Bookkeeping records and procedures

Accounts. Bookkeepers record all economic transactions in accounts. The three basics types of accounts are asset accounts, liability accounts, and equity accounts. There are also income (or revenue) accounts and expense accounts.

Assets are the resources used by an organization. An organization usually owns its assets, which include cash, inventory, supplies, land, buildings, and equipment. Separate accounts are kept for the various types of assets. Liabilities are claims of creditors such as debts owed by an organization. They include accounts payable, wages payable, and mortgages payable and also are generally recorded on separate liability accounts. Equity consists of the claims of owners. Such claims include contributed capital and retained earnings. Income and expense accounts are sometimes called nominal accounts. They are considered part of the equity of the organization.

Double-entry bookkeeping. The most commonly used bookkeeping system is called double-entry bookkeeping. This system looks at two dimensions of every business transaction. Thus, every account has two sides. One side is the debit side, and the other is the credit side. Each side has columns for dates, explanations of any changes in the account, and the amount of money involved.

For asset accounts, the beginning balance and all increases are recorded on the debit side. Decreases are recorded on the credit side. This procedure is reversed for liability and equity accounts. This is, the beginning balances and all increases are shown on the credit side, and any decreases are recorded as debits.

Most transactions in income accounts are reflected as credits. Most transactions in expense accounts are debits.

The fundamental equation in double-entry bookkeeping is Assets=Liabilities+Equity. A transaction can affect this equation must always balance each other that is, they must be equal.

Some transactions increase – or decrease – both sides of the equation. Others affect only one side. For example, the purchase of a machine for $100 in cash will affect only one side, the assets side. This is because the purchase will increase the equipment account, an asset account, by $100 and decrease the cash account, also an asset account, by $100.However, the purchase of a machine for $100 on credit will increase both sides of the equation, the assets side and the liabilities side. This occurs because the purchase will increase the equipment account, an asset account, by $100 and will increase the accounts payable account, a liability account, by $100. In principle, bookkeeping analyze every business transaction in this manner. That is, they check to determine what changes a transaction has caused in the organization’s assets, liabilities, equity, income, and expenses.

Many kinds of transactions and events are relatively easy to analyze. But difficult questions may arise in deciding what accounts to debit and credit. Fir example, there has been disagreement about the proper method of recording an oil company’s exploration costs. The pensions earned by an organization’s employees also cause bookkeeping problems. Such issues are generally discussed and debated by accountants, not bookkeepers.