Bookkeeping is a business method that helps a company record operating transactions in accordance with professional standards and financial accounting and reporting rules. These rules include international financial reporting standards (IFRS) and generally accepted accounting principles (GAAP). Bookkeeping also helps a firm report financial statements that conform to GAAP and IFRS.
Assets are resources that you own and intend to use in business operations or in everyday activities. Examples include cash, tax refunds, accounts receivable, property and machinery. To record an asset transaction, debit the asset account to increase its amount and credit it to reduce the account balance. To illustrate, assume you own a small department store. Customers owe a total of £3,250 at the end of the month. To record the transaction, debit the customer receivables account for £3,250 and credit the sales revenue account for the same amount. In accounting parlance, crediting an asset, such as cash, means reducing its balance. This is different from the banking concept of credit.
Liabilities are debts you must repay. Examples include accounts payable, taxes due and long-term loans. Liabilities also may be financial guarantees that you must honour on time. For instance, you are liable if you cosign a loan with a friend or business partner. To record a debt transaction, credit the liability account to increase its amount and debit it to reduce the account balance. Assume you receive the monthly utility bill for £650. To record the transaction, credit the vendor payables account for £650 and debit the utility expense account for the same amount.
Expenses are costs or charges that you incur through operations. On a personal level, expenses include bills, taxes and loan interest. In business operations, expenses include salaries and the cost of goods sold. To record an expense transaction, debit the expense account to increase its amount and credit it to reduce the account balance. As an illustration, the department store receives the annual tax estimate from the Internal Revenue Service. To record the transaction, debit the tax expense account and credit the taxes payable account.
Revenue is income you earn from a labour contract or earnings a company generates by selling goods or providing services. To record a revenue transaction, credit the revenue account to increase its amount and debit it to reduce the account balance. As an example, the department store generates £65,000 in monthly gross revenues, all of which are on credit. To record the transaction, debit the accounts receivable account for £65,000 and credit the sales account for the same amount.