Basic Accounting

Author: / Country: Mainland China
Publisher:
Publish Date: 1996-09-01
Features: II. Basic Principles of Double-Entry Bookkeeping
Double-entry bookkeeping, also known as "double-entry accounting," is abbreviated as "double-entry method." The advantage of double-entry bookkeeping lies in its ability to comprehensively and interrelatedly record economic transactions, accurately reflecting the origin and development of each specific change. The basic principles of double-entry bookkeeping should be grasped from the following aspects.
(1) Balance Equation
The balance equation of double-entry bookkeeping is:
Assets = Equity
As mentioned earlier, assets and equity are two sides of the same capital. The total assets and total equity of any unit are the same in quantity and are necessarily equal. The occurrence of any economic transaction will not disrupt the balance between assets and equity. From the perspective of the overall movement of capital, assets are the destinations of movement, while equity is the source of movement. For every economic transaction, which is a small, specific movement of capital, there must be both a source and a destination, and the quantity of the source and destination is always equal.
Double-entry bookkeeping uses "credit" to represent the source of capital movement and "debit" to represent the destination. By recording both the source and destination for each entry, it clearly tracks the origin and development of capital movement, thereby reflecting both the dynamic transformation between the two and their static balance. The balance equation serves as the theoretical basis for double-entry bookkeeping, trial balance, and the preparation of financial statements.
(2) Account Setup and Application
The setup and classification of accounts in double-entry bookkeeping are intrinsically linked to the balance equation. Accounts established based on the specific categories of assets on the left side of the equation are generally debit-balance accounts. Accounts established based on the specific categories of equity on the right side of the equation are generally credit-balance accounts. Accounts with balances are also known as real accounts or permanent accounts. At the same time, accounts with balances are often the basis for preparing balance sheets, hence they are also called "balance sheet accounts." Income and expense accounts, which are derived from owner's equity accounts, are generally without balances at the end of each accounting period because their balances are transferred to owner's equity accounts. Therefore, these accounts are also known as "nominal accounts" or "temporary accounts." The data collected from the balances of these accounts are often necessary for preparing income statements, hence they are also called "income statement accounts." The recording methods for the debit and credit sides of these accounts were explained in the previous section and are omitted here. It should be emphasized that double-entry bookkeeping not only sets up and uses accounts with single characteristics but also extensively uses "mixed accounts" (also known as "dual-purpose accounts" or "common accounts"). For example, setting up a "other receivables and payables" account to record "other receivables" (claims) and "other payables" (liabilities). The balances of mixed accounts are not fixed; they may sometimes be debit balances and sometimes credit balances, but they cannot have both debit and credit balances simultaneously. Whether it is a debit or credit balance, it only represents the difference after the mixed increase or decrease in assets and equity. The use of "mixed accounts" is a feature and advantage of the double-entry method because these accounts can more sensitively reveal the transformation between different nature contents (e.g., claims and liabilities) within them. In addition to receivable and payable mixed accounts, double-entry bookkeeping also sets up profit and loss mixed accounts, such as "asset impairment gains and losses," which will be taught in later chapters.
(3) Recording Rules
The occurrence of any economic transaction always involves two aspects (source and destination). According to the requirement of "credit for the source and debit for the destination," the recording rule naturally forms "every debit has a corresponding credit, and the total debits must equal the total credits." We will now record the 10 economic transactions from Section into the respective accounts according to the requirement of "credit for the source and debit for the destination." See Figure 2—7. It can be seen that each economic transaction recorded according to "credit for the source and debit for the destination" naturally forms "every debit has a corresponding credit, and the total debits must equal the total credits."
(4) Account Balancing Methods
"Account balancing methods" (the balancing and trial calculation methods for bookkeeping and accounting) are another important factor in the complete method system of double-entry bookkeeping. Whether the results of bookkeeping and accounting are correct? What methods are used to check? Double-entry bookkeeping mainly uses the following methods to check the correctness of bookkeeping and accounting:
1. Transaction Balance Method
This method involves comparing the sum of the debit balances of all accounts with the sum of the credit balances of all accounts to see if they are equal. If they are not equal, there must be an error. The account balancing formula is:
Total debit balances of all accounts = Total credit balances of all accounts
In the previous example of the Yi Si Clinic on December 10, some accounts were used only once, making it easy to calculate their debit or credit balances. However, the debit or credit balances of accounts such as "bank deposits" and "operating expenses" have several entries, requiring a total calculation. After calculation, the balances of each account are as follows:
- "Paid-in Capital" has a debit balance of 0 and a credit balance of 10,000 yuan.
- "Bank Deposits" has a debit balance of 18,000 yuan (10,000 + 8,000) and a credit balance of 8,700 yuan (600 + 5,000 + 2,000 + 500 + 600).
- "Operating Expenses" has a debit balance of 3,400 yuan (600 + 2,000 + 700 + 100) and a credit balance of 0.
- "Operating Revenue" has a debit balance of 0 and a credit balance of 8,000 yuan.
- "Inventory" has a debit balance of 1,000 yuan and a credit balance of 700 yuan.
- "Accounts Payable" has a debit balance of 500 yuan and a credit balance of 1,000 yuan.
- "Profit Distribution" has a debit balance of 600 yuan and a credit balance of 0.
- "Fixed Assets" has a debit balance of 5,000 yuan and a credit balance of 0.
- "Accumulated Depreciation" has a debit balance of 0 and a credit balance of 100 yuan.
Thus, the total debit balances of all accounts amount to 28,500 yuan (0 + 18,000 + 3,400 + 0 + 1,000 + 500 + 600 + 5,000 + 0), and the total credit balances of all accounts also amount to 28,500 yuan (10,000 + 8,700 + 0 + 8,000 + 700 + 1,000 + 1,000 + 0 + 100), both balancing each other.
2. Balance Balance Method
This method involves summarizing the accounts used and calculating the ending balances of each account. Then, the sum of the ending balances of all asset accounts is compared with the sum of the ending balances of all equity accounts to see if they are balanced. If the ending balances are balanced, the beginning balances of the next period will naturally be balanced. The balances of accounts represent the actual amounts of assets and equity when capital movement is relatively static. Since assets equal equity, the sum of the beginning (or ending) balances of all asset accounts must always equal the sum of the beginning (or ending) balances of all equity accounts.