Accounting Basics
Quick Review of Debits vs. Credits
In Abacus Accounting, you will find yourself frequently debiting and crediting accounts. Don’t worry if you are confused about debits and credits – so is everyone else! But here is a table that will clear everything up.
|
Type of Account
|
Account Prefix
|
Debit
|
Credit
|
|
Asset
|
1
|
Increase
|
Decrease
|
|
Liability
|
2
|
Decrease
|
Increase
|
|
Capital
|
3
|
Decrease
|
Increase
|
|
Revenue
|
4
|
Decrease
|
Increase
|
|
Expense
|
5
|
Increase
|
Decrease
|
For example:
-
If you DEBIT an ASSET account, you INCREASE the balance.
-
If you CREDIT an ASSET account, you DECREASE the balance.
Hard Costs vs. Soft Costs
Hard and soft costs are client-incurred costs where:
-
Hard costs are costs for which you write a check, such as paying an invoice that you received from a court reporter.
-
Soft costs are costs for which you would NOT write a check, such as faxes and photocopies.
General Accounting Definitions
AccountAccount
Formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims. You can have asset, liability, capital (equity),
revenue and expense accounts. All of these accounts together make up the general ledger.
Accounts PayableAccounts Payable
Amount owed to a creditor for completed services.
Accounts ReceivableAccounts Receivable
Amount billed to client but not yet paid.
AssetAsset
Resources belonging to a person or business, tangible or intangible. Includes accounts receivable, cash, inventory, equipment, good will, etc.
Assets = Liabilities + Owners Equity
BalanceBalance
Sum of debit entries minus the sum of credit entries in an account. If the debits are higher, there is a debit balance; if the credits are higher, there is a credit balance.
Balance SheetBalance Sheet
Basic financial statement presenting an entity's assets, liabilities, and the owners’ equity as of a specified date.
BillBill
An itemized statement of charges for services sent to your clients.
BudgetBudget
Financial plan that serves as an estimate of future cost and revenues.
Calendar YearCalendar Year
Period of 12 consecutive months starting in January and ending in December.
CreditCredit
Entry on the right side of a double-entry bookkeeping system that represents the reduction of an asset or expense or the addition to a liability, equity, or revenue account.
DebitDebit
Entry on the left side of a double-entry bookkeeping system that represents the addition of an asset or expense or the reduction to a liability, equity, or revenue account.
DisbursementDisbursement
Payment by cash, check, debit card, or automatic withdrawal.
Double-Entry BookkeepingDouble-Entry Bookkeeping
Method of recording financial transactions in which each transaction is entered in two or more accounts and involves two-way, self-balancing posting. Total debits must equal total credits.
Fiscal YearFiscal Year
Period of 12 consecutive months chosen by an entity as its accounting period which may or may not be a calendar year.
General LedgerGeneral Ledger
Collection of all asset, liability, owners’ equity, revenue, and expense accounts.
Income StatementIncome Statement
Summary of revenues and expenses over a period of time. Shows profit or loss.
InvoiceInvoice
An itemized statement of charges for services sent to you for payment.
JournalJournal
Any book containing original entries of daily financial transactions. Also called ledger.
LedgerLedger
Any book of accounts containing the summaries of debit and credit entries. Also called journal.
LiabilityLiability
Debts or obligations owed by the debtor to the creditor.
ReceivableReceivable
Amount of money due from customers or other debtors.
RevenuesRevenues
Sales of products, merchandise, and services; and earnings from interest, dividend, rents.
TrustTrust
Ancient legal practice where one person (the grantor) transfers the legal title to an asset, called the principle or corpus, to another person (the trustee), with specific instructions about how the corpus is to be managed and disposed.
TrusteeTrustee
Person who is given legal title to and management authority over the money or property placed in a trust.