Tag Archives | debit

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


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Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

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Journal Entries

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Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

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General Ledger Reconciliation and Analysis

See also:
Account Reconciliation
Standard Chart of Accounts
Problems in Chart of Account Design
Cash Flow Statement
Income Statement
Subsidiary Ledger

General Ledger Reconciliation and Analysis Definition

Define a general ledger as the financial record of every transaction of a company. Commonly, it is referred to as the “books” of the company. In the general ledger, record each of the transactions twice as both a subtraction (debit) and addition (credit). The general ledger is the main accounting record of the company.

Consequently, general ledger reconciliation is the process of ensuring that accounts contained in the general ledger are correct. In short, reconciliation makes sure you place the appropriate credit and debit in the associated accounts. Seemingly simple, this process requires an experienced bookkeeper when applied to small companies. Complicated applications require the hand of a trained CFO or equivalent controller. In either situation, a general ledger reconciliation policy must by enacted to ensure consistency.


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General Ledger Reconciliation Explanation

Not every general ledger account has a detail subsidiary ledger to reconcile to. Monthly all balance sheet accounts should be analyzed for accuracy. In addition, periodically it may be necessary to reconcile revenue accounts, expense accounts and miscellaneous balance sheet accounts.

In these cases the procedures are similar to reconciling an account to a subsidiary ledger. Print a detail general ledger transaction report for the account. Then, eliminate reversing journal entries correcting errors. Finally, investigate any transactions that are unusual in nature. For example a debit entry or decrease to a revenue account would be unusual.

Finally, prepare a detailed schedule of transactions remaining in the final balance.

General Ledger Reconciliation Process

Some wonder “what is general ledger reconciliation?”. Others wonder how to do general ledger reconciliation. For bookkeepers, adhere to the following process:

First, study the accounting policy of the company. Ignorance to this is missing the essential foundation of the process; knowing the rules is key.

Then, gather information. These include receipts, invoices, account statements, invoices, and related financial reports. This data is the information the accounting staff puts into accounts.

Third, ask questions about the accounts. What items did the company purchase? Do they relate to company policy? Why are they included in the given account? When were they spent/made?

Finally, document your work. Proper documentation ensures properly reconciled accounts as much as it ensures effective bookkeeping in the first place.

General Ledger Reconciliation Template

A general ledger reconciliations template can be found at: Microsoft Templates.

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Periodic inventory System

 

General Ledger Reconciliation and analysis

Originally posted by Jim Wilkinson on July 23, 2013. 

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Debit vs Credit

Debit vs Credit

Since the late 13th century, people have discussed debit vs credit. Double entry accounting was conceived centuries ago. Now, it is an international standard to record all business transactions with a debit and a credit. This double entry keeps the accounting equation balanced. It also ensures that one account is not left out of a transaction. If you make a mistake, an unbalanced ledger occurs.

Should You Learn It?

Even though accounting software guides you along the double entry process, it is still important to understand the debit and credit rules. This gives you the ability to correct mistakes and edit your company’s books. Without knowing the fundamentals of double entry accounting, you run the risk of keeping inaccurate records that may be beyond repair.

Entrepreneurs are often guilty of not truly understanding accounting and their company’s financial statements. Understanding these begins with grasping the debit and credit rules. These rules are part of a bigger concept: keeping the assets equal to the liabilities plus shareholders’ equity.

What are the rules?

The basic rules state whether an account increase or decreases with a debit or credit. Asset accounts and expense accounts increase with debits and decrease with credits. This means you debit cash to increase the cash account. It also means you debit your COGS to increase your cost of goods account. On the other hand, liabilities, revenues, and shareholders’ equity increase with credits and decrease with debits.

While these rules are not instinctual, they helped businesses keep accurate records for centuries. The extra work to record a debit and credit for each transaction helps prevent errors as well as making mistakes easier to identify.

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Debit vs Credit

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Debit vs Credit

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Debit vs Credit

See Also:
Debits and Credits
Double Entry Bookkeeping

Debits and Credits in Accounting

When people discuss debit vs credit, they are usually referring to double entry accounting. More specifically, a debit and credit are recorded for each transaction. These two are required for each transaction in order to keep the accounting equation in balance. There is more information about this in the next section.

Today’s accounting software is also based off of the debit and credit account ledgers. In fact, these programs also offer mobile applications to manage your business’s finances on the go. Even if new software reduces the need to understand debits and credits, it is still essential for business owners and managers to be comfortable with. For example, if one has to record an unusual transaction or correct a mistake, it is often necessary that he or she understands double entry bookkeeping.

What is Double Entry Bookkeeping?

Double entry bookkeeping is a method of recording business transactions using at least two accounts for each transaction. Each account receives a debit on the left side or a credit on the right side. Together, the debits and credits keep assets equal to liabilities plus shareholders’ equity. For example, imagine Business A purchases equipment using cash from Business B. Business A would record a debit to equipment, to increase this asset account, and a credit to cash, to decrease this asset account. Business B would record two transactions: a debit to cash and a credit to revenues, as well as a debit to COGS and a credit to Inventory.

The rules are not quite intuitive. They say to increase assets and expenses with debits and decrease with credits. On the other hand, increase liabilities and revenue with credits and decrease with debits. It takes memorization and commitment to learn these rules, but it pays off by having a better grasp of a company’s books.

Debits and Credits for a Bank

One reason people have such a difficult time learning the difference of debit vs credit is their experience with bank accounts. When a business deposits money into a bank, it credits its account. Conversely, if you have a recurring charge, debit the account to decrease its amount. This is the opposite of the rules stated above for double entry accounting. Why are the bank’s debits and credits confusing? Banks are in the business of lending money. This means that a client’s deposit is a liability on their books; thus, it increases with a credit.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Debit vs Credit

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Debit vs Credit

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Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) Definition

Electronic funds transfer (EFT) refers to an electronic financial transaction. According to the U.S. Electronic Fund Transfer Act, an EFT is a non-paper financial transaction initiated via computer, or another electronic terminal, that gives a financial institution authorization to debit or credit an account. And EFT may also be called a wire transfer.

Electronic funds transfer transactions are quicker and more efficient than paper-based funds transfers. They can also eliminate paperwork and needless administrative efforts. Examples of common electronic funds transfer transactions include the following:

EFTPOS Meaning

The EFTPOS acronym stands for electronic funds transfer point of sale. This refers to electronic funds transfers made at point of sale terminals in retail outlets. When the customer uses his or her debit, credit, or charge card at the check out counter, the customer can opt to take out cash using the card. Furthermore, this type of EFT is common in Australia and New Zealand.

electronic funds transfer

See Also:
Electronic Data Interchange
Technology Assessment Criteria
How to evaluate IT systems
How Redundant is Your Data Communications Link?
Research and Development

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Debit Memorandum (memo)

Debit Memorandum (Memo) Definition

A debit memorandum or memo is a form or document, sometimes called a debit memo invoice, that informs a buyer that the seller is debiting or increasing its amount in the accounts receivable, thus increasing the amount of the buyer’s accounts payable due to extenuating circumstances.

Debit Memo Meaning

A debit memo is often issued when a seller has not billed or charged enough to the buyer, or it might come from another error or any other factor requiring an adjustment. When a seller issues a debit memo, it is normally required that the seller give specific details why the current memo is being issued. A debit memo pertaining to banks, called a debit memo bank statement, informs a depositor that the bank will be decreasing that particular account from something other than a debit or check payment. This is usually a bank service charge of some sort.

Debit Memo Example

Cindy works for Fluffy Stuffs Inc., a toy company specializing in the manufacture of stuffed animals. The company has recently sold a large shipment of stuffed animals to Toys N’ More. Cindy billed the company for the stuffed animals sold, but worked off of an old pricing sheet to create the invoice. This is normally not a large problem except that the market price for stuffing has increased dramatically. Therefore, Cindy has created a debit memo to inform Toys N’ More of the increase in price due to current market conditions.

debit memorandum

See Also:
Credit Memorandum (memo)
Account Reconciliation
Credit Sales
Chart of Accounts (COA)
Accounting Principles
Account Reconcilement Definition

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Below the Line

Below the Line Definition

Below the line is defined as income or expense in accounting which have no noticeable effect on company profits in the current period; however, it is an unofficial term. This term is used by people in-the-know who deal with above and below the line items and account for expenses regularly. They know where to place each in credit and debit fields of accounts.

Below the Line Explanation

Below the line explained, as an industry term, expenses which are not accounted for. These extraordinary expenses, perhaps relevant to another accounting period, are not important in this period. So, leave them out or put them below the line. You may include them in later statements.

Extraordinary expenses are those which are not related to the normal business operations of a company. these are excluded because they are one time and do not relate, overall, to company finances. An example of an extraordinary expense includes the sale of a warehousing plant for a manufacturer. Though these expenses or incomes should still be accounted for they should not be included in company financials. Rather, they should be added to income after company financials when regular operations are completed.

Accountants are the experts in what lies below the line or above the line. One should consult a trained accountant before passing judgement on this matter as it may have great consequences. Below the line accounting is more serious than it may appear.

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Below the Line Example

For example, Ken is the CEO of a company that sells electronic parts to wholesale clients. His business started as a function of the company he was then working in. It has grown quite successfully.

In this period, however, the recession damaged his business. Ken is worried that his investors will see this as a sign of weakness rather than a temporary issue.

Ken considers including the sale of one of his distribution warehouses in his company financials. This creates the appearance of sound income. Ken knows that this income is part of the below the line deductions list but feels that it will not matter in the long run.

After debating the issue for a while Ken decides not to include the income. It belongs on the below the line income statement. Ken knows he will come under the scrutiny of his investors but wants to remain honest. Though he may not feel the most comfortable with this, he can receive honest assistance from company stakeholders this way. Ken, ultimately, realizes that honesty is the best policy.

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below the line

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below the line

See Also:
Accounting Income vs. Economic Income
Tax Efficiency
Payroll Accounting
Accrual Based Accounting

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