Accounting can be a pain in the ass. Sometimes you don’t know where to record given transaction. Should I debit or credit? Your accounting teacher expects that you understand what debiting and crediting is and at that time you float the whole of the lesson.
The Bookkeeping Terms you must know
For starters, you need to understand the definition of terms like:
1. Debiting and Crediting
This may also be referred as a debit entry or a credit entry. A debit entry is recorded on the left-hand side of your accounts while credit entry I recorded on the right-hand side of your accounts. Debit entry will simply an increase in the business assets while credit entry will represent a decrease in the business assets.
Assets are the total investment that the company has in its business and the same can measured to have economic value. Asset is like the bank to a business and the invest in the same is with the hope that the sale of the same will bring profit to the organization.
There are two bro categories of assets: Fixed Assets and the Current assets
Fixed assets are those resources in the business that are expected to lasts for a long time a period of more than 1 year. Fixed assets cannot be easily converted to cash and they include machines, inventories, land and buildings.
Current assets– This is resources in a business that can be easily be converted into cash. Current assets include cash in the bank, cash in hand. The current assets in business are usually expected not to last for more than a year. Both the current and the fixed assets are debited. Other examples of current assets include the prepaid expenses, account receivable, marketable securities and inventory.
3. Prepaid Expenses
This is an expenditure that has been paid for, but the underlying assets have not been fully consumed. Use this analogy of you paying for mobile data packages –or subscribing before you even use the bundles. Here the mobile company list you are a prepaid customer and you will be purchasing the prepaid bundles.
When recording the prepaid expenses, record the same as current assets on the balance sheet. But until that period that they will be all consumed, you will post the same as expenses in the trading profit and loss account –income statement. The reverse here is true for postpaid expense.
Some confuse the same with the prepaid expenses but prepaid revenue is also referred as unearned revenue. This is payments which are made from the business customers who have not yet received the goods. But business cannot record the same s revenue till the sale to the business competes.
Examples of such include air tickets school tuition fees paid during registration of the students. Prepaid revenues form liabilities to the business. Record prepaid revenue as liabilities to the balance sheet and as a revenue to the income statement.
5. Double Entry Principal
For every credit entry, there must be a debit entry. It means that one transaction that is recorded in the business should be recorded on both the credit and debit business side. I guess this article puts you somewhere in that Accounting class. You can also have a look at the nine steps of accounting cycle.