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The Businessman's Encyclopedia

Bookkeeping 101

Bookkeeping is the art of making a systematic record of business transactions, so as to exhibit the resources and liabilities of the business. The system in use In a business, the business itself or more often the adaptation of the method of accounting to the requirements of the business, determine kind and number of books used. When but a single book is used, it is usually a simple book, similar in form to the common day-book, in which are set down in the order of their happening such transactions as are necessarily recorded. As it is not to advantage to bulk too many accounts in one book, the cash-book, purchase-book and sales-book are often used together. The principal book of accounts is the ledger, it showing in classified form all the records of the original books of entry. Systems of Bookkeeping. Two systems of bookkeeping are in use, single entry and double entry. Single entry is most commonly used by retail merchants and other similar tradesmen. It keeps no account of property, personal accounts alone being shown in the ledger, which, consequently balances only when the business is closed out. Saving in labor over double entry, it furnishes fewer checks against error. One of its fatal objections for some classes of business is the lack of detailed information shown regarding the sources of gain or loss. This information, as clearly exhibited by the double-entry balance-sheet is often an absolute essential in the determination of profit. In single entry, to determine capital at any time, the inventory of resources and liabilities is taken; the difference between the totals indicating the capital. The difference between present and former capital gives the loss or gain. Double entry bookkeeping requires that every transaction be entered twice, first on the debtor side of one or more accounts, and second, on the creditor side, thus keeping the ledger in balance perpetually. Debit and Credit. The first law of double entry is that every debit amount in one account must have a corresponding credit amount in some other account, and vice versa. The rule of debits and credits may be thus summarized: Debit that which goes into the possession of the business and costs value. Credit that which goes out of the possession of the business and produces value. Rules for Journalizing. Besides the above general rules the following specific ones may be given: The proprietor is debited: (1) For withdrawals from the business for personal use; (2) for liabilities assumed by the business; (3) for net loss when the books are closed. He is credited (1) For all investments in the business; (2) for net gain when the books are closed. Property is debited, under its given name, when it comes into possession of the business. It is credited, under its given name when the business parts with it. Persons are debited (1) when they get into our debt; (2) when we get out of their debt and are credited: (1) When we get into their debt and (2) when they get out of our debt. Expense account, including rent, salaries, insurance, etc., is debited for money paid out to carry on the business and credited for the proceeds of the sale of any item previously debited to expense account. Bills receivable are debited when received by the business and credited when the business parts with them. Bills payable are debited when redeemed by the business and credited when issued by the business. Allowances, as interest, discount, collections, etc., are debited under their given names, when allowed to us by others, and similarly credited when allowed by others to us. Trial Balance. The taking of a trial balance frequently causes the student or bookkeeper a great deal of waste time, such mistakes commonly arising from errors in posting, though there is chance for an infinite variety of mistakes to arise. The following rules are of use in tracing errors: Go over the additions of the trial balance. Go over all additions of the ledger accounts. If not located, check your posting as follows: Trace each item from the journal to the ledger, and if found to be correct, place a check mark at the left of the first money column in the journal and at the left of each date column in the ledger. Find the exact amount of error; if ten or some power of ten, the error is usually in addition. If the amount is exactly the same as some amount In the journal, the error is probably with that amount If the amount of error is divisible by nine, the error is probably in transposition of figures. If dollars have been written as cents or vice versa, dividing the difference by 9, 99, or 999, respectively, will locate a figure which has been misplaced one, two or three orders to the right or left. Extracted from "The Businessman's Encyclopedia". Download the complete ebook from SuccessEsource.com for $5 (PDF format).

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