Part 2: Double-Entry Bookkeeping


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Notes

Basics:

  • For any transaction that involves money, there is a record of this transaction.
  • We keep a set of books that we use to record these transactions under different accounts.
  • Any transaction is always recorded using a minimum of 2 accounts, using at least 1 Debit and at least 1 Credit.
  • For every Debit, there has to be an equal Credit.
  • Revenue and income are used almost interchangeably and are almost the same. Describe money that you earned
    • No expenses are taken into account when calculating revenue or income.
  • Net Income and Profit are the same. They both refer to “The bottom line.” They look at revenue minus expenses.
  • The books are a loose term, referring to the record of a company’s financial transactions.
  • The journal and the general ledger are very similar items.
    • The journal is like a book, it tells a story… just not a very interesting one. It is a record of a company’s financial transactions in the order that they happened. Transactions are listed, with all the accounts that were used and the amounts of their debits and credits.
    • The general ledger is organized by account… still not interesting. Accounts are listed and under the account, all debits or credits that were made to the account are listed.
  • The chart of accounts is just a list of all the accounts that a company uses.
  • A capital expense can be easily understood as an expense that increases the life or value of an asset (you’re property.) This does not include repairs. An example would be repairing and replacing a roof. If you repair a few shingles on a roof, the building’s value or life of the roof may be increased, but it was just a repair. If you replace the roof on a building, the life of the building is increased and the expense needs to be depreciated.
  • Depreciation and Amortization are identical actions that calculate the decline in value of an asset; the term only refers to the type of asset. Depreciation is for a tangible asset that you can see or hold, such as a truck or a property. IE: You re-carpet an apartment for $1,000 and the depreciable life of the carpeting is 5yrs. You depreciate the carpeting over 5yrs and count an expense of $1,000/5yrs (or $200) per year. Amortization is for an intangible asset, such as a mortgage.