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PROCESSES
In the preceding sections, we discussed the master data and key concepts rel-
evant to fi nancial accounting. In this section, we examine the actual processes
that companies use in fi nancial accounting. Specifi cally, we explore general
ledger, accounts receivable, accounts payable, and asset accounting.

GENERAL LEDGER ACCOUNTING
General ledger accounting is based on the double entry accounting system,
where every transaction has both a debit entry and a credit entry. Recall that
accounts are divided into balance sheet accounts (Figure 3-5) and income (profi t
and loss) statement accounts (Figure 3-6). Balance sheet accounts are grouped
into assets, liabilities, and equity, while profi t and loss accounts are divided into
revenue and expenses. Figure 3-11 illustrates how postings are debited and
credited to these accounts using a “T” account. Debits are displayed on the
left side of the T account, and credits on the right side. An increase in an asset
account or an expense account results in a debit posting, whereas a decrease
results in a credit posting. Conversely, an increase in revenue or liability results
in a credit posting, whereas a decrease generates a debit posting. Below we
present several examples involving GBI to illustrate and clarify the concept of
postings. Please refer to Appendix 3A at the end of this chapter for the specifi c
accounts that are included in the examples.

Figure 3-11: Debits and credits

Consider the following scenario. A venture capitalist invests $50,000 in
GBI US on January 10, 2010, which GBI deposits into its bank account.
In exchange, the investor receives GBI common stock at $1 per share. How is
this transaction recorded in the general ledger? The fi rst step is to identify
the relevant accounts. For this transaction the appropriate accounts are bank
(#100000) and common stock (#329000). The transaction will generate an
increase in both accounts. Because the bank account is considered an asset,
there will be a debit posting, while common stock, a liability, will receive a
credit posting. This transaction is illustrated in Figure 3-12.

Figure 3-12: Posting example 1: Investment in company

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