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2 A Shorter Term Picture and the Basic Accounting Reports
You may put record of all you invoices you issue to customers into account 400 if you wish. You may also create 400 series sub-accounts 401, 403, etc. for specific customers to keep track of you business with then. Similarly, you may enter all you bills received into account 500 prior to paying them from your bank or cash account. Usually however you want to keep separated records by expense type, say, 501 for rent or 502 for utilities etc.
This constitutes the bare bones bookkeeping or accounting system. Each Ledger account has a record of financial activity of each with a running balance. You can see what is going on with each part of you business by scanning these Ledger Account records. Soon you will want a summary of the account balance at any point to see the big picture. Otherwise it's easy to get lost in minutiae and not see where the business is going.
Here is a paper system sample page of A General Ledger Account book
The summary of accounts are divided along big picture and bigger picture lines. Your revenue and expenses are what is happening to your business from week to months - up to usually a year. From year to year the bigger picture is told by the Assets Liabilities (and Equity) accounts. We will discuss how we transition from yearly business cycles to longer term later - it's called closing out the books or year end processing.
The Assets, Liabilities and Equity are summarized on a report called the Balance sheet. For resons implied above the Liabilities (with Equity - a special liability) and Assets should equal each other. The practice is to make 2 columns with the Assets listed with their balances on the left (called a debit account) and the Liabilities and Equity are listed in a column on the right with their balances (Liabilities above Equities) and called credit accounts. The totals at the bottom of each column can be easily seen to be equal (or it they don't you know there is an error somewhere in the ledger account recording. Debits must equal Credits!
The shorter term picture is seen in the day to day Income and cost record. This is a separate report called variously the Income Statement, Profit and Loss Statement etc. By practice the Income accounts are in a list with their balances on the left and the expense accounts are shown in a list with their balances on the right side.
For reasons that will become clear later the Revenue accounts are considered as Credit accounts and the Expense accounts are considered Debit accounts. The difference between the Revenue and the Expenses is the Net Income or Profit of the company. It the expenses exceed revenue the net income is clearly negative which is ok for early operations but definitely not our goal.
At the end of the year any income left in the business is clearly a reinvestment by the owner (what they have not drawn as their salary). The Net income if shown therefor as an entry in the equity account and that is why income is a credit - because it is shown on the balance sheet on the credit side with the equity. The Expenses must therefore be a Debit account to balance things off.
So there you have it. Nothing left but the details - see the screen shots for illustration.
a page of The Accounting System Manual
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