Accounting – Definition

We talked about a single entry system and a basic accounting definition in the last post.

Before I elaborate, the single entry system, let me give you a concept of the double entry system. When we do any transaction, it is always associated with two sides, just like a coin. Some examples are given below:

  • You go to store to buy groceries, you give money and take groceries
  • You provide services to a client, you give services and receive money

So, it is a give and take. In some cases, though you give, but you don’t get, like when you give a loan to a friend, or when you take, you don’t give, like taking an advance from your bank. But even in these situations, you are getting or taking a commitment to receive back the loan / advance amount.

Now if we record both sides of the transaction, calling one side as “Debit” and the other as “Credit” we can do a complete entry, and classify each of these lines in separate sheets. In such a situation, both the debits and credits will always total to the same amount (unless you make mistakes).

This is the basic concept on which a double entry system was built and most of the accounting systems encompass this.

So, one question which normally accounting professionals of large companies ask, “Are ERP systems based on the double entry?”  – Watch out for the answer in the next post…..

 

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