T count and double Entry Accounting

The simplest account structure is shaped like the letter T. The account title and account number appear above the T. Debits (abbreviated Dr.) always go on the left side of the T, and credits (abbreviated Cr.) always go on the right.



Accountants’ record increases in asset, expense, and owner's drawing accounts on the debit side, and they record increases in liability, revenue, and owner's capital accounts on the credit side. An account's assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Therefore, asset, expense, and owner's drawing accounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances. To determine the correct entry, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account's balance. You may find the following chart helpful as a reference.

Occasionally, an account does not have a normal balance. For example, a company's checking account (an asset) has a credit balance if the account is overdrawn.

The way people often use the words debit and credit in everyday speech is not how accountants use these words. For example, the word credit generally has positive associations when used conversationally: in school you receive credit for completing a course, a great hockey player may be a credit to his or her team, and a hopeless romantic may at least deserve credit for trying. Someone who is familiar with these uses for credit but who is new to accounting may not immediately associate credits with decreases to asset, expense, and owner's drawing accounts. If a business owner loses $5,000 of the company's cash while gambling, the cash account, which is an asset, must be credited for $5,000. (The accountant who records this entry may also deserve credit for realizing that other job offers merit consideration.) For accounting purposes, think of debit and credit simply in terms of the left-hand and right-hand side of a T account.

http://www.youtube.com/watch?v=6xR2ijuDiHI

 

The key factor of a double entry system is the presence of a ‘cash book’ account. This account contains the entries made when assets (e.g. money) are taken into or released from the accounting system. As such the total value of this account always matches the total value of the assets in the system. Using accountant’s ‘T charts’ to represent this we use the following example that uses two accounts only. The ‘cash book’ and an account in the name of ‘Smith’. (a) £300 is entered into this system to be allocated to the Smith account. The £300 is credited to the Smith account (credits are on the right, debits on the left). To match this debit of £300 is allocated to the Cash Book.

b) If £50 is taken out of the system from the Smith account, £50 is debited from the Smith account and credited to the Cash Book.

(c) If another account is added in the name of Pattel and £100 is transferred from Smith to Pattel then £100 is debited from Smith and £100 credited to Pattel.

(d) To complete the picture £60 is taken out of the system from the Pattel account with a debt from Pattel and a credit to the Cash book.

At the end of this the Smith account balance is £150, the Pattel account is £40 and the Cash Book is £-190, the negative sum of the other accounts. On this simple basis very complex asset tracking systems can be built.

The above example is shown below as entries in this data model (the column list is kept as simple as possible for clarity).



 

The balance of the POSTING Amount column always being zero after every complete JOURNAL transaction (and the software must not allow an incomplete one). From the above the total in the Cash Book adds up to –190 which is the negative sum of the 150 belonging to Smith and the 40 belonging to Pattel.

To expand this system into a multi-currency system a new asset type is added and used. If Mr Smith wished to change £20 into dollars at a rate of £1 to $1.5 the transaction is made though the Cash Book as follows (the required POSTING entries):

http://www.youtube.com/watch?v=Aw-rf76ofx0

ACCOUNTING PERIODS

Our accounting model so far is perfectly sound but could creak under high volumes as we can never delete anything. Most accounting requirements include the concept of an accounting period, maybe monthly, three monthly or yearly, for example. Whilst there is no need to constrain the logical requirement for an accounting period by tying it too closely to the physical model it provides a useful indication as to where to break flow of the data. The year end is often a convenient point, either the calendar year end or the financial year end. By adding a period indicator column to the POSTING table (and also to its primary key) the data can be split into discreet time chunks that can be validated independently. If in the above example the next set of entries fell into the next accounting period the balances outstanding are brought forward as summary entries in the next period first (leaving out the currency exchange example for simplicity).

Written by
Natasha Méndez


Sources consulted
Author: Jhon Wiley
Date: may 5, 2011

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