Oil & Gas Accounting 101 – Accounts
Oil & Gas accounting isn’t that difficult to understand. Accounting is accounting, so the first step in learning oil & gas accounting is to understand accounting.
The basic element in accounting is an account. Accounts are how transactions are grouped and collected. For instance, Cash could be an account. This account could represent a checking or bank account where a business’s cash or money is kept. Accounts Receivable is another example of an account. This is where money owed to the business is kept. An account called Wages is used to keep track of the wages paid to employees.
Accounts are grouped together according to the type of account. Some of the account groupings are:
- Assets – this is what the company owns. Includes accounts such as Cash, Inventory, Wells and Land
- Liabilities – this is what the company owes to others. Includes Accounts Payable, Payroll Taxes and Loans
- Equity – this is what the company has after all liabilities are paid
- Income – this is the revenue or economic gains recieved for items sold or services provided. Includes Oil & Gas Revenues, Administration Revenue and Service Revenue
- Expense – this is the costs the company incurs doing business. Includes Rent, Telephone, Well Expenses and Taxes
Debits and Credits
Every transaction in accounting has at least two parts, a debit and a credit. This is the essence of what’s called double-entry accounting. Because of the two-fold effect of transactions, the total effect on the left, or debit, side will always be equal to the right, or credit, side. All the debits in a transaction must equal all the credits in a transaction.
Here’s a posting example using the cash method: On February 1st, 2015 you receive $25,500 of oil revenue.
|Cash – Operating||2/1/2015||$25,500|
Cash is debited and Revenue Payable is credited creating a balanced transaction.
Here are the rules for debiting and crediting accounts. To increase an asset, you debit it; to decrease an asset you credit it. The opposite applies to Liabilities and Equity.
|Accounting Element||To Increase||To Decrease|
Once you have a basic understanding of accounting, understanding a specific type of accounting, such as Oil & Gas Accounting is much easier.
Source: SherWare Blog