Accounting Definitions

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Contra Account: A contra account is used in a general ledger to reduce the value of a related account when the two are netted together. A contra account's natural balance is the opposite of the associated account. If a debit is the natural balance recorded in the related account, the contra account records a credit. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset's depreciation is recorded separately.

Journal Entries: A journal entry is made up of an equal amount of debits and credits. A journal entry can affect as many accounts as you want, but the debits and credits must still always equal each other.

General Ledger: The general ledger of a company is one of the most important records it has. The general ledger is a listing of each asset, liability, equity, revenue, and expense account that a company has. The general ledger begins with the starting balance for each account and will show, by date, each debit and credit that affects that account. At the end of each account, there will be a debit or credit balance that is determined by taking the beginning balance plus the debit and credit activity in that account. Every journal entry that a company makes will go on the general ledger, so if you make the following entry to record a cash sale:

Journal Entry
Cash $800
Sales $800

In the Cash account on the general ledger, there will be a debit for $800 on the date of the journal entry, and there will be a credit of $800 in the Sales account on the date of the journal entry. The general ledger is made up exclusively from the individual journal entries. Because each journal entry contains an equal amount of debits and credits, the general ledger must also have an equal amount of debits and credits, but that is not to say that each account within the general ledger has an equal amount of debits and credits.

Trial Balance: The trial balance of a company is a listing of each asset, liability, equity, revenue, and expense account that a company has. It is very similar to a general ledger but without the detail of each individual journal transaction affecting the account. The figures that are displayed on a trial balance are the balances that are shown at the end of each account on a general ledger. Likewise, the trial balance also must have an equal number of debits and credits.

Balance Sheet: The balance sheet is made up of each asset, liability, and equity account. The information for the balance sheet comes directly from the trial balance.

Income Statement: The income statement is made up of the revenue and expense accounts. The information for the income statement comes directly from the trial balance.

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  • 20 days ago by vince