When accessing and extracting reports from an accounting software, it is important to know the transaction codes. But once you know the transaction codes, do you understand what you are viewing? Are you able to answer questions about an account or a specific transaction?
A list of accounts that an organization uses in the general ledger is known as the chart of accounts or COA. The information within the chart of accounts is used to produce the organizations financial statements. The COA segregates revenue, expenditures, liabilities and assets providing a quick view of the organizations financial health. The COA is designed to meet the needs of management and ensure financial reporting compliance.
Knowing the chart of accounts is one thing but understanding how transactions are recorded in each account is also important. When viewing accounts understanding whether or not a transaction should be recorded as a debit or credit makes all the difference. It will also help to identify errors. In accounting, all transactions are recorded as either debits or a credit according to the GAAP (Generally Accepted Accounting Principles), however, how it works depends on the account. An asset or expense account will increase with a debit, but a liability or equity account will decrease. A liability or equity account is increased with a credit, but an asset or expense account will decrease. This can be very confusing because banks use debits and credits opposite from accounting. So don’t apply these rules to your bank account.
A T-account is a term used in double-entry accounting and it describes the appearance of the entry. The basic, non-negotiable rule to T-accounts is debits go to the left of the column and credits go to the right. T-accounts are the best way to understand the cycle of a transaction. Once you understand the cycle of a transaction, then you can easily answer general account questions.