GridTracks App

In Depth Tutorial on Using GridTracks

Introduction

Welcome to the in depth tutorial guide on using GridTracks. The aim of this In Depth analysis is to teach you how to use double-entry bookkeeping with GridTracks. If you already very familiar with double-entry bookkeeping, I recommend that you check out Quick Start instead.

The Fundamental Accounting Equation

In this section, we will go over the fundamentals of accounting in preparation for using GridTracks.

Fundamental Accounting Equation: 
Assets = Liabilities + Owner's Equity

The fundamental Accounting Equation is perhaps the most basic and most important part of accounting. It states that the total Assets (what you own) of your business must equal equal your total Liabilities (what you owe) plus Owner's Equity (what you net worth is). Off the bat, you may wonder Assets are the highlight of the equation as opposed to your net worth, Owner's Equity, and this is because total Assets represents your total purchasing power. Especially given that the purpose of borrowing money is to increase your purchasing power, it makes sense that the main focus of the equation is Assets.

Assets

As mentioned earlier, Assets represents what you own. This includes accounts for cash on hand, bank account balance, Accounts Receivable (capital other people owe you), and long term assets, such as a car, land, etc. (note that asset depreciation is also considered an asset account).

Liabilities

Liabilities are accounts that refer to what you owe. This includes a credit card, bank loans, Accounts Payable (capital you owe others), taxes to be paid

Owner's Equity

Owner's Equity are the accounts that represent your net worth. Your total net worth can be divided across multiple accounts, if there are multiple owner's in the business, you would create individual accounts for each owner. In some regards, expenses, revenue/income, drawings (money taken out by the owner), and dividends (handed out by the company for stock holders), would fall under this category as well. However, in reality this is more complicated and will be elaborated on when we discuss more on accounts.

Debits and Credits

In accounting, when we wish to increase or decrease the value of an account, we do not apply postive or negative transactions to an account, but rather we debit or credit an account to adjust its value. It is not as simple as saying debits increase account balances and credit decrease, because the impact of debiting or crediting an account depends on the type of account it is.

The table below is a summary of the act of debiting or crediting different types of accounts:

Account Type	To Increase	To Decrease
Asset	Debit	Credit
Liability	Credit	Debit
Revenue/Income	Credit	Debit
Expense	Debit	Credit
Owner's Equity (DR)	Debit	Credit
Owner's Equity (CR)	Credit	Debit

Understanding the debiting and crediting of assets and liabilities is very straight forward. For both you can think of debiting as adding more to what you own, and crediting as adding more to what you owe. Thus, it makes sense that debiting an asset will increase it, because you are adding more to what you own. In the same respect, crediting an asset will decrease it, because you are decreasing capital to pay off what you owe.

Likewise for liabilities, crediting a liability will increase it because you are adding more to what you owe. As such, debiting a liability will decrease it, because adding more to what you own will allow you to pay off part of the liability, thus decreasing it.

For Owner's Equity (CR), this concept gets a little trickier. For now we will ignore revenue/income, expenses, and owner's equity (DR) (drawings, dividends, etc.), because their purpose is to act on the value of Owner's Equity (CR), and thus will not be covered until we start discussing adding journal entries to the general journal. The reason that this cateogry of accounts increases when credited and decreases when debited will in explained in the section below about balancing accounts.

The Importance of Balancing

In order to understand by crediting increases Owner's Equity (CR) and debiting decreases, it is important to understand that one of the main benefits of double-entry bookkeeping is that in order to keep consistency and prevent mistakes, all the accounts must be balanced. This means that in the end, the sum of all the accounts with debit balances must equal the sum of all accounts with credit balances. For every journal transaction that you make, it must both debit an account and credit another with the same value, to ensure that everything still remains balance thereafter (note that technically you can debit and credit as many accounts as you want in one tranasction, provided that the total amount debited equals the total amount credited).

Here is an example from my fake company, "The Fresh Cupcaker" (note that revenue, expenses, and owner's equity (DR) accounts are omitted):

Account	Type	Debit Balance	Credit Balance
Cash (ID: 1000)	Asset	$156.33	-
Bank (ID: 1010)	Asset	$7,500.00	-
Accounts Receivable - John Smith (ID: 1020)	Asset	$125.24	-
Accounts Receivable - Emily Cash (ID: 1030)	Asset	$78.95	-
Kitchen Equipment (ID: 1050)	Asset	$5,188.50	-
Credit Card - VISA (ID: 2001)	Liability	-	$541.22
Bank Loan (ID: 2010)	Liability	-	$2,546.11
Accounts Payable - Stock Foods Inc. (ID: 2020)	Liability	-	$0.00
Owner's Equity - The Fresh Cupcaker (ID: 3001)	Owner's Equity (CR)	-	$9,961.69
Total		$13,049.02	$13,049.02

Note that in the end, the total debit balance is equal to the total credit balance. Typically speaking, accounts have balances that are "positive", meaning that they are typically the ones that make an account increase. For example, bank (ID: 1010) is an asset, and correspondingly has debit balance, of which with assets debiting them is what makes them increase. Of course, if an account has a negative balance, it would switch over. Thus, if bank were to have a negative balance, it would then have a credit balance instead.

From the table above, I hope it becomes apparently that Owner's Equity (CR) increases when credited by virtue of the fact that it is on the same side of the fundamental accounting equation as liabilities, which are accounts that also increase when credited. This ensures that the total debit balance determined from assets, will match the total credit balance determined by the addition of liabilities and owner's equity.

Finally, as a short hand form, debit balances can be post-fixed with DR, and credit balances with CR. Thus, $125.55DR would represent a debit balance, while $125.55CR would represent a credit balance.

Next Steps

Credits

Please note that most of the information from this site is taken from the book "Bookkeeping for Canadians for dummies" by Lita Epstein and Cécile Laurin.

(Epstein, L., & Laurin, C. (2019). Bookkeeping For Canadians For Dummies. Hoboken, New Jersey: John Wiley & Sons, Inc.)