Accounting is the art of consolidating the financial information that should be clear
and understandable to the organization. Most importantly, accurate Financial Reports can
be obtained since the financial records will reflect the company’s performance. They
serve us in gaining a better understanding of the company's financial situation, keeping
track of the Profit and Loss of the organization, and comparing the financial status
with a previous period.
Similarly, Budget Management, which is one of the core operations of every organization,
puts forward new strategies and business plans based on the historical data and gains
recorded. So the records should be managed accurately to take the right decisions for
the business by management and make the organization profitable.
Double-entry Bookkeeping System
The Double-entry bookkeeping system in Accounting records the transactions on two sides,
known as debit and credit. In fact, for this system, if any transaction happens
affecting an account, it must have a counterpart that affects another account. Thus,
there will be a Credit value (right side) and its counterpart record as a Debit value
(Left side). And at the end, the debit should be equal to the credit. The accounts that
are credited and debited are listed in the company chart of accounts.
For example, when a sale happens for $100, the Income Account and Receivable Account get
affected. Since the income increases, the income accounts credit $100 and as assets
increase, the Receivable Account debits $100. How the accounts should be credited or
debited is based on the nature of the account.
Hierarchy of accounting
As a general accounting system, all its transactions must be accounted for in
corresponding ledgers correctly. How the transactions are recorded on the credit and
debit side of accounts is determined by its nature. There is a hierarchy where general
accounting is following.
Natures
The four types of nature include Asset, Liability, Income, and Expense.
| Natures |
Increasing |
Decreasing |
| Liability & Income |
Credit |
Debit |
| Expense & Asset |
Debit |
Credit |
In some accounting systems, use ‘Equity’ as an additional nature that follows the rules
of Liability and Income. The account groups with the nature of income and expenses
affect the profit and loss report.