zero balance".

[edit] Debit cards and Credit cards

Debit cards and credit cards are creative terms used by the banking industry to market and identify each card. From the cardholder's point of view, these terms are unrelated to the terms used in formal accounting. A debit card is used to make a purchase with one's own money. A credit card is used to make a purchase by borrowing money. [8]

However, from the bank's point of view, when a debit card is used to withdraw cash from a checking account, the withdrawal causes a decrease in the amount of money the bank owes to the cardholder. A decrease to the bank's liability account is a debit. Hence using a debit card causes a debit to a checking (liability) account in the bank. Likewise when a credit card is used by a cardholder to pay a merchant for something, that increases the amount the bank must credit to the merchant's checking account when the check clears. This obligation is the bank's liability and an increase to a liability account is a credit. Hence using a credit card causes a credit to a liability account in the bank.

[edit] General ledgers

Definition: The general ledger is the term for the comprehensive collection of T-accounts (so called because there was a preprinted vertical line in the middle of each ledger page and a horizontal line at the top of each ledger page, like a large letter T). Before the advent of computerised accounting, manual accounting procedure used a book (known as a ledger) for each T-account. The collection of all these books was called the general ledger. Nowadays a 'ledger' can refer to a single spread sheet on an accounting software system. The different ledgers can be saved under the same file (which will be called the 'general ledger'). [citation needed]

"Day Books" or journals were used to list every single transaction that took place during the day, and the list was totalled at the end of the day. These daybooks did not use the double entry system because each book was for either debits or credits. Negative amounts were recorded in red ink. This was simply a way of recording the transactions immediately, without taking time during the day to record transactions in their respective ledger accounts. Nowadays this is done with computer software that instantly updates each ledger account - for example, recording a cash receipt in a cash receipts journal and as a debit in a

cash ledger account with a corresponding credit in the ledger account for which the cash was received. Not every single transaction need be entered into a T-account. Usually only the sum of transactions for the day is entered, so that each entry in the account has a different date. [citation needed]

[edit] The Five Accounting Elements

There are five fundamental elements [2] within accounting. These elements are as follows: Assets, Liabilities, Equity, Income and Expenses. The five accounting elements are all affected in either a positive or negative way. It is important to note that a credit transaction does not always dictate a positive value or increase in a transaction and similarly, a debit does not always indicate a negative value or decrease in a transaction. An asset account is often referred to as a "debit account" due to the account's standard increasing attribute on the debit side. When an asset has been acquired in a business such as a delivery vehicle, the transaction will affect the debit side of that asset account illustrated below:

Asset

Debits (dr)

Credits (cr)

X

Where "X" in the debit column denotes the increasing effect of a transaction on the asset account balance (total debits less total credits), because a debit to an asset account is an increase. The asset account above has been added to by a debit value X, i.e. the balance has increased by £X. Likewise, in the liability account below, the X in the credit column denotes the increasing effect on the liability account balance (total credits less total debits), because a credit to a liability account is an increase.

All "mini-ledgers" in this section show standard increasing attributes for the five elements of accounting.

Liability

 
 

Debits (dr)

Credits (cr)

X

Income

 
 

Debits (dr)

Credits (cr)

X

Expenses

 
 

Debits (dr)

Credits (cr)

X

Equity

 
 

Debits (dr)

Credits (cr)

X

Summary table of standard increasing and decreasing attributes for the five accounting elements:

ACCOUNT TYPE DEBIT CREDIT

Asset

+

Liability

+

Income

+

Expense

+

Equity

+

[edit] Principle

Each transaction that the business makes consists of at least one debit to one account and at least one credit to another account. A debit to one account can be balanced by more than one credit to other accounts, and vice versa. For all transactions, the total debits must be equal to the total credits and therefore balance.

For Every Transaction: The Value of Debits = The Value of Credits

The basic accounting equation is as follows:

Assets = Equity + Liabilities (A = E + L)

The extended accounting equation is as follows:

Assets + Expenses = Equity/Capital + Liabilities + Income (A + Ex = E + L + I)

Both sides of these equations must be equal (balance).

When a transaction takes place, traditionally the transaction would be recorded in a ledger or "T" account. A "T" account represents any account that is opened e.g. "Bank" that can be effected with either a debit or credit transaction.

In accounting it is acceptable to draw-up a ledger account in the following manner for representation purposes:

Bank

Debits (dr)

Credits (cr)

[edit] Accounts pertaining to the five accounting elements

Accounts are created/opened when the need arises for whatever purpose or situation the entity may have. For example if your business is an airline company they will have to purchase airplanes, therefore even if an account is not listed below, a bookkeeper or accountant can create an account for a specific item, such as an asset account for airplanes. In order to understand how to classify an account into one of the five

elements, a good understanding of the definitions of these accounts is required. Below are examples of some of the more common accounts that pertain to the five accounting elements:

[edit] Asset accounts

Cash, Bank, Receivables, Inventory, Land, Buildings, Equipment, Vehicles, Trademarks and patents, Goodwill,plants,Prepaid Expenses,Debtors etc.,

[edit] Liability accounts

accounts payable, salaries and wages payable,income taxes payable ,bank overdrafts, deposits owed to depositors, trust accounts, accrued expenses etc ...

[edit] Equity accounts

Capital, Drawings, Common Stock, Accumulated funds etc ...

[edit] Income accounts

Services rendered, Sales, Interest income, Membership fees, Rent income etc ...

[edit] Expense accounts

Telephone, Water, Electricity, Repairs, Salaries, Wages, Depreciation, Bad debts, Stationery, Entertainment, Honorarium, Rent, Fuel etc ...

[edit] Example

Quick Services business purchases a computer for ₤500 for the receptionist, on credit, from ABC Computers. Recognize the following transaction for Quick Services in a ledger account (T-account):

Quick Services has acquired a new computer which is classified as an asset within the business. According to the accrual basis of accounting, even though the computer has been purchased on credit, the computer is already the property of Quick Services and must be recognised as such. Therefore, the equipment account of Quick Services increases and is debited:

Equipment (Asset) (dr)

500

(cr)

As the transaction for the new computer is made on credit, the payable "ABC Computers" has not yet been paid. As a result, a liability is created within the entity’s records. Therefore, to balance the accounting equation the corresponding liability account is credited:

Payable ABC Computers (Liability)

(dr)

(cr)

500

The above example can be written in journal form:

 

dr

cr

Equipment ABC Computers (Payable)

500

500

The journal entry "ABC Computers" must be indented to indicate that this is the credit transaction (not accurately shown here due to restrictions). It is accepted accounting practice to indent credit transactions recorded within a journal.

In the accounting equation form:

A = E + L 500 = 0 + 500 (The accounting equation is therefore balanced)

[edit] Further Examples

  • 1. A business pays rent with cash: you increase rent (expense) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.

  • 2. A business receives cash for a sale: you increase cash (asset) by recording a debit transaction, and increase sales (revenue) by recording a credit transaction.

  • 3. A business buys equipment with cash: You increase equipment (asset) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.

  • 4. A business borrows with a cash loan: You increase cash (asset) by recording a debit transaction, and increase loan (liability) by recording a credit transaction.

  • 5. A business pays salaries with cash: you increase salary (expenses) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.

  • 6. The totals show the net effect on the accounting equation and the double-entry principle where, the transactions are balanced.

Account

Debit (dr) Credit (cr)

  • 1. Rent

100

Bank

100

  • 2. Bank

50

Sales

50

  • 3. Equipment 5200

Bank

5200

Loan

11000

  • 5. Salary

5000

Bank

5000

  • 6. Total (dr)

21350

Total (cr)

21350

[edit] "T" Accounts

The process of using debits and credits creates a ledger format that resembles the letter "T". [9] The term "T-account" is accounting jargon for a "ledger account" and is often used when discussing bookkeeping. [10] The reason that a ledger account is often referred to as a "T" account is due to the way the account is physically drawn on paper (representing a "T"). The left side (column) of the "T" for Debit (dr) transactions and the right side (column) of the "T" for Credit (cr) transactions.

Debits (dr)

Credits (cr)

[edit] Contra account

  • This section may not be warranted as a stand-alone section. Please attempt to diffuse its content into appropriate sections of the article. (November 2011)

All accounts have corresponding contra accounts depending on what transaction has taken place i.e. when a vehicle is purchased using cash, the asset account "Vehicles" is debited as the vehicle account increases, and simultaneously the asset account "Bank" is credited due to the payment of the vehicle using cash. Some balance sheet items have corresponding contra accounts, with negative balances, that offset them. Examples are accumulated depreciation against equipment, and allowance for bad debts against long-term notes receivable.

[edit] Real, personal, and nominal accounts

  • This section requires expansion with:
    more detail needed.

Real accounts are assets. Personal accounts are liabilities and owners' equity and represent people and entities that have invested in the business. Nominal accounts are revenue, expenses, gains, and losses. Accountants close nominal accounts at the end of each accounting period. [11] This method is used in the United Kingdom, where it is simply known as the Traditional approach. [3]

Transactions are recorded by a debit to one account and a credit to another account using these three "golden rules of accounting":

1.

Real account: Debit what comes in and credit what goes out

  • 2. Personal account: Debit who receives and Credit who gives.

  • 3. Nominal account: Debit all expenses & losses and Credit all incomes & gains

Real (assets) Personal (liability)

Debit

Credit

Increase Decrease Decrease Increase

Personal (owner's equity) Decrease Increase

Nominal (revenue) Nominal (expenses) Nominal (gain) Nominal (loss)

Decrease Increase Increase Decrease Decrease Increase Increase Decrease

Broadly speaking, there are four steps, or phases, which take place in accounting. These are:

• Identification and Record • Sorting and Classification • Summarizing and Presentation • Interpretation

In the first stage, the accountant will need access to all financial records and paperwork the business or individual. This may include receipts, invoices and vouchers. From these articles, the accountant can create a log containing every financial transaction of the business or individual.

From this log, the accountant can get an idea of how much money is being spent and earned. An accountant is not permitted to create and log transactions which have not happened. Also, an accountant should not omit delete records from the log. Instead, they should make amendments to records in the log, along with the reason why the amendment was needed.

In the second stage, all the transactions in the log must be sorted and categorized into different groups. First of all, as stated above, the accountant must identify whether each transaction represents income or expenditure.

After this has been identified, the account must link the transaction with the appropriate field within the business or the individual's life. For example, within the expenditure category, you may have groups for expenses such as travel, marketing and production.

In the third stage, the accountant must communicate a summary of the figures they have found, and how they found them. Computer software may be used to create texts such as graphs, charts, spreadsheets and invoices, as well as having the information clearly presented in a written article.

The final stage requires that the account works closely with the business or individual in order to make them more efficient and increase their profit. For example, there may be particular areas of expenditure which the account feels are too high, and need to be reduced. They will then work with the company or individual in order to come up with methods and processes to reduce these areas of expenditure. Community Answer Was this answer helpful? Yes | No Ads by Google

XBRL and Enterprise Risk Management Download Your Free Report Today. www.DiscoverIMA.org/XBRL

Improve Reporting with SAS Business Intelligence. Read White Paper! www.SAS.com

Recording, classifying, summarizing, and interpreting. Anonymous

Report Was this answer helpful? Yes | No | Edit this RecordingRecording or bookkeeping is a basic phase of accounting. It is where all financial transactions are recorded in a systematical and chronological manner in appropriate books or databases. Accounting recorders are the documents and books involved in preparing financial statements, these include records of assets, liabilities, ledgers, journals and other supporting documents such as invoices and checks.

Classifying

Classifying involves sorting and grouping similar items under the designated name, category or account. This phase uses systematic analysis of recorded data in which all transactions are grouped in one place.

For example, "food expenses" might be a category that accountants use to classify expenses relating to company events or travel related meetings etc. A "ledger" is the book in which classifications are recorded.

Summarizing

This refers to the summarizing of the data after each accounting period specific to a particular company, such as a month, quarter or year. The data needs to be presented in a manner which is easy to understand

and is generally used by both external and internal users of the accounting statements. Graphs and other visual elements are often used to complement the text data and can be used in meetings, to relate information via in house intranets or post company information.

Interpreting Interpreting in the accounting process is concerned with analyzing financial data, and is a critical tool for decision-making and strategic management. This final function interprets the recorded data in a manner which allows end-users to make meaningful judgments regarding the financial conditions of a business account, as well as the profitability of business operations. This data can then be used to prepare future plans and frame policies to execute financial plans. Alice King Report Was this answer helpful? Yes | No | Edit this

Definition and Explanation of Transaction:

in the books of accounts and to ascertain its true result at the year end. Thus transaction is the foundation of accounting - the first and formest element of accounting. In a word, it is the life and blood of Accounting. Hence the accountant must have a fair idea about the term "transaction."

In ordinary language "transaction" means exchange of something. But in Accounting it is used in a

special sense. If the financial position of a business concern changes on the happening of an event which is measurable in terms of money, that event is regarded as a "transaction" in Accounting.

Or

A business event which can be measured in terms of money and which must be recorded in the books of accounts is called a "transaction".

What is an Event?

In ordinary language "Event" means anything that happens. Human life is full of events. So many events take place in the family and social life of a person. The events may be classified into two types:

  • 1. Monetary Events:

Events which are related with money, i.e. which change the financial position of a person are known as "monetary events". For example, daily shopping, marriage ceremony, birthday anniversary, marriage anniversary etc.

  • 2. Non-Monetary Events:

Events which are not related with money i.e. which do not change the financial position of a person are known as "non-monetary events". For example, winning a game, delivering a lecture in a meeting etc.

In business accounting only those events which change the financial position of the business and which call for accounting are recognized as "Events". In other words, all monetary events are regarded as "business transactions."

Remember, it is not that anything which results in exchange of something will be regarded as transaction. On the other hand, something may be regarded as a transaction even though it involves no exchange.

Example:

For example, R sends a price-list to his customer, A. This involves exchange of price list-between R and A, yet it is not regarded as a transaction, because it is not measurable in term of money and it does not change the financial position of both the persons.

Again, suppose, goods worth $1000 are destroyed by fire. This does not involve any exchange, yet it is regarded as a transaction, because it is measurable in terms of money and it changes the financial position of the business.

It must be noted that an event, although measurable in terms of money, may not be regarded as a transaction. For example, we receive an order for supply of goods worth $1000. Although it is measurable

in terms of money, it is not regarded as a transaction, since it has not changed the financial position. It will, however, be regard as a transaction when the goods are supplied according to the order.

It appears from the above discussion that the following two conditions must be satisfied in order that an event may be regarded as a transaction in Accounting;

  • 1. The event must be measurable in terms of money.

  • 2. The financial position of the business must change on account of that event.

External or internal transaction or change that is recorded in the double-entry bookkeeping system as a debit or credit entry.

..

Definition of 'Accounting Event'

A transaction or change recognized on the financial statements of an accounting entity. Accounting events can be either external or internal. An external transaction would occur with an outside party, such as the purchase or sales of a good. An internal transaction would involve changes in the accounting entity's records, such as adjusting an account on the financial statements.

Related Definitions

Investopedia explains 'Accounting Event'

An accounting event is any financial event that would impact the account balances of a company's financial statements. Every time the company uses or receives cash, or adjusts an entry in its accounting records, an accounting event has occurred.

The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the ...

To provide a record such as funds paid or received for a person or business. Accounting

summarizes and submits this information in reports and statements. The reports are intended both ...

A seven-member independent board consisting of accounting professionals who establish and communicate standards of financial accounting and reporting in the United States. FASB ...

o

 

The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by ...

 

o

 

An accounting principle under generally accepted accounting principles (GAAP) that determines the specific conditions under which income becomes realized as revenue. Generally, revenue ...

 

o

 

A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, ...

 

o

 

A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate. Depending on the specific type of savings account, the ...

 

Accounting Event

How a company accounts for its expenses affects how its net income and cash flow numbers are reported.

More than just crunching numbers, this career blends detective work with trouble shooting.

chart of Accounts Introduction

The chart of accounts is a numerical listing of all identified accounts used by a company to record transactions. As part of the accounting cycle, the chart of accounts is used in the journaling process (i.e., performing journal entries) and also serves as the title for each ledger. All the accounts will be filed under one of five categories:

Assets

Liabilities

Owner’s Equity

Revenue

Expenses

Each account can be assigned a number for identification purposes. Most systems will assign a block of numbers to one of the five categories to be applied to the sub-categories. Some charts leave gaps of numbers between the sub-category listings to allow for the addition of new accounts.