Double-entry Accounting
The Ultimate Glossary of Double-Entry Accounting Terms and Concepts
Double-entry accounting is a fundamental concept in financial management, ensuring accurate record-keeping and financial analysis. In this glossary, we'll explore the key terms and concepts related to double-entry accounting, complete with examples. By understanding these essential terms, you'll be better equipped to manage your business finances and make informed decisions.
Double-Entry Accounting
Double-entry accounting is a method of bookkeeping where every financial transaction is recorded in at least two accounts: one as a debit and another as a credit. This system helps maintain accurate financial records and ensures that the accounting equation (Assets = Liabilities + Owner's Equity) remains balanced.
Example: A company purchases office supplies worth 500 SAR. In double-entry accounting, the transaction will be recorded as a debit in the Office Supplies account (increasing assets) and a credit in the Cash account (decreasing assets).
Example: A company purchases office supplies worth 500 SAR. In double-entry accounting, the transaction will be recorded as a debit in the Office Supplies account (increasing assets) and a credit in the Cash account (decreasing assets).
Streamline your double-entry accounting process with Wafeq's easy-to-use and powerful accounting software.
Streamline your double-entry accounting process with Wafeq's easy-to-use and powerful accounting software.
Assets
Assets are resources owned or controlled by a company, which are expected to generate future economic benefits. Assets can be tangible (physical items) or intangible (non-physical items, such as patents or copyrights).
Example: A company owns a building worth 2,000,000 SAR. This building is considered an asset because it can generate rental income or be sold for profit in the future.
Example: A company owns a building worth 2,000,000 SAR. This building is considered an asset because it can generate rental income or be sold for profit in the future.
Liabilities
Liabilities are financial obligations or debts a company owes to others, such as loans, accounts payable, or salaries payable.
Example: A company has a bank loan of 500,000 SAR. This loan is considered a liability because the company must pay it back with interest.
Example: A company has a bank loan of 500,000 SAR. This loan is considered a liability because the company must pay it back with interest.
Owner's Equity
Owner's equity, also known as shareholder's equity or net assets, represents the residual interest in the company's assets after deducting liabilities. In other words, it is the amount of money that would be left if all assets were sold, and all liabilities were paid off.
Example: A company has total assets of 1,000,000 SAR and total liabilities of 300,000 SAR. The owner's equity is 700,000 SAR (1,000,000 - 300,000).
Example: A company has total assets of 1,000,000 SAR and total liabilities of 300,000 SAR. The owner's equity is 700,000 SAR (1,000,000 - 300,000).
Debit
A debit is an entry that increases asset or expense accounts and decreases liability, equity, or income accounts in double-entry accounting.
Example: When a company receives cash of 10,000 SAR, a debit entry is made to the Cash account, increasing the company's assets.
Example: When a company receives cash of 10,000 SAR, a debit entry is made to the Cash account, increasing the company's assets.
Credit
A credit is an entry that decreases asset or expense accounts and increases liability, equity, or income accounts in double-entry accounting.
Example: When a company pays a supplier 5,000 SAR, a credit entry is made to the Cash account, decreasing the company's assets.
Example: When a company pays a supplier 5,000 SAR, a credit entry is made to the Cash account, decreasing the company's assets.
Learn more: Debit vs. Credit: Everything You Need to Know
General Ledger
The general ledger is a complete record of all financial transactions affecting a company's accounts, organized by account type. It serves as the foundation for creating financial statements and tracking the company's financial activities.
Example: A company's general ledger includes separate accounts for assets, liabilities, equity, income, and expenses, with each transaction recorded as a debit or credit.
Example: A company's general ledger includes separate accounts for assets, liabilities, equity, income, and expenses, with each transaction recorded as a debit or credit.
Journal Entry
A journal entry is a record of a financial transaction in the general ledger, containing details about the accounts involved, the date, and the amounts debited and credited.
Example: A company sells goods for 15,000 SAR cash. The journal entry for this transaction would include a debit to the Cash account for 15,000 SAR and a credit to the Sales account for 15,000 SAR.
Example: A company sells goods for 15,000 SAR cash. The journal entry for this transaction would include a debit to the Cash account for 15,000 SAR and a credit to the Sales account for 15,000 SAR.
T-Account
A T-account is a visual representation of an account in the general ledger, shaped like the letter "T." The left side of the T-account represents debits, and the right side represents credits. T-accounts are used to track account balances and analyze transactions.
Example: A company's Cash T-account might show a beginning balance of 20,000 SAR, followed by debit entries for cash receipts and credit entries for cash payments.
Example: A company's Cash T-account might show a beginning balance of 20,000 SAR, followed by debit entries for cash receipts and credit entries for cash payments.
Trial Balance
A trial balance is a report that lists all general ledger accounts and their debit or credit balances at a specific point in time. It helps to verify that the total debits equal the total credits, ensuring that the double-entry accounting system is balanced.
Example: At the end of the month, a company's trial balance might show that the total debits equal 300,000 SAR, and the total credits also equal 300,000 SAR, indicating that the double-entry accounting system is balanced.
Example: At the end of the month, a company's trial balance might show that the total debits equal 300,000 SAR, and the total credits also equal 300,000 SAR, indicating that the double-entry accounting system is balanced.
Accounts Receivable
Accounts receivable represents the amount of money owed to a company by its customers for goods or services provided on credit.
Example: A company sells products worth 50,000 SAR on credit to a customer. The company's accounts receivable would increase by 50,000 SAR.
Example: A company sells products worth 50,000 SAR on credit to a customer. The company's accounts receivable would increase by 50,000 SAR.
Accounts Payable
Accounts payable represents the amount of money a company owes to its suppliers for goods or services purchased on credit.
Example: A company purchases inventory worth 25,000 SAR on credit from a supplier. The company's accounts payable would increase by 25,000 SAR.
Example: A company purchases inventory worth 25,000 SAR on credit from a supplier. The company's accounts payable would increase by 25,000 SAR.
Revenue
Revenue, also known as sales or income, is the money a company earns from its business activities, such as selling goods or providing services.
Example: A company sells products worth 100,000 SAR. This amount is recorded as revenue in the company's income statement.
Example: A company sells products worth 100,000 SAR. This amount is recorded as revenue in the company's income statement.
Expenses
Expenses are costs incurred by a company in its business operations, such as salaries, rent, or utilities.
Example: A company pays 10,000 SAR for rent each month. This amount is recorded as an expense in the company's income statement.
Example: A company pays 10,000 SAR for rent each month. This amount is recorded as an expense in the company's income statement.
Conclusion
Understanding double-entry accounting terms and concepts is crucial for maintaining accurate financial records and making informed business decisions. This glossary serves as a helpful reference for navigating the world of double-entry accounting. By leveraging accounting software like Wafeq, you can further simplify the process and ensure accurate financial management for your business.
Ready to simplify your double-entry accounting process? Get started with Wafeq today!
Ready to simplify your double-entry accounting process? Get started with Wafeq today!