Financial and Cost Accounting, Taxes and Economic

On the previous post we can know that the basic of modern accounting is on the double entry book keeping system. This system was first described by the Italian mathematician Luca Pacioli, in his Summa de arithmetica, geometrica, proportioni et proportionalità (Venice, 1494).By using this system we will record each transaction in at least two accounts., at least one account being debited and at least one account being credited with the total debits of the transaction equal to the total credits.

Basically item in accounts are classified into 5 broad groups, there are:
1. Asset
2. Liability
3. Equity
4. Revenue
5. Expense
From that group we can get an accounting equation, the basic of accounting equation:

assets = liabilities + equity

Revenue minus expense means profit or loss, the next, profit or loss well be added to the component of equity so basic equation can be further expanded becomes:

assets = liabilities + equity + (revenue − expenses)
assets + expenses = liability + equity + revenue

From that equation we can know the normal balance for each group. Assets and expenses (on the left side of the equation) have a normal balance of DEBIT. Liability, equity and revenue (on the right side of the equation) have a normal balance of CREDIT.
The following table summarizes how debits and credits affect the different elements of the accounts.
Debit/credit

** Assets :
-->Debit : Increase
-->Credit : Decrease
** Expenses :
-->Debit : Increase
-->Credit : Decrease
** Liabilities :
-->Debit : Decrease
-->Credit : Increase
** Shareholder Equity :
-->Debit : Decrease
-->Credit : Increase
** Revenue :
-->Debit : Decrease
-->Credit : Increase

Sources: Wikipedia

By seeing that equation and knowing the normal balance for each account, it can make easier for us to record every transaction we have. The process of recording transactions usually called as a JOURNAL.

Here, we will take an example:
** Purchase a machine (by CREDIT), we will journal as follow:
Dr. Machine (fixed asset account) is increased
Cr. Account payable (liabilities account) is increased

** Paying sallary to employee, we will journal as follow:
Dr. Wages (expense account) is increased
Cr. Cash (asset account) is decreased

After a certain period, the columns in each journal are each totalled to give a summary for the period and then transferred to their respective accounts in the ledger. The process of transferring is called POSTING. On a general ledger, debits are recorded on the left side and credits on the right side for each account.