It was the year 2008, I had completed almost one year at Web Notes. At that time, we did not have a product and provided development services as per customer's requirements. We were working on a customized ERP for "Janak Healthcare", which gave me an opportunity to get familiar with accounting concepts.
I completed my engineering in IT, did not have any kind of accounting background. The concepts of Debit/Credit was just like another world to me, my brain cells used to go to sleep mode hearing those terms. Rushabh, was the person, from whom I learned the basics of Accounting. In this blog, I will try to share my very first session.
Chart of Accounts
Chart of Accounts represents a tree like representation of all accounting heads, used to represent company's financial information. There are two types of accounts: Balance Sheet and Profit and Loss Statement accounts. Balance Sheet consists of Assets and Liabilities accounts and Profit and Loss Statement accounts consists of Incomes and Expenses.
- Assets: Bank and Cash balances, outstanding amounts of customers and all other assets are recorded here.
- Liabilities: All the company's liabilities like shareholder's capital, outstanding amount to be paid to suppliers, taxes to be paid to concerned to authorities are recorded under this group.
- Incomes: Income from direct/indirect sales.
- Expenses: All the expenses to run the business, like salaries, purchases, rent etc. are recorded here.
Debit and Credit
Each of these accounts are either "Debit" or "Credit" type. Assets, Expenses are "Debit" accounts and Liabilities, Incomes are "Credit" accounts.
But I could not understand how will I determine account type? There are many reasons available on books and internet. Then Rushabh told me "Don't try to understand the logic, simply remember account types for those 4 accounts".
The balance of account can be increased / decreased, depending on account type and transaction type.
|Account Type||Transaction Type||Effect on account balance|
This means that every accounting entry has two parts, one debit and one credit and must affect two separate accounts. Means if you add or deduct to one account, some other account somewhere else must also be affected. See the example below:
1. Company sells a laptop worth 50000 to Customer A and delivers that with an invoice.
As the company will receive a payment from customer, the customer is considered as an asset account. For booking income, company maintains an account called "Sales of Laptop". So, entries will be like the following:
|Sales of Laptop||50000|
2. Company receives payments by cash from Customer A:
Customer A has made the payment, so customer balance should reduced by the paid amount which will increase "Cash" balance.
I will share more with our most popular "Chai-wala" example in my next blog.