What is recorded

Each document that represents a change in credit o debits, or an income o payment must be recorded in the accounts.

Double Entry

The double entry method was born in Italy in the 14th century.

With registration you store a document simultaneously in two “sections” in DEBIT and CREDIT.
A double registration with the same overall amount which affects two complementary aspects:
the economic one (money – received or spent) and the patrimonial one (goods, credits and debts – acquired or sold).

With the double entry method, CONTROL of the periodic income result (ECONOMIC aspect) and that of the monetary/financial movements (CAPITAL aspect) is obtained.

Example of selling an asset, pending payment:
What's up Goods account in CUSTOMER account in What Increases Account Type
Company gives the goods CREDIT REVENUE ECONOMIC
Customer receives it DEBIT CREDIT ASSET

As long as the Customer does not pay the REVENUE is fictitious as a CREDIT has been granted.
When the Customer pays, the ECONOMIC revenue is realized, the CREDIT is closed and the ASSETS are recorded with credit to the BANK.

Obviously I will have incurred COSTS to produce. If they are lower than REVENUES, I have generated a positive INCOME which increases the EQUITY.


The ASSETS of a company can be thought of as the level that a lake can reach.

Metafora del lago su patrimonio e conto economico

The metaphor of the lake

With the metaphor of the lake, the TRIBUTARY is the REVENUE, the EMISSARIES are the COSTS.
Every day the sources and tributaries feed the level of the lake (the ASSETS) while the emissaries lower it.

To increase assets over time, revenues must exceed costs.

Economic and Patrimonial

The accounts, referred to in the records, can be Patrimonial or Economic.

PATRIMONY

The asset is born, increases, decreases and is reset to zero on extinction (therefore it can last several years).
It can be negative (PASSIVE) or positive (ACTIVE):

  • LIABILITIES: where did I get the money (FINANCING SOURCES)
  • ACTIVE: where I put the money (ASSEST USES)

The PASSIVE entries items represent the SOURCES with which I finance the activity, through:

  • risk capital: share capital, reserves, operating results;
  • long-term debt: long-term financing, funds;
  • short-term debts: debts to suppliers, banks, others.

IN SINTESI

The business can be financed by partners, economic results, recourse to bank debt or suppliers

The main ASSETS items can be summarized in the different ways of USING the money that may have been spent on:

  • fixed assets, or investments (tangible, intangible, financial);
  • warehouse;
  • receivables, mainly from customers;
  • liquid assets or the same money (banks, cash)

IN SINTESI

I have to make the correct investment choices, optimize warehouse stocks, verify customer solvency and cash flows

INCOME STATEMENT

The income statement can contain COST or REVENUE items
It lasts one accounting year. If the revenues at the end of the year are greater than the costs, I have a profit (increases the assets), but if the costs exceed the revenues, I have a loss (reduces the assets).

Debit (to give) and Credit (to have)

Although the use of accounting models which allow you to store accounts in the debit or credit sections by type of accounting is consolidated, it is good to know the correct definition to set up, verify and carry out the necessary maintenance of them.

From an accounting perspective, there is always a doubt as to where to record the amount: in the DEBIT or CREDIT section?
There is a valuable mnemonic rule that can help clarify the answer:

WHO GIVES MUST HAVE, WHO RECEIVES MUST GIVE

The OBJECT of the accounting entry must be clear, with the help of its visualization.
For example, viewing the GOODS leaving the company because they have been delivered to the CUSTOMER.

In the table presented above and reported below, GOODS are given by the Company and therefore the goods account must be recorded in CREDIT (WHO GIVES MUST HAVE) while Customer RECEIVES a CREDIT which is recorded in DEBIT (WHO RECEIVES MUST GIVE).

CAR

What's up Goods account in CUSTOMER account in What Increases Account Type
Company gives the goods CREDIT REVENUE ECONOMIC
Customer receives it DEBIT CREDIT ASSET

When the CUSTOMER pays, the object to be displayed for writing becomes MONEY.
The BANK receives the money from the Customer, Bank account is registered in DEBIT (WHO RECEIVES MUST GIVE).
The Customer gives the money, the account is recorded in CREDIT (WHO GIVES MUST HAVE).

MONEY

Whats Happen BANK account in CUSTOMER account in What Increases