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Accounting in 5 minutes - in simple words: debit and credit - assets and liabilities

Accounting in 5 minutes - in simple words: debit and credit - assets and liabilities

Hearing in accounting about some kind of transactions, accounts - active, passive, debits, loans, etc., it begins to seem to many that it is incredibly long and difficult to learn all this.

Nothing like that!

Of course, you need to study, but not for as long as it seems to understand and understand the basic things in this whole "kitchen".

Over time, the accountant simply develops experience, taking into account the specifics of the legislative framework, and the algorithms remain the same.

For a quick understanding of the basic principle of accounting, the main thing is to grasp the basic essence of this process and how it should fit into our consciousness, taking into account its features.

Using a simple and easy-to-understand example, in 5 minutes, we will try to understand all the basic subtleties of the accounting process: what are debit and credit, and what is their relationship to the assets and liabilities of the balance sheet. What is meant by debiting, crediting, balances and for which accounts this is typical.

Any business transaction is always executed using two accounts (not one, not three, but two).

this is important

For example, our company bought some material for its production purposes (to produce products from it) for 100 rubles.

In this example, I bought it, I haven't paid it yet, but simply, on the terms of a contractual relationship, the supplier delivered his products (material) to the buyer's warehouse (our company) and the latter had accounts payable. Documents confirming the transaction for the accounting transaction - the contract, the invoice, the act of arrival at the warehouse.

And only then, upon delivery, the company will already pay for it. Documents confirming the transaction for the accounting transaction – in addition to the above, there is also a bank payment order, an account statement.

That is, in this case, only two operations will be associated with the purchase of the material - its arrival at the warehouse and payment for it.

To use this material, it must be understood that two connecting elements are always involved in this process (the principle of double recording):

  • from where - from whom we take (buy) 
  • where do we put it later (enter it)

That is, the acquisition process in this case is associated with the accounting account 60 (settlements with suppliers/contractors) and account 10 (materials). We transfer it from the seller (who transfers it) to the buyer (where it is accepted).

From where (sch. 60), to where (sch. 10).

And here, at this very moment, it is always necessary to project this whole process onto accounting balance. That is, it is necessary to understand the balance, at least at a minimum level.

As we know, it has ASSETS and LIABILITIES. Assets - active accounts live there, and passive accounts live in Liabilities. And it is not for nothing that many accounts, transactions between which we build as a result of any business transaction, are called balance sheets.

accounting in 5 minutes - in simple words

You just need to "apply" this operation immediately to the accounting balance. This will allow us to associate and understand this whole process on a global level, and not separately - the "root" of the "head".

According to his ASSETS, these are the balances of active accounts, and they are always debit (balances), and for LIABILITIES - credit balances. It just needs to be remembered (an AXIOM).

Just in case, the balance is the difference between debit and credit turnover (for active accounts), and, conversely, for passive accounts (credit turnover minus debit).

That is, for active accounts that have arrived (increases this account) – this is debit, which has gone (reduced it) - this is lending. The difference is his debit balance. As you know, it cannot be with a minus (more to come than to leave later, this does not happen in life). Therefore, at least the balance may be zero.

For passive accounts, what has come (increases this account) – this is lending, which has gone (reduced it) - this is debit. The difference is his credit balance. And it can't be with a minus sign either, for the same reason.

As a result of all such movements on accounts for a certain period, the so-called turnover balance sheet is formed (a regular report where you can see how much came, went and when).

this is important

So, what «where » falls into our ASSET (what we get) is represented in accounting by an active account. It's just that what we call "where" can be different in nature (essence) - material (sch.10), electricity (sch.60), wages (sch.70), equipment (sch.08), money in the checking account (sch.51), products (account 43) that were released and put in a warehouse (in another way, they connected some current assets with others (one asset moved to another) - material + electricity + wages, etc., and already received a new type of asset from them - products (its cost)).

The key moment!

With any kind of movement (business operation), it is immediately necessary to determine which account the amount will go to. In our case, this is an account. 10 (and its replenishment, as we have already mentioned, always occurs by debit - the account is active (from the concept of an Asset - where we invest)). In parallel, we determine which account it will correspond to (do not forget that there should always be two accounts during the operation – double entry). Because we buy the material, then account 10 will deal with the supplier (and this is account 60). Because payment for the material has not yet passed, but only movement to our warehouse, then until we pay off the loan (then there will be another operation and a transaction to repay the debt), a source (i.e. a Liability - directly contributing to the formation of an Asset) accounts payable (this is an increase in the loan account of 60 - T.K. he is passive). As a result, the balance was leveled by the Materials (ATIV) and Accounts payable (LIABILITIES). It is always necessary to evaluate the whole thing at the level of balance.

correspondence of balance sheets accounts - equalize asset with liability

Let's go back to our example.

Initially, before the purchase of the material, the company has such a balance. She has her own money in her checking account (for example, 700 rubles), with which she plans to pay off the supplier after the delivery of the material.

According to the balance, the money is in the current account, this is our Authorized Capital (the source is the nature of education).

The asset is the Debit balance of account 51 (settlement account), the Liability is the Credit balance of account 80 (authorized capital).

And here's what we have at the start (before all our operations):

accounting in 5 minutes - in simple words - 1

Our balance is completely consistent with the checksums.

After the supplier delivers the material to the company (formation of accounts payable), the correspondence of the main accounts, their "airplanes", with the distribution of balances (balances) on the balance sheet, there will be the following:

accounting in 5 minutes - in simple words - 2

For our case, account 10 is active, which means that its replenishment (increase) occurs by debit, and account 60 is passive (although, by its nature, it may be active, you will understand later), which means that its replenishment (increase) occurs by credit.

Our balance is completely converging on the checksums.

In this case, the checksum on the balance sheet has increased, offsetting the temporarily formed accounts payable.

And now it's time to pay the cost of the delivered material (extinguish accounts payable):

accounting in 5 minutes - in simple words - 3

Our balance is completely converging on the checksums.

And by the way, if, according to the terms of the contract between our company and the supplier, there would have been an advance payment first, and not payment after delivery (when we had accounts payable, then which we repaid), here account 60 would have acted as an active one (accounts receivable would have been formed) and in general, the situation would then look like this.

accounting in 5 minutes - in simple words - 4

After delivery of the material to the company's warehouse:

accounting in 5 minutes - in simple words - 5

Based on this approach, some accounting accounts have the opportunity, caused by necessity, to be both active and passive. Such accounts are called active passive.

Now we understand that correspondence can be not only between active and passive accounts, but also between only active (as well as passive) ones.

Similarly, the interaction between accounts (transactions) is carried out in other business transactions (purchase of equipment, payment of wages, payment of energy resources, services, transfer of products from work in progress to a warehouse, receipt of proceeds to a checking account, payment of taxes, offsets, etc.).

this is important

By simulating the entire business process in a similar way using other accounting accounts - from the purchase of equipment to the receipt of money to the settlement account from sold products, you can thoroughly understand the entire accounting. It remains only to take into account the specifics of the legislative framework of the jurisdiction where all this accounting will have to be applied.

The main thing is to understand the system of interaction of accounts at the balance sheet level, and which account is responsible for what.

Accounting in 5 minutes - in simple words: debit and credit - assets and liabilities - Something like that!

автор - Михаленко Р.
M R. Автор - kaktotak.by Specialization: financial and economic design - modeling of business, investment projects of the real sector, analysis and evaluation of efficiency, optimization of the management decision system.

A wide range of web-based competencies for solving business problems.

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