Accounting is the method of organizing the financial information of an entity. It’s a set of rules that cover every financial situation so that anyone with the skills to read a set of accounting books can gain a clear understanding of that entity’s financial status. Basic accounting is useful not only for businesses of any size, but for households as well. Accounting can be complicated as you apply specialized accounting rules, but all of the rules involved begin at a basic, easy to understand level.
Things You'll Need
- Accounting books
Create a basic bookkeeping journal to keep track of all financial matters. Keep track of both income and expenditures. Record every financial transaction using two components, a debit and a credit. For each transaction, write down the date of the transaction followed by the type of transaction. For example: “5/5/2011, Cash.”
Enter the transaction amount as either a debit or a credit. Record debits in a column next to the account type and credits in a column slightly right of that. Any transaction needs both a debit and credit entry to balance, so for each transaction there will be at least two account types used. The debits represent incoming funds while the credit lists outgoing. For example, you receive a cash payment of $1,000. Record the payment in your journal as “5/5/2011 Debit: Cash, 1,000.” Beneath this on the next line you will need to record a credit to balance out the entry. Record the balancing credit indented slightly to the right beneath the debit for ease of reading. For the $1,000 cash entry: “Credit: Pay, 1,000.”
Create a separate account listing, either in another part of your accounting book or in a separate book, for all account types to keep an overall view of transactions for each account. For the $1,000 payment, you’ll want to open two different account listings. Label the first account “Cash” and record your debit inside the account by creating two columns of numbers under the heading “Cash.” Label the first column “Debit” and the second “Credit.” List the $1,000 in the Debit account. Create a second account listing for the “Pay” account type, only place the $1,000 in the Credit column.
Add to the journal and the account listings as you make additional transactions. Always create a balancing credit for each debit. For example, spending $600 on rent will have a journal listing of “5/6/2011 Debit: Rent Payment, 600,” balanced by the line beneath of “Credit: Cash, 600.” In the account listings under the Rent Payment account, list $600 in the debit column, and in the listing for Cash, a credit of $600.
Total multiple postings in your account listings when you have two or more entries in a single column. Place the information in your journal and accounts for pay received, 5/19/2011 of $1,000, representing your second payday for the example. Now your Cash accounting listing has two debits of $1,000 each; beneath this create a line labeled Total and beneath the two entries in the debit column write $2,000. Do the same for the Pay account type, totaling the credit column to $2,000 as well.
Create a Trial Balance listing that will give you a look at your cash flow. The Trial Balance listing keeps track of all transactions using five columns. From left to right, label the columns Account Name, Debit Transaction, Credit Transaction, Debit Balance and Credit Balance. For every transaction, list the name and amount in the appropriate column. Use the Debit Balance account to note the totals listed in the account listings. For example, the first entry would read: “Cash” under Account Name, with an entry in the Debit Transaction column of $1,000 and a Debit Balance of $1,000. Under all listings total the entries in each column and list the totals, making sure that the debit and credit totals are equal.
Continue building your accounts and keeping track of your transactions in your journal. More advanced accounting transactions build upon the basics. Use this basic information to build financial statements or to simply look at your financial status at any time.