Accounting Basics

Why Double-Entry Matters

Every financial event has at least two effects. Receiving inventory gives the business an asset, but it also creates an obligation. Selling goods creates revenue, but the inventory leaving the business also becomes a cost. Double-entry accounting records both sides instead of showing only the cash movement.

In Supply Weave, each valid new journal therefore has total debits equal to total credits. This balance is a structural check on recorded entries, not proof that the business record is complete or professionally correct. If malformed historical data exists, reports preserve and flag its imbalance rather than hiding it.

The Minimum Accounting Equation

The foundation is:

Assets = Liabilities + Equity

Assets are resources the business controls, such as bank balances, inventory, and amounts customers owe.
Liabilities are obligations, such as amounts owed to suppliers.
Equity is the owners’ residual interest after liabilities. Profit increases equity; loss decreases it.
Revenue increases profit and therefore equity.
Expenses reduce profit and therefore equity.

The equation must remain balanced after every journal. Debits and credits are the method used to record changes while preserving that balance.

Debit And Credit Basics

Debit means the left side of a journal and credit means the right side. Neither word automatically means good, bad, increase, decrease, cash in, or cash out. Its effect depends on the account type.

Account type	Usually increased by	Usually decreased by	Examples in this guide
Asset	Debit	Credit	Bank, Inventory, Accounts Receivable
Liability	Credit	Debit	Accounts Payable, Goods Received Not Invoiced
Equity	Credit	Debit	Retained earnings
Revenue	Credit	Debit	Revenue from customer sales
Expense	Debit	Credit	Cost of Goods Sold

A useful first question is not “Is this money in or out?” Ask instead: “Which accounts changed, what types are they, and did each increase or decrease?”

Worked Example In BDT

This is the same example introduced in the Accounting Overview. Assume:

inventory costs BDT 100,000;
all of it is received and later dispatched;
the supplier bill and payment are BDT 100,000;
the customer invoice and receipt are BDT 150,000; and
there is no tax, VAT, bank charge, foreign currency, advance, return, or opening balance in the example.

1. Receive The Inventory

Why: The business now controls inventory, but the supplier bill has not yet been recorded. Accounting needs both the asset and the temporary obligation.

Document: Receive the Goods Receipt Note.

Account	Debit (BDT)	Credit (BDT)
Inventory	100,000
Goods Received Not Invoiced		100,000
Total	100,000	100,000

Inventory, an asset, increases by debit. Goods Received Not Invoiced, a liability, increases by credit.

2. Post The Supplier Bill

Why: The supplier’s formal bill replaces the temporary receipt obligation with an amount payable to that supplier. Inventory must not be recorded a second time.

Document: Post the Supplier Bill.

Account	Debit (BDT)	Credit (BDT)
Goods Received Not Invoiced	100,000
Accounts Payable		100,000
Total	100,000	100,000

The debit clears the temporary liability. The credit increases Accounts Payable. The business still has inventory of BDT 100,000 and now clearly owes the supplier BDT 100,000.

3. Pay The Supplier

Why: Payment settles what the business owes and reduces its bank asset.

Document: Create the Supplier Payment.

Account	Debit (BDT)	Credit (BDT)
Accounts Payable	100,000
Bank		100,000
Total	100,000	100,000

Accounts Payable decreases by debit. Bank, an asset, decreases by credit. This step does not create an expense: the inventory cost remains in Inventory until the goods are dispatched.

4. Dispatch The Inventory

Why: Once the goods leave for the customer, their cost is no longer held as an asset. It becomes the expense associated with the sale.

Document: Dispatch the Delivery Challan.

Account	Debit (BDT)	Credit (BDT)
Cost of Goods Sold	100,000
Inventory		100,000
Total	100,000	100,000

Cost of Goods Sold, an expense, increases by debit. Inventory decreases by credit.

5. Post The Customer Invoice

Why: The business has earned revenue and now has a legal claim against the customer, even though cash has not yet arrived.

Document: Post the Commercial Invoice.

Account	Debit (BDT)	Credit (BDT)
Accounts Receivable	150,000
Revenue		150,000
Total	150,000	150,000

Accounts Receivable, an asset, increases by debit. Revenue increases by credit. Revenue of BDT 150,000 less Cost of Goods Sold of BDT 100,000 gives BDT 50,000 gross profit before other expenses and taxes.

6. Receive The Customer Payment

Why: Collection changes the form of the asset from money owed by the customer to money held at bank. It does not create revenue a second time.

Document: Create the Customer Receipt.

Account	Debit (BDT)	Credit (BDT)
Bank	150,000
Accounts Receivable		150,000
Total	150,000	150,000

Bank increases by debit and Accounts Receivable decreases by credit.

What The Completed Cycle Shows

Looking only at this cycle and ignoring the pre-existing bank funds needed to pay the supplier:

Result	Amount (BDT)	Explanation
Revenue	150,000	Customer sale posted from the Commercial Invoice
Cost of Goods Sold	100,000	Inventory cost recognized on dispatch
Gross profit	50,000	Revenue less Cost of Goods Sold
Net bank movement	50,000	BDT 150,000 received less BDT 100,000 paid
Closing Inventory from this cycle	0	All received inventory was dispatched
Closing Accounts Payable	0	Supplier was fully paid
Closing Accounts Receivable	0	Customer paid in full

The BDT 50,000 bank increase and BDT 50,000 profit are related in this simplified, fully settled example. They will often differ in real operations because invoices may remain unpaid, inventory may remain unsold, advances may occur, and other expenses or timing differences may exist.

Where The Example Appears In Reports

Journal Entries shows the six postings and their debit and credit lines.
General Ledger explains each account movement, such as the increase and decrease in Inventory or Accounts Receivable.
Trial Balance summarizes all six entries. Total recorded debits equal total recorded credits, while cleared accounts can finish at zero.
Profit & Loss shows Revenue of BDT 150,000, Cost of Goods Sold of BDT 100,000, and gross profit of BDT 50,000 before other expenses and taxes.
Statement of Financial Position shows the remaining asset and liability balances at the selected date. In this isolated cycle, inventory, receivable, and payable have cleared, while net assets and earnings have increased by BDT 50,000.
Receipt & Payment shows the BDT 150,000 customer receipt and BDT 100,000 supplier payment when the relevant bank account is correctly classified and the selected month includes both postings.

Warning: Receipt & Payment is a report of posted cash and bank activity. It is not a bank reconciliation and does not prove that the bank balance agrees with the bank statement.

Three Checks To Remember

Document check: Does the application document agree with the real invoice, receipt, delivery, bank evidence, party, amount, and date?
Posting check: Did the document reach the state that creates its accounting effect, and is the expected journal visible?
Report check: Does the journal appear in the correct account and reporting period, and have warnings or unusual balances been investigated?

Warning: Equal debit and credit totals are necessary, but they do not prove completeness, correct classification, correct cutoff, tax compliance, or audit assurance. The operator must investigate the business record, and the CA must review matters requiring professional judgment.

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Reviewed against the application on: 2026-08-21