The illustration below shows the relationship between debits and credits in double-entry bookkeeping:
The following outline describes in greater detail the four major divisions of the General Ledger Balance Sheet accounts:
I. ASSETS — WHAT WE OWN (Debit balance accounts)
A. Current — Accounts that show assets with continued activity and turnover within the year.
B. Property, Plant and Equipment — Accounts reflecting assets owned but not intended to have a quick turnover. These items are marked down (depreciated) gradually over a number of years specified by the IRS.
C. Other — Assets that do not have a quick turnover and are not depreciated.
II. LIABILITIES — WHAT WE OWE (Credit balance accounts)
A. Current — Liabilities with continual activity and turnover within the year.
B. Long-Term — Contracts payable beyond one year.
III. ACCRUALS (Credit balance accounts)
A. Accumulated Depreciation — Accounts that represent markdowns in the value of fixed assets.
B. Bad Debt Allowance — Shows markdowns in accounts receivable.
IV. CAPITAL (Credit balance accounts)
A. Owners' Investment/Owners' Equity — Cash or other assets invested in a business by a proprietor or partner. During the first year of business, assets invested by owners are recorded in "Owner's Investment" account(s). At year's end, these assets are to be permanently transferred into a new account called "Owners' Equity."
B. Capital Stock, Retained Earnings (in a corporation)
C. Draw of Proprietors/Partners (in a single proprietorship or partnership)
D. MEMO: Annual Earnings — not a General Ledger account. "Annual Earnings" is only a Balance Sheet statistic.
A simple way to illustrate the function of the General Ledger is to describe it as a book which shows the classification and dollar value of what we own (asset accounts=debit balance) and the source from which these assets came (liabilities, accruals, investments, earnings accounts=credit balance).
Accounting Made Easy, Module I of the Professional Bookkeeper™ Program, explains General Ledger Balance Sheet Accounts in detail.
Click HERE to see what else is taught in Module I.