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Debits and credits are essential terms used by bookkeepers and accountants when recording transactions. Each transaction amount must be recorded in one account as a debit and in another as a credit. This double-entry system ensures that accounting (Also see What is the definition of an Accounting Equation?) records and financial statements are accurate.

Before delving into an explanation and illustration of debits and credits in accounting and bookkeeping, it is crucial to understand which accounts will have the debit entry or credit entry. If you find it difficult to understand debits and credits in accounting, don’t hesitate to seek the assistance of a professional accounting service Malaysia. They can provide you with comprehensive guidance and ensure that your financial records are accurate.

What Is an Account?

Accountants (Also see How a Good Accountant will Help Your Business to Grow and Save You Money?) have created a system to organize financial data for companies, which involves sorting transactions into records known as accounts. When setting up the accounting (Also see Definition of Accounting Cycle) system of a company, the accounts that are likely to be impacted by the company’s transactions are identified and listed. This record of accounts is commonly known as the chart of accounts for the company. The company creates a chart of accounts, which is a list of accounts used to classify transactions in an organized manner. The chart of accounts may vary in length, ranging from thirty to thousands of accounts, depending on the size and complexity of the business operations. Companies can customize their chart of accounts to meet their unique requirements.

The chart of accounts lists the balance sheet accounts first, followed by the income statement accounts. The accounts are arranged in the chart of accounts in the following order:

• Assets

• Liabilities

• Owner’s Equity

• Income

• Expenses

Double-Entry Accounting

Double-entry accounting is a method where each financial transaction impacts at least two accounts. For example, when a company pays rent, Rent Expenses and Cash are affected. Although it’s called double-entry, some transactions can involve more than two accounts.

Debits and Credits

After identifying the accounts involved in a transaction, at least one account must be debited and at least one account must be credited. Debiting an account means recording an amount on the left side, while crediting an account means recording an amount on the right side.

Generally, the following accounts are increased by a debit: Expenses, Dividends, Losses, and Assets.

Generally, the following accounts are increased by a credit: Revenues, Income, Owner’s Equity, and Liabilities.

To decrease an account, the opposite of the action that increased the account is taken. For instance, an asset account is increased with a debit, and it is decreased with a credit.

The entire concept of double-entry accounting depends on the basic accounting equation, making it fundamental to all accounting (Also see Definition of Accounting Cycle) systems. This basis equation shows two facts about a business: what it owns and what it owes. The accounting (Also see Accounting Concepts Used Most in the Financial World) equation equals the assets of a company to its liabilities and equity, revealing all the assets of the company acquired from creditors (liabilities) or investors (equity). For instance, the company’s assets are initially purchased with cash from creditors or investors when the company is formed.

What is the Basic Accounting Equation Formula?

Assets = Liabilities + Equity

The sum of liabilities and owner’s equity is equal to assets. Normally, creditors need to be paid before bankrupt investors, so the equation is usually written with liabilities occurring before the owner’s equity. In this case, liabilities are more mobile than equity. This is the same with financial reporting, where current assets and liabilities are usually entered before non-current assets and liabilities. This equation applies to all company activities and transactions, with assets always equating to liabilities and owner’s equity. As long as assets increase, liabilities or owner’s equity will also increase to balance the equation. If you’re unsure about the Accounting Equation, consider reaching out to an accounting service in Johor Bahru for assistance.

What are the Accounting Equation Components?

Assets

An asset is a source that is owned by the company and is utilized for future advantages. Some assets are intangible, like goodwill, while some are tangible, like cash. Below are some illustrations of assets:

• Current Assets: Cash, Accounts Receivable, Prepaid Expenses

• Fixed Assets: Motor Vehicle, Machinery, Buildings

• Intangible Assets: Goodwill, Copyrights, Licenses

Liabilities

A liability is an amount of money owed to another person or organization. In other words, liabilities are claims of creditors on the assets of the company, since that is the amount of assets the creditors will own when the company is liquidated. Below are some illustrations of liabilities:

• Accounts payable

• Bank debt

• Personal Loans

• Unearned income

Equity

Equity is the part of the assets of the company that stockholders or partners own. Said a different way, once all the debts are paid off, the stockholders or partners own the remaining assets. Business owners could maximize their ownership share by contributing money to the company, while business owners (Also see How a Good Accountant will Help Your Business to Grow and Save You Money?) could also withdraw the company funds to minimize their equity. Similarly, revenues would increase equity while expenses decrease equity. Below are some illustrations of equity accounts:

• Owner’s Capital

• Owner’s Withdrawals

• Officer Loans

• Unearned income

• Dividends

The accounting cycle is a set of steps that involves recording, categorizing, and calculating financial transactions in a systematic manner. Typically, a company would synchronize the accounting cycle with the due dates of their respective filing deadlines. Usually, a bookkeeper would manage the accounting cycle, which may involve various procedures depending on the company. Nevertheless, every transaction from its occurrence to the production of financial documents is tracked during the accounting process.

By following the accounting cycle procedure, a company can accurately prepare its financial statements at the end of the fiscal year. This process helps a company to systematically record their business events, and present them to others through financial statements. If you require assistance with accounting or cannot afford an in-house accountant, do not hesitate to engage the services of an accounting firm in Singapore.

Why Is the Accounting Cycle Vital?

The accounting cycle is a crucial aspect of running a business as it provides a comprehensive understanding of the company’s performance. By breaking down complex financial information into clear categories and step-by-step calculations, accountants and bookkeepers can achieve greater accuracy.

How does the Accounting Cycle Works?

The accounting cycle process may vary depending on the reporting (Also see Do Your Company Need Interim Reports?) needs of the company. However, some of the essential procedures include:

Identification and Analysis: This involves identifying receipts, invoices, and other documents to analyze transactions and their impact on accounts.

Recording: Every transaction is entered in a journal using a debit or credit system, either single or double-entry. If a cash-accounting (Also see Differences Between the Accrual Basis and Cash Basis of Accounting) system is used, transactions are entered when money is paid or received.

Making Corrections: Journal entries are adjusted to account for any necessary corrections, such as prepaid or accrual expenses.

Generating Financial Statements: Financial statements are produced once all entries have been adjusted.

Closing Books: The accounting cycle concludes with the closing of the books, which involves closing expenditures and income to the income summary account, closing the income summary account to the owner’s capital account, and closing withdrawals to the owner’s capital account.

Upon completion of the accounting cycle, the resulting financial reports provide the business owner with insights into cash flow (Also see Tips to Preserve Cash Flow and Maximize Profits) and available funds. This information enables the business owner (Also see How a Good Accountant will Help Your Business to Grow and Save You Money?) to make informed decisions regarding financial operations.

Tax planning is essential for companies. It may not be that much of a concern if you are not highly profitable. Still, suppose business (Also see How a Good Accountant will Help Your Business to Grow and Save You Money?) starts to pick up, you should make an effort to look at obtaining the tax planning reconstructed with tax advisory services in Singapore as well as tax working as a consultant service in Singapore. Do not hesitate to seek help from professionals in an accounting firm in Singapore so we can assist in devising tax (Also see Do You Know What is Deferred Tax?) strategies that suit your organization best.

So why is it so important to have good tax planning carried out in place and done in advance simultaneously?

Tax planning is the procedure of making a plan of action in your company’s system position right before you end up being profitable (Also see Identifying the Profitability of a Business). You can not do tax planning working backwards after making money. If you have an idea of what you need to do in order to have structures in position, you will conserve a lot of money that would have been taxed. By law, it is done so that you do not go against the laws of the country.

A good tax consultant will help you save on both your corporate tax obligations and your own personal income tax obligations. A tax consultant could help you obtain the most effective optimum point to proclaim your income (Also see The Difference Between Net Income and Operating Income) appropriately.

This is overall the best way to use the law to the best advantage of a business owner. Entrepreneurs with these tax benefits can contribute to employment and conserve money for more investments to grow. Additionally, the benefits also allow them to make capital purchases that can eventually improve their company efficiency and also financial capabilities in the future for the good development of the company.

Deferred tax is an entry that is related to the amount of tax that the company owes or overpays as a result of temporary differences. This may arise from the difference in the frequency of accounting treatment of depreciation and the taxation treatment of capital expenditure. If it is a positive entry, then it is an asset of the company. If it is a negative balance, in contrast, it will fall under the category of the company’s liability.

One may divide the deferred tax into two different categories, which are the deferred tax assets or deferred tax liability. They reflect the positive or negative amounts of tax the company owes, and they will appear on the company’s balance sheet. However, both of them will not show up at the same time. This means that on the balance sheet, one will only see either deferred tax assets or deferred tax liabilities.

To determine whether the amount is an asset or a liability, business owners need to identify whether they have overpaid the tax or owed the tax. The calculation related to deferred tax can be quite complicated sometimes as this may be associated with capital allowances, which is not something easy to deal with. Thus, if you are one of the business owners who do not know anything related to this, why not consider hiring an accounting firm in Johor Bahru? The professionals will be able to help you with the accounting tasks so that you can run your core business operations without having to worry about your books of accounts.

When it comes to deferred tax, an important concept that you need to understand is the temporary taxable differences. Such a situation will arise when the current taxable value of an asset is not the same as the liability associated with it. This is often due to the differences between the accounting approaches the company has taken to handle depreciation of assets and the tax laws related to depreciation. As a result, these differences bring an impact on the company’s account as the company’s income and expenses will appear in a particular accounting period, while the taxes payable (Also see Everything To Know About The Accounts Payable Process) will show up in another period.

The taxable difference can be deductible or taxable. In a case where the company overpays the taxes (Also see Impact of Poor Bookkeeping on Taxes), the amount overpaid will be its deferred tax asset. This is because one may take the overpayment as an asset. Thus, in the following accounting period, the company will obtain some tax break. On the other hand, in the case where the sum of income of a company is less than the taxable income in an accounting period, the accountants will record the difference as a liability on the balance sheet. This means that the business should pay for that amount in the future. Business owners should handle issues related to taxes with care if they do not want themselves to get into hot soup due to taxation issues. To avoid problems associated with taxes, they need to ensure that they have understood the rules and regulations that are related to tax filing. Otherwise, they may consider engaging a taxation service in Johor Bahru too.