by Bryan
(Fort Worth, TX, US)
Q: In your example you show how the entry is made on a GL I believe. How does that translate into the business's documents? Would it be recorded on the P&L and/or the balance sheet? Dr and Cr does not show up on the P&L but it does on the balance sheet if I recall (it is too late for me to look it up). I guess what I really want to know is, why should I care about Dr and Cr if I am a business owner? I can use an income and expense ledger to document most transactions after all. How would those other documents benefit me?
I do run a small business and I own some rental properties. My background is managerial accounting so documenting Dr and Cr is not something I worry about. I understand it conceptually (a little) from accounting 101 but I cannot seem to make the leap to put it into place in everyday use. Nor do I understand why I should worry about it...except to have a nagging feeling that I should.
A: Some great questions Bryan and I totally understand where you're coming from.
Your first question was: "How does that (accounting entries of debit and credit) translate into the business's documents (financial reports)? Would it be recorded on the P&L and/or the balance sheet?"
I would recommend first taking a look at the lesson on the accounting cycle. It gives a big picture of how journals, T-accounts and financial reports all fit together. The lesson also includes a great diagram of the accounting procedure or steps, from source documents right through to the financial statements and also displays images of each individual accounting step.
You stated that "Dr and Cr does not show up on the P&L but it does on the balance sheet..." This is incorrect. Dr and Cr definitely show up on the profit and loss statement. Journal entries involving incomes or expenses will always affect the profit and loss statement (also known as income statement).
Likewise, journal entries involving assets, liabilities or owners equity will always affect the balance sheet. The balance sheet is literally the accounting equation of assets, owners equity and liabilities in a vertical format.
All journal entries (debits and credits) affect either the income statement or the balance sheet, and sometimes both.
Your second but related question was, "why should I care about Dr and Cr if I am a business owner? I can use an income and expense ledger to document most transactions after all. How would those other documents benefit me?"
A journal entry is the record of an individual transaction, such as Joe Shmoe paying you rent for one month. Understanding journal entries allows you to check the records of specific transactions.
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