It is always advisable to reconcile your bank accounts each month to ensure your cash balance shown on a bank statement, and the amount shown in the account holder’s records balance.
The result of your reconciliation will lead to an adjustment of any discrepancies that exist. Once corrected, both your bank account and financial statement records will be in agreement.
This is the only way to ensure that your debits equal your credits.
Overview
Every transaction or every accounting event affects at least two items. This is why accounting is called a double-entry system based on the following rule, to which there is no exception: for each transaction, the debit amount must equal the credit amount. The debit and credit arrangement used in accounting provides a useful means of checking the accuracy with which the transactions have been recorded.
Debits and Credits apply the principle of double-entry accounting to every financial transaction. The purpose of double-entry accounting is to provide a business owner with the opportunity to apply two equal and corresponding sides, known as debits and credits, to the financial transactions occurring in their business are recorded accurately.
Debit in Latin means “he owes;” credit means “he trusts.” They are the method in which increases and decreases are classified and recorded by a business transaction according to the following five basic units of accounting:
Assets usually are a debit establishing the value of your assets. When an asset debit increases, it means you have more assets. Credit means you have fewer assets.
Liabilities are usually a credit representing how much money you owe. A debit to liabilities is good. It means you owe less. A credit to liabilities means you owe more.
Equity is hopefully a credit meaning your business is worth more. A debit to equity means your share of the business has declined. A credit means your business is worth more.
Revenues are always a credit except for sales write-offs. Any debit to sales is a reduction in gross sales. Credits represent what you sold.
Expenses are always a debit reflective of your sales except for vendor refunds. Every expense debit reflects what you have spent. Credit represents a refund or overpayment of an expense.
Accounting accurately and on a timely basis for your debits and credits is how you know if your business made a profit or not. Too often, the information contained on the P&L Statement and Balance Sheet is not used to make more profitable business decisions. Be the exception, learn to use the numbers reported on your financial statements to validate your company’s performance, so you continuously make better and better decisions.
