Double Entry Bookkeeping

□	Double Entry Bookkeeping - The sum of all Debit entries must equal the sum of all Credit entries.

•	This is the great mystery known and understood only by accountants - well maybe not.

•	Just to dispel the mystery, a rudimentary version of Double Entry Bookkeeping was used by the Romans, and later a more advanced version by middle eastern countries, then most famously, by the Venetians in the 15th and 16th Century.

•	So, Double Entry Bookkeeping is not a new concept.

▪	Double Entry Bookkeeping is simply a method used to make sure your "books" stay properly balanced at all times.

▪	It assumes that there are two columns of values (monies) - each with the same total value.

▪	That value set says that your Assets and your Expenses, when added together, will equal the same total as when your Liabilities, Sales and Equity accounts are added together.

▪	This is one of those "Rules" we warned you about before - so just accept it.

•	So, if that is true - and it must be because it is a "Rule" - whenever you make an entry into this two column set of values, if you add to one, you must add to the other - and visa versa - if you subtract from one you must subtract from the other.

▪	You may also add to an account in one column and the subtract from another account in the same column - thus that column remains in balance with the other.

▪	In all of these cases, you make at least two entries to complete an update to your financial records.

▪	In some cases, three or more entries may be made in the same transaction set, but the sum of all the entries in the first column (Debits) will equal the sum of all entries in the second column (Credits).

•	Debits and Credits - The column on the left is called the Debit column, the column on the right is called the Credit column.

▪	This is also one of those "Rules" we warned you about - so just accept it, too.

•	Here are some practical examples of Double Entry Bookkeeping where the "Debits equal the Credits":

►	Note: Once the General Ledger is properly Setup:

a)	All of the transaction examples explained below would occur automatically within the General Ledger System.

b)	The User does nothing extra when making an entry into any Accounting module (i.e., Accounts Receivable, Accounts Payable, and Inventory Tracking modules).

c)	The four examples below are presented here to enhance your understanding of the Double Entry Bookkeeping concept and process.

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Posting a Sale to a Subscriber - Conversationally: this is easy to understand. If you make a Sale, and record it in your "books", you should also make an entry that says you are owed money for that sale. The "sale" amount naturally would be the same as the "owed by the customer" amount. This is the basic concept of posting a sale using Double Entry Bookkeeping.

▪	The Sale (as a reminder, Sales are classified as a Credit Account Type) is added (a Credit action) to the General Ledger account number identified for that item in the Sale-Purchases Items Form.

▪	That same amount is also added (a Debit action) to your Accounts Receivable account (Accounts Receivable is an Asset account, which are classified as a Debit Account Type) - and represents the other half of this "Debits must equal Credits" transaction example.

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Posting an Invoice from a Vendor - Conversationally: this is also easy to understand. If you make a Purchase, and record it in your "books", you should also make an entry that says you owe someone money for that Purchase. The "purchase" amount naturally would be the same as the "owed to the vendor" amount. This is the basic concept of recording a purchase using Double Entry Bookkeeping.

▪	The Purchase (a Debit Account Type) is added (Debited) to the General Ledger account number identified for that item in the Sale-Purchases Items Form.

▪	That amount is also added to your Accounts Payable account (a Credit posted to a Credit Account Type) representing the other half of the transaction.

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Charging Sales Taxes - Conversationally: this is not quite as easy to understand but explains the process of making more than two entries to record a transaction in your "books". If you make a Sale that has been charged sales tax, and record that sale in your "books", in addition to making an entry for the actual sale amount, you must make an entry that says you owe the sales tax that was charged to someone else, and you should, of course, also make an entry that says your customer owes the money to you for that sale and its sales tax, too. But this time, the "sale" amount would not be the same as as the "owed by the customer" amount, because the customer owes you for the sale (your money) and for the sales tax, as well (which initially is collected by you but ultimately must be sent to the state).

▪	First, the Sale (Sales are classified as a Credit Account Type) is added (a Credit action) to the General Ledger account number identified for that item in the Sale-Purchases Items Form.

▪	That same amount is also added (a Debit action) to your Accounts Receivable account (Accounts Receivable is an Asset account and so is classified as a Debit Account Type)

▪	But when you charge a Subscriber Sales Tax (local or national), you are simply holding that money until you file the Department of Revenue's Sales Tax Return and actually send that money to the State (or whomever is the appropriate governmental authority).

▪	So, the Sales Tax amount is added to a Sales Tax Liability account (you Credit this Credit Account Type) because you are obligated to pay that sales tax money to someone else in the near future.

o	You must have defined a Local Tax Liability account (and a National Tax Liability account - even if you don't use it now) to accept this Sales Tax entry.

▪	In addition to the Sale Amount you posted above, you must also add that Sales Tax amount to your Accounts Receivable account (you Debit a Debit Account Type) which represents the other half of the sales tax transaction

o	Its held in the Accounts Receivable account because you have billed the Subscriber for the Sales Tax, but have not yet received it.

◆	Paying Sales Taxes - When you are being charged Sales Tax (Local and/or National) by a Vendor, you are incurring an Expense.

▪	The Purchase (excluding the Sales Tax) is added (Debited) to the General Ledger account number (a Debit Account Type) identified for that item in the Sale-Purchases Items Form.

▪	That amount is also added to your Accounts Payable account (a Credit posted to a Credit Account Type) representing the other half of the transaction.

▪	Then the Sales Tax Expense transaction is posted to a Sales Tax Expense account (you add - Debit - a Debit account).

▪	You then add (a Credit action) this Sales Tax amount to your Accounts Payable account (Classified as a Credit Account Type) completing the other half of the sales tax transaction (because you must eventually pay the Vendor for the Sales Tax - as well as the Purchase).

•	Aren't you glad that MKMS does all of the for you automatically!