Posted by Early Growth
November 18, 2014 | 4-minute read (647 words)
This excerpt was reprinted with permission from Madeline Bailey's book, "Radically Simple Accounting:A Way Out of the Dark And Into the Profit."
There is only one business bookkeeping system—the double-entry system. Luca Pacioli published the first textbook of double-entry bookkeeping in 1494. Believe it or not, there has been virtually no change since then. His system of debits and credits is so confusing that no one can figure it out, let alone improve upon it, so it remains intact (Just kidding, Pacioli.). The real reason that we’re still using double-entry bookkeeping is because it works, produces balanced books, and has become an ingrained standard.
So what exactly is double-entry bookkeeping? And why do you need to use it?
Double-entry bookkeeping is what is taught in accounting school. Fledgling accountants learn to enter a bookkeeping transaction using a journal entry. A journal entry has two or more line items (entries) that balance debits and credits.
Get the idea? Luckily for you, popular accounting software insulates you from having to learn the rules of double-entry bookkeeping. However, if you get stuck or want to do something tricky, a journal entry is the way to go. You can do anything, change anything, or manipulate anything with a journal entry.
- One entry shows what account the money is going to; the other shows which account the money is coming from.
- One entry is considered primary; the other is offsetting.
- One entry will be a debit; the other a credit.
One trick to making a journal entry is learning when to use a debit and when to use a credit. Here’s a Journal Entry Debit / Credit Chart to help. Post this cheat sheet near your computer, so that you’ll always have it handy.
With time, you’ll memorize basics such as: your bank account is an asset account so when you want to increase it, you debit it. Here’s a sample journal entry for a bank deposit from the sale of a product:
See how the credits and debits balance? See how you’re becoming empowered? Don’t see it yet? Just for fun, let’s say you remember that when your bank account is increased, it’s debited. The first time you hear about a “debit card” your empowered mind will go “red flag—possible money trick.” You know that using your debit card decreases your bank account. So why is it called a debit card? (The answer comes later in the book.)
Not certain of debits and credits? There’s always the trial-and-error method. Try it one way, then check your financial report to see if you’re correct. If it's not, do it the opposite way. If you make a mistake, relax. Depending on your software, you can either correct your mistake by reversing the entry or by making an adjusting entry. Trust me, your accounting software package offers you a way to fix mistakes. Accounting really is one part doing the work and one part auditing it.
Need help or have questions about journal entries? Air your thoughts in the comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation.
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Madeline Bailey is a Senior Accountant at Early Growth Financial Services. She has an extensive prior career in software development. In addition to being a QuickBooks Expert as well as certified by Intuit (in Advanced QuickBooks, Enterprise, Online and Point of Sale), she is the Founder of QC Computing LLC, a Seattle-based consulting firm. To read more of Madeline's sage advice on accounting and financial management, order Radically Simple Accounting: A Way Out of The Dark And Into The Profit.