We left off last issue with an example expense, a $200 purchase for FUEL which we paid for with a debit card on our business checking account. If you don’t have a separate checking account for your business you should open one now. It will be much easier to keep track of what your business has and how your business is doing if you keep your business books separate from your personal books. But that’s another topic, so let’s get back to our sample entry and understanding how to enter it in our books.
Let’s start this time by understanding a few terms that you’ll need to know. The basic accounting terms that you need to understand are:
ASSET: everything of value that the business owns. Typical assets are your banks account, your truck, if you have separate property for the business the land, any buildings on the land and so forth. Basically Assets are anything and everything that is owned by the business and used exclusively for the business.
LIABILITIES: everything that the business owes to someone else. These are things like your truck loan, the balances on any fuel cards, credit cards and any accounts which have a balance due. So anything and everything that you owe is a Liability. These are usually broken down into current liabilities, things that you pay off every month and long term liabilities which are for things which are paid off over a long term such as your truck loan.
EQUITY: is the value of the company. It is the difference between the Assets and the Liabilities and can be a positive or a negative amount. This relates back to our basic accounting formula, ASSETS = LIABILITIES + EQUITY. It is this basic formula and how it can be used to figure out what you need to enter that we’re going to discuss this time. Last issue we used a little table to illustrate what was happening with our sample entry.
|ACCOUNT TYPE||ACCOUNT NAME||DEBIT AMOUNT
The account TYPE directly relates to the ASSET/LIABILITY/EQUITY categories. This relationship gives you the ability to determine what type of account is being increased and what is being decreased. Thus it’s possible, once you understand what account goes in each category to figure out what to Debit(reduce) and what to Credit(increase) so that your entry will balance. Looking at our sample entry we have –
So here’s the logic. You purchased fuel which is a EXPENSE account using CASH from your checking account (a debit card is a ‘cash equivalent). So you are going to increase the EXPENSE account and you are going to decrease the CASH account. The increase minus the decrease then equals zero and the entry balances.
Most accounting entries will fit into this same pattern and I’ve found that the easiest way to understand them is to relate them to their actual value. Debits deduct and credits increase. Assets are a positive value (things you own) and Liabilities are a negative value (things you owe). So EXPENSE accounts are Liability type accounts and CASH accounts are an Asset. When you spend $200 you are now MINUS 200 so you will DECREASE (DEBIT) the Checking account and you will INCREASE (CREDIT) the FUEL account. The T chart just gives you a way to visualize this so that you can easily see what account needs to be decreased and what account needs to be increased. Every entry you make needs to have these two sides to it and needs to balance. Accounting is basically moving values back and forth between your different accounts. In every case one account will be increased by the amount of the transaction and another account will be decreased by that same amount. Next we’ll talk about account TYPES, and whether they represent a positive value account or a negative value account. That is the last piece to this puzzle and once you understand that the puzzle suddenly falls into place.
Till next time, be safe.
This article first appeared in my Owning The Wheel column, published in the July 2016 issue of Owner Operator. Reprinted here under license from Target Media Corporation. Part 3 of this series will appear in the September 2016 issue. Check it out there and will be posted here when the November issue appears.