All accountants know several terms that create
basis for any accounting system. Such terms are T-account, debit and
credit, and double-entry accounting system. Of course, these terms are
studied by accounting students all over the world. However, any
business person, whether an investment banker or a small business
owner, will benefit from knowing them as well. They are easy to grasp
and will be helpful in most business situations. Let us take a closer
look at these accounting terms.
T-Account
Accounting records about events and transactions
are recorded in accounts. An account is an individual record of
increases and decreases in a specific asset, liability, or owner’s
equity item. Look at accounts as a place for recording numbers related
to a certain item or class of transactions. Examples of accounts may be
Cash, Accounts Receivable, Fixed Assets, Accounts Payable, Accrued
Payroll, Sales, Rent Expenses and so on.
An account consists of three parts:
- title of the account
- left side (known as debit)
- right side (known as credit)
Because the alignment of these parts of an account
resembles the letter T, it is referred to as a T account.
You could draw T accounts on a piece of paper and use it to maintain
your accounting records. However, nowadays, instead of having to draw T
accounts, accountants use accounting software (i.e., QuickBooks,
Microsoft Accounting, Peachtree, JD Edwards, Oracle, and SAP, among
others).
Debit, Credit and Account Balance
In account, the term debit
means left side, and credit means right side.
These are abbreviated as Dr for debit and Cr for credit. Debit and
credit indicate on which side of a T account numbers will be recorded.
An account balance is the difference between the
debit and credit amounts. For some types of accounts debit means an
increase in the account balance, while for others debit means a
decrease in the account balance. See below for a list of accounts and
what a debit to such account means:
Asset – Increase
Contra Assets – Decrease
Liability – Decrease
Equity – Decrease
Contribution Capital – Decrease
Revenue – Decrease
Expenses – Increase
Distributions – Increase
Credits to the above account types will mean an
opposite result.
Double-entry Accounting System
A double-entry accounting system requires that any
amount entered into the accounting records is shown at least on two
different accounts. For example, when a customer pays cash for your
product, an account would show the cash received in the Cash account
(as a debit) and in the Sales account (as a credit). All debit amounts
equal all credit amounts provided the double-entry accounting was
properly followed.
Having a double-entry accounting system has
benefits over regular, one-sided systems. One of such benefits is that
the double-entry system helps identify recording errors. As I
mentioned, if one amount is entered only once in error, then debits and
credits won’t balance and the accountant will know that one or more
entries were not posted fully. Note, however, that this check will help
spot errors, but will not identify all cases of errors. For example,
equal debits and credits will not identify an error when an amount was
posted twice, but was posted to wrong accounts. Keep this in mind when
analyzing causes of errors in accounting records.
Article Source: http://www.articlesbase.com/
accounting-articles/explanation-of-taccount-debit-and-credit-
and-doubleentry-accounting-system-490669.html About the Author
Igor Voytsekhivskyy is a CPA and CIA working in
public accounting. He maintains a website SimpleStudies.com
devoted to helping people learn accounting online for free. | 