[ Previous Section ]     [ Next Section ]

A Quick Lesson in Accounting

For those of you that are new to bookkeeping and accounting terms read on.

We have introduced to you a couple of accounting terms already. The first term we introduced was something called Chart of Accounts. This chart is something that accountants use all of the time; it is simply a way to categorize the way you spend your money, allocate your assets, and earn your income. Another term is "asset". A quick (although not complete) definition of an asset is something that gives you benefit and helps you earn income.

In the introduction of this document, we mentioned that Moneydance supports double entry accounting. In double entry accounting there is a "link" between two accounts. One account is debited the amount of the transaction and another account is credited for the same amount of the transaction. This is how we categorize transactions within the Chart of Accounts.

For example, entering a transaction into your checking account, you need to specify an additional account for the transaction.

Let's say that you are paying your utility bill. You get the bill in the mail, and you write a check. By writing the check you effectively reduced the amount left in your bank account by the amount of the utility bill. In this case a credit is entered in the checking account. Now on the other side of the transaction you want to record the fact that you have paid the utility bill, so a debit would be entered for the same amount of the bill in an account called utility bill.

In specifying an account you essentially assign a category to the transaction. Specifying an account (or category) for every transaction allows you to recognize income and expenses to help you determine where your money is being made and spent.

Double entry accounting can also easily represent the transfer of funds from one account to another. Simply create a transaction in one account, and specify the additional account in which the funds are transferred to or from. Just remember a debit in one account is represented by a credit in another account.