Explanation of T Account, Debit and Credit, and Double Entry Accounting System

The Accounting Definition

Debits and credits serve as the two balancing aspects of every financial transaction in double-entry bookkeeping. Debits are entered on the left side of a ledger, and credits are entered on the right side of a ledger. Whether a debit increases or decreases an account depends on what kind of account it is. In the accounting equation Assets = Liabilities + Equity, if an asset account increases (by a debit), then one must also either decrease (credit) another asset account or increase (credit) a liability or equity account.

Another way to help remember debit and credit rules, is to think of the accounting equation as a tee (T), the vertical line of the tee (T) goes between assets and liabilities. Everything on the left side (debit side) increases with a debit and has a normal debit balance; everything on the right side (credit side) increases with a credit and has a normal credit balance. (Note: a normal balance does not always mean the accounts balance will be on that side, it’s simply a way of remembering which side increases it).

Double-Entry Accounting Defined

True to its name, double-entry accounting is a standard accounting method that involves recording each transaction in at least two accounts, resulting in a debit to one or more accounts and a credit to one or more accounts.

The total amount of the transactions in each case must balance out, ensuring that all dollars are accounted for. Debits are typically noted on the left side of the ledger, while credits are typically noted on the right side.

Public companies must follow the accounting rules and methods dictated by generally accepted accounting principles (GAAP), which are controlled by a nongovernmental entity called the Financial Accounting Standards Board (FASB).

Double-entry accounting also serves as the most efficient way for a company to monitor its financial growth, especially as the scale of business grows.

Keeping Accurate Books

As a company’s business grows, the likelihood of clerical errors increases. Although double-entry accounting does not prevent errors entirely, it limits the effect any errors have on the overall accounts.

Because the accounts are set up to check each transaction to be sure it balances out, errors will be flagged to accountants quickly, before the error produces subsequent errors in a domino effect. Additionally, the nature of the account structure makes it easier to trace back through entries to find out where an error originated.

Account Types

When you employ double-entry accounting, you will need to use several types of accounts. Some key account types include:

• Asset accounts show dollars associated with things a business owns, such as the cash in its checking account or the price paid for its warehouse.
• Liability accounts show what the firm owes, such as a building mortgage, equipment loan, or credit card balances.
• Income accounts represent money received, such as sales revenue and interest income.
• Expense accounts show money spent, including purchased goods for sale, payroll costs, rent, and advertising.

The double-entry system requires a chart of accounts, which consists of all of the balance sheet and income statement accounts in which accountants make entries. A given company can add accounts and tailor them to more specifically reflect the company’s operations, accounting, and reporting needs.

Double-entry accounting system and its rules

The double-entry rules can be helpful when we need to find a mistake in financial records. If total debits do not equal total credits, there must be a mistake. However, this system cannot ensure complete accuracy. For example, even if debit balances equal credit ones, an error may still be present because a wrong account was debited (or credited) when the entry was made.

The two important rules about the double-entry recording system are as follows:

• Assets = Claims (Liabilities and Owner’s Equity)
• Total Debits = Total Credits

Debits and credits

In double entry bookkeeping, debits and credits are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the receivable account associated with the tenant and a debit for the bank account where the cheque is deposited.

Debits and credits are traditionally distinguished by writing the transfer amounts in separate columns of an account book. Alternately, they can be listed in one column, indicating debits with the suffix “Dr” or writing them plain, and indicating credits with the suffix “Cr” or a minus sign. Despite the use of a minus sign, debits and credits do not correspond directly to positive and negative numbers. When the total of debits in an account exceeds the total of credits, the account is said to have a net debit balance equal to the difference; when the opposite is true, it has a net credit balance. For a particular account, one of these will be the normal balance type and will be reported as a positive number, while a negative balance will indicate an abnormal situation, as when a bank account is overdrawn. Debit balances are normal for asset and expense accounts, and credit balances are normal for liability, equity and revenue accounts.

T-Account

Accounting records about events and transactions are recorded in accounts. An account is an individual record of increases and decreases in a specific asset, liability, or owner’s equity item. Look at accounts as a place for recording numbers related to a certain item or class of transactions. Examples of accounts may be Cash, Accounts Receivable, Fixed Assets, Accounts Payable, Accrued Payroll, Sales, Rent Expenses and so on.

An account consists of three parts:

• Title of the account
• Left side (known as debit )
• Right side (known as credit )

Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account . You could draw T accounts on a piece of paper and use it to maintain your accounting records.

Why would a company outsource payroll?

What is payroll?

First and foremost, let’s clear up the most basic issue. Many business owners start off small, perhaps as just a one man band, realise their business’s potential, and then quickly have to take on employees. After which, the process of managing your finances becomes slightly more difficult, and as you take on more and more people, you need to find a way to organise it.

A company’s payroll is simply their list of employees. That is everyone who they employ and pay to work for them. Business people often also use the term payroll to refer to the following:

The total amount of money which a company pays to its employees.

This refers to every employee, their full wages or salary including any bonuses, and not including any deductions. These amounts will all be added up, totalled and the amount will be used as part of the accounts records.

The company’s list of employee’s salaries and wages, bonuses and taxes.

The details of all money paid to each and every employee must also be recorded. For some this may involve totting up the hours they have worked, their hourly wage or salary and any additional payments which have been made to an employee. Many companies use time sheets, rotas or clocking in machines to keep records on times and hours that have been worked in a week. It is also highly advisable to take note of how many sick and holiday days your employees have taken. Taxes also have to be calculated for each employee.

The department in the company which calculates and pays employees.

Some companies have a specific department within the business which organises the payment of employees. Within a company, this department is often also referred to with the term ‘payroll’.

The Benefits of Outsourcing Payroll

Outsourcing payroll has many advantages. Handing over this essential part of business to an external partner can save time, money, and compliance headaches, making it a wise move for multinational companies of all sizes. This is why an increasing number of enterprises and small business owners are turning over their payroll function to professional providers who offer specialized, fully managed payroll services. To discover whether outsource payroll is a good fit for your organization, consider the following benefits.

Save on time and cost

When you are running a business, time is, quite literally, money. Processing payroll in-house is time-consuming and requires lots of attention to detail, and that demand increases as staff numbers grow. Time spent on payroll, managing considerable amounts of data and ensuring no miscalculations are made, is time taken away from the core tasks of your business. Many of the cost savings associated with payroll outsourcing reflect the time a company can win back by not doing these duties in-house. By outsourcing payroll processing, which can include everything from calculating payroll taxes and statutory filings to handling payroll enquiries, your organization could be much better off financially.

Improve data security

In-house payroll comes with a lot of risk, including identity theft and embezzlement. Even if you are be confident that your payroll software is secure, there is also the safety of the server or network to consider. Quality outsourced payroll providers protect and store data on highly secure cloud-based servers and use cutting-edge encryption technology to ensure your critical information is safe. They also use electronic payment methods so that if an error occurs, it can be easily traced, helping to protect you against potential losses. This is all included in the outsourced service they provide, while attempting to do the same in-house would be very expensive.

COST

Big businesses can afford to maintain big payroll departments. For small businesses however, an in-house payroll service is a money burner. If you calculate the hours your employees spend on payroll-related activities, plus payroll software costs, training costs, printers, printing and distributing payslips, creating tax documents etc, you could be surprised by the result when you compare that amount to the cost a payroll service provider can offer.

RESOURCES

The payroll function can consume a large proportion of your staff resources, especially if the staff in charge of the payroll are not trained specifically to deal with it or have the payroll function as a smaller part of their overall responsibilities. The benefits of outsourcing the payroll include freeing up these resources allowing your staff to concentrate on more essential tasks. You may even be able to reduce your staff’s size. Outsourced functions also give you better scope for expansion of your company with scalable services suited to your business.

Avoid Losing Payroll Expertise

By outsourcing the functions of your payroll department, you can eliminate the need for costly transfer of information between former and new employees. Outsourced payroll services can be relied on to maintain a consistent approach to payroll management. There’s no need to induct employees on logic or how technology platforms operate. Role transfer can be reduced to the functions and outputs of the payroll service.

Simplify Reporting

With complete transparency and immediate access to accurate information that doesn’t need to be verified, management can more effectively plan for growth and predict changes to staffing needs.

Reduce Redundancy

With less data inputs by fewer people, task management and delivery can be managed with greater consistency while eliminating redundancy.

Pay your employees on time:

Besides having payroll software, Third Party Payroll Services provider will also take care of paying salary to all your employees on time, fill their income tax, form 16, etc. helping you to avoid any penalties related to late payment.

Be in compliance with evolving regulations:

Third-Party Payroll Services providers have a team of professionals who continuously stay updated with the regulatory changes introduced by the state and federal government related to tax payments. As your business expands, you need to establish new offices across various geographies and be in compliance with local as well as national compliances.

Using an Online Payroll Service

Advantages of Using Online Payroll Services

Managing payroll with online payroll services can have several advantages over managing payroll in-house. Many companies have already made the switch, along with a shift to other online HR management tools. If you are considering a move from manual systems to online payroll systems, the following potential benefits may help influence your decision.

Increased Efficiency

Manual payroll systems generally require at least one person to export or manually calculate time and attendance information, calculate tax and benefit withholdings, draw up paychecks, and file forms with the IRS. This process can take several hours and must be completed every pay period. Typically, online payroll services perform these tasks automatically or with approval that simply requires a couple seconds of your time and few clicks.

Improved Labor Management

Since online payroll systems handle most of payroll’s time-consuming tasks, making the switch can help free up labor hours. If hours of an employee or department’s time were allotted to manage payroll, those hours can now be spent on other tasks – potentially revenue-bearing ones. Making the switch may also allow a company to eliminate a position altogether.

Decreased Potential for Errors

Automating payroll helps mitigate the potential for human error. Any time manual calculations must be done or information is keyed in, mistakes can be made that can cause employee discontent. This causes a loss of money for the company, or compliance issues. Streamlining payroll systems to export time and attendance information, automatically calculating withholdings, and drawing up paychecks with just a few clicks can prevent these errors.

Employee Access to Data

Most online payroll services allow employees and managers to access historical and current payroll data using mobile devices and defined login information. Having access to this information can improve employee satisfaction, while also saving human resources professionals’ time. Allowing managers to access payroll using mobile devices at any time establishes another way to review information, creating an additional error prevention check point.

Simplifies Compliance

It’s estimated that as many as 25 percent of companies pay penalties to the IRS every year, due to compliance errors. These errors are not intentional; most of them stem from the changing nature of regulations. The mandatory amount of time and effort required to keep all payroll employees up-to-date also inhibits matters.

The Key Benefits of Choosing the Best Small-Business Payroll Software

An owner may be able to simply pay a group of people consistently, but it’s often more difficult to also keep track of the right paperwork, pull reports, or handle special circumstances. As a result, for medium-sized businesses, it’s often one person’s dedicated job to take care of payroll or several people’s part-time job. For small businesses, it’s still very time-consuming, and owners struggle to keep up. Regardless of what they are using online payroll services for, small-business owners can also enjoy the following benefits as a result:

1. You can save money by reducing data entry errors and sometimes avoiding large mistakes.
2. You can save time, allowing you to focus your energy on core competencies and ignore the tricky business of conducting bookkeeping duties yourself.
3. You can increase visibility for employees, as they’ll often be able to log in and view their account information, reducing any awkward, uncomfortable, or accusatory conversations.
4. You can reduce the need to train or maintain payroll-related employees, reducing costs further and allowing HR professionals to focus on other important duties.
5. You can ensure that tax information is consistent and accurate and have the information at hand rather than needing to calculate based on lists.

Is payroll easy to manage yourself?     

Typically, it’s not. It must be compliant with local, state and federal laws that are subject to change.

If your company has employees in more than one city or state, payroll may become complicated. For instance, if your employee lives in one state and works in another, where do you report their income?

Local income taxes and fees may also be surprising. Did you know some cities charge employees a flat fee for every week they work?

Quality payroll services stay current with local, state and federal laws.

If you don’t work as an accountant, it doesn’t make sense to try to learn every aspect of payroll law. Focus on building your own business and choose a payroll-service firm right for you. Be confident every time you run payroll.

How do you choose a payroll service?

• Assess your payroll needs
• Review available payroll-service offerings
• Check the references of your top three choices

Cloud-Based Payroll Computing for Your Business

Businesses have become more environmentally aware and it has become increasingly common for a company to implement policies and practices for reducing carbon footprints and excess waste. Opting for a cloud-based payroll computing solution provides a “green” approach to a cost-effective and efficient payroll process.

Among other benefits, online payroll software greatly reduces paper usage, saves you money, and helps retain our natural resources for future generations.

In addition, more employees are taking advantage of direct deposit of their payroll checks. Online payroll software simplifies this process and, as a result, there is rarely any need for paper checks except in the case of special circumstances.  An added convenience of using direct deposit is that employees no longer need to leave the office during work hours to deposit their checks and reduced driving time, as well.

By using an expert online payroll service provider, setting up your payroll online is quick and easy. In addition, the advantages provide benefits for both the employer and employees.

How Secure Are Online Payroll Services?

The increased threat of data breaches continues to push companies — leading online payroll providers — to invest in the most advanced security tools to store and protect client information. This includes:

• State-of-the art encryption systems (to save password-protected files in encrypted form)
• Redundant backup systems (duplicating key functions to increase reliability)
• Multiple server locations (storing the same information in more than one place as backup)