The chart of accounts is the heart of accounting for any business including automotive repair. A familiar saying is that “Accounting is the Language of Business”. A General Accounting System contains summarized business activity organized in such a way that the state of the business can be analyzed readily. A basic understanding of the components of a general accounting system will help a business owner to comprehend the reports that are the end product of an accounting system:
- The Double Entry System – This is an accounting system that uses a two-sided entry to maintain financial records. Each dollar amount that is posted to one or more accounts has corresponding entries to one or more other accounts. One side of the entry is comprised of debit values and the opposite side consists of credit values.
- Balance Sheet Accounts – These accounts are used to maintain activity for a company’s asset and liability accounts as well as owner equity accounts. An example of an asset account would be ‘Cash in Bank’. An example of the corresponding account in the double entry system would be ‘Sales’. As money is received by the business – the balance in the cash account is debited and the sales account would be credited. An example of a liability account would be ‘Accounts Payable’. This represents money owed. An example would a parts purchase in which the asset account would be Inventory. When parts are purchased – inventory would be debited and accounts payable would be credited.
- Income Statement Accounts – These accounts are those that appear in a company’s profit and loss statement. Examples of income statement accounts are revenue and expense accounts. Income statement accounts are sometimes referred to as temporary accounts because at the end of an accounting year their balances are zeroed and posted to balance sheet accounts.