The simple accounting consists of recording the income and expenses of one or more accounts. Double-entry accounting, on the other hand, is more complex and particularly concerns companies that need to have professional accounting with more details, or because they are required by law to keep their accounts with the double-entry system.
The double-entry method involves a double entry, on at least two or more accounts, to simultaneously record what is happening from a monetary/financial and economic point of view. When recording a movement, it is necessary to record on two or more accounts. For example, the company pays several invoices through the bank: you will record the bank account from where the money comes out to pay the invoices, but at the same time you will indicate the accounts of what has been paid (electricity, gas, rent) and which represent the counterparts.
For this reason, double-entry entries should be recorded in two columns, debit and credit.
The set of all of a company's accounts is called the accounting plan. This is divided into two sections, namely the financial one (numerical accounts, such as the cash account), which corresponds to the balance sheet, and the economic one (income accounts).
The balance sheet indicates the balance sheet of a company's assets and liabilities in a given period and is organized into assets and liabilities. The assets show how the capital is used (e.g. credits, properties, etc.), while the liabilities show where a company's funds come from (e.g. debts).
In addition to the balance sheet, there is the Profit & Loss Statement, represented by costs and revenues, referred to as income accounts. Costs must be recorded in the "debit" column; revenues, i.e. earnings, are recorded in the "credit" column.
Below you will find a list of terms that will help you get a better understanding of the double-entry accounting.
The counterpart is a double-entry accounting term. It indicates one or more accounts that balance the debit and credit. For example, if a company pays the goods to a supplier, the account of the cash will go in credit and the account of the supplier (counterpart), whose debt is extinguished, will go in debit.
Simple transaction and composed transaction
Simple transactions are those that involve two accounts and are each entered on a single line. The document number is different for each record.
Composed transactions, on the other hand, concern two or more accounts and must be recorded on more than one line, recording one account per line. In this case the document number reported on the different lines will be the same because it is the same transaction.
The balance sheet is the financial situation of a company at a certain point in time and must be provided by law. The balance sheet is divided into assets and liabilities.
The assets show how the capital is used and invested, highlighting the use of the means available to the company. For example, credits and properties are assets because the capital is invested.
Liabilities and Equity
The liabilities indicate the source of capital invested in a company. Debts for example are liabilities: a company has debts with suppliers, which will allow the company to continue the activity.
Equity capital includes assets brought by the founder or third parties (e.g. friends, acquaintances or other investors) as shares or quotas of the company's share capital. It also includes accumulated profits.
The estate or gross capital is all the assets and liabilities at the disposal of a company.
Shareholders' equity is the difference between assets and liabilities, and represents its internal sources of funding, as it comes directly or indirectly from the person or persons who set it up and promote it.
Profit and Loss Account
The Profit and Loss Account is an accounting document that shows a summary of a company's costs and revenues, highlighting the profit or loss for the year through the difference between costs and revenues and corresponding to the change in shareholders' equity.
The costs are expenses to be charged to the company for the purchase of necessary productive facts, such as materials and labor, which will allow the introduction of goods and services into the market.
When a company sells its finished products, it receives a sum of money, a profit, that is, the revenue.
Profit indicates the difference between costs and revenues of a company.
Debit and Credit
In order to understand how the Debit and Credit system works, it is necessary to distinguish between the accounts of the balance sheet (numerical/financial accounts) and those of the Profit and Loss Account (costs and revenues).
Debit for Balance Sheet Accounts (Assets)
Debit, for the accounts belonging to the Balance Sheet, represents the positive financial changes (assets), such as increases in money, increases in receivables and decreases in debts. Debit represents the use of money.
Credit for Balance Sheet accounts (Liabilities)
On the other hand, for the accounts belonging to the Balance Sheet, it represents the negative financial changes (liabilities), i.e. increases in debts, decreases in money and decreases in receivables. Credit represents the source of money.
If for example a company buys goods and spends 150, under the column "debit" we will write the amount that the company has paid because there has been a decrease in the debt to the supplier. In credit we will write the same amount because there is a decrease of money, in this case the Cash Account.
Supplier debt decreasing
(decrease in the liquidity of the company)
The important thing about the double-entry system is that the two accounts in debit and credit must be equal.
Debit for income accounts (Costs)
The economic data from the economic point of view represents the increasing changes in costs (new purchases of goods and services) and the reversal of revenues (credit notes issued to customers, discounts and reductions).
Credit for income accounts (Revenues)
From an economic point of view, this represents the increase in revenues (sales to customers) and the reversal of costs (credit notes from suppliers, discounts and rebates).
In double-entry accounting, it is essential that entries break even. The values in debit and credit, the assets and the liabilities are equal.
The Cash Plan is the real evolution of income and expenditure over time. Through the categories, Banana allows you to control where your money comes from, the type of expenses you make and the moment these movements occur
In order to control and analyze the financial performance of a company, we rely on cash flow, i.e. the positive or negative changes of money over a specific period. Therefore, the cash flow considers the differences between the money that comes in and is spent.