Accounting: Double-Entry Bookkeeping
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Transcript
was kind of perpetual balance and cross checking which well
perpetuated accuracy as companies grew bigger and more complex As
you'd imagine when one of eighty seven basketballs is pulled
from the shelves inventory needs to be adjusted or deducted
in value then by one basketball But a sale happened
as well so revenue comes in at the same time
And yeah that revenue might come in the form of
an IOU also known as a credit card payment or
other kind of credit payment or other delayed payment system
The double entry bookkeeping system allows for error checking and
granularity to exist in the management of financial records Computers
today automatically double enter as records are kept The reality
is that accounting offers no room for error and a
lost penny causes the same havoc as one lost in
your car door jam You know it's a pain isn't
it So with double entry bookkeeping the theory remains that
errors are minimized and that there exists an intrinsic fact
checking system For example take a company that pays twenty
thousand dollars to buy raw plastic for its lot of
Goo Dahl When the purchase first happens it books twenty
thousand dollars as an account payable and it books twenty
thousand dollars of raw plastic as an account receivable Then
the plastic is shipped to the company and instead of
being an account receivable the twenty thousand dollars is booked
as an asset Yeah it might be labeled something like
raw materials assets and since company already probably had say
a million dollars worth of raw materials just sitting around
on the shelves the new number then would be presented
on the balance sheet as a million twenty thousand Note
The company's still owes twenty thousand dollars in cash to
the people who sold them the plastics and that would
still exist on the balance sheet as an accountant payable
So now a new transaction happens and the company wires
twenty thousand dollars to the plastics provider The cash account
in their existing say Bank of America account declines by
twenty thousand and goes from exactly five hundred thousand dollars
to exactly four hundred eighty thousand dollars And note that
in all these example of accounting practice each time we
made an entry it was essentially entered twice Paying for
the plastics took twenty thousand dollars out of our bank
account in cash but it also got rid of twenty
thousand dollars of accounts Abel Liability There is a lot
of action and grief to write everything down twice But
generally speaking this system takes care of the risk of
errors from at least being very high to being a
pretty minimal In essence you can think about every entry
in a balance sheet as being Newtonian not like the
FIG For every action there is an equal and opposite
reaction Yeah the more common pilots in describing double entry
bookkeeping names the process in the form of credits and
debits Well a debit is usually put on the left
side of a T account there which increases the value
of an asset And it's generally a good asset he
kind of thing And a good asset either Increases in
cash increases in accounts receivable increases the value of some
intellectual or really property or decreases a liability and expands
or some other bad thing on a credit film just
does the opposite A T account credit increases liability and
or expense or it decreases the value of an asset
or some other thing of value Let's take as the
first event purchase of twenty thousand dollars of plastic Raw
material from plastics are us by the lot of Goo
Doll company All right first thing that happens is that
a document is signed A lot of goose signs a
binding contract where they agreed no matter what to purchase
Twenty thousand dollars worth of raw plastic material from plastics
are us Had there been some thirty day money back
guarantee or some other price discounting wealth then that would
change the way the dollars get accounted for But at
this point those air corner case events and they just
add confusion So we're going to ignore me When the
contract is signed There are two balance sheet items Then
that happened First a debit of twenty thousand dollars is
made to the duck accounts receivable line on the balance
sheet At the same time a twenty thousand dollar credit
is made to the accounts payable line Then magically on
March one the plastic shows up on the loading dock
and the new book looks like this Why is there
an asterisk on the million twenty thousand dollars worth of
raw materials Well because the previous day lot of Gu
Corporation already had a million dollars worth of raw materials
The fact that the material showed up and were put
in the bin with all the other raw materials now
changes the state of being that asset So then a
lot of go writes a check for twenty thousand dollars
to the plastics are US corporation and the new balance
sheet simply reflects the loss of twenty thousand dollars of
accounts payable right They pay their bills at the same
time losing twenty thousand dollars out of the corporations BankAmerica
account That's it Pretty simple huh That's double entry Or
in the case of the lot of Goo Dahl double
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