Accounting Beginners: Mastering the Basics
( Step-by-Step Guide )
Understanding the Accounting Equation
Assets = Liabilities + Owner’s Equity
- Assets = things you own (cash, inventory, equipment)
- Liabilities = what you owe (money owed to suppliers, banks)
- Owner’s Equity = owner’s investment + profits kept in the business
Two Sides of the Coin: Debits & Credits
Every transaction affects two accounts.
- Debits (Dr.): increase assets & expenses, decrease liabilities & equity (think “Deliver”: adding supplies)
- Credits (Cr.): increase liabilities & equity, decrease assets & expenses (think “Create”: selling products creates income)
Knowing Your Winds: Revenue vs. Expenses
- Revenue (Income): money earned from selling products or services (like wind filling your sails)
- Expenses: costs of running your business (like fuel to keep the ship going)
Charting Your Course: The General Journal
- Like a ship’s logbook, it records all financial transactions chronologically.
- Each entry includes: date, accounts affected, amount, and explanation.
Anchoring Your Records: The General Ledger
- Think of it as your ship’s organized cargo hold.
- Groups similar transactions from the general journal into individual accounts.
- Allows for detailed analysis of each account (like tracking how much you spend on supplies).
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