Basic Guide to Accounting

Accounting is one of those subjects that normally does not generate a positive reaction

. In fact, the mention of the word often causes people to cringe. It is perceived to be extremely tedious and boring and therefore people tend to shy away from a life filled with balance sheets and income statements. Yes, accounting is difficult and not everyone is cut out to be an accountant, but there are basic aspects of accounting that are very simple and easily learned if explained right. In fact, these basic aspects of accounting can be applied to everyday business life and it is crucial for anyone in the business world to familiarize themselves with these aspects. So what are these "must know" aspects? Well they are: the basic accounting equation, debits vs. credits, and the balance sheet.

Assets equal liabilities plus stock holders equity is the basic accounting equation. It is the foundation of accounting and taught to accounting students on the first day off accounting 101. It is as simple as it sounds, assets really do equal liabilities plus stock holders equity. What becomes tricky about this simple equation is making sure that it is true. If assets do not equal liabilities plus stockholders equity there is a BIG problem. In order to ensure that this equation is always true, one must know what each piece of the equation means. Assets are what are owned by the company. These could be land, buildings, equipment and cash owned by a business. Liabilities are payments that a company or business owes. Accounts payable, notes payable, and unearned revenue are examples of liabilities. And finally, equity is the owner's claim on his/her assets. Equity can also be referred to as capital. Equities consist of common stock, dividends, revenues, and expenses. So there you have it, basically what we own is equal to what we owe in addition to the money we make. With understanding of this equation other elements of accounting will become clearer and less scary, such as debits and credits.

The next main aspect of accounting is the difference between a debit and a credit. A simple mix-up of a debit and credit, on the right account, can be the difference between making a huge profit and filing for bankruptcy. So obliviously, this is not something that accountants what to be mixing up. The first thing to remember is that debits are always on the left and credits are always on the right. This is never an exception. Also, debits and credits are interdependent of one another, when you increase the debits on an account you must decrease the credits and when you increase the credits the debits must be decreased. What can sometimes be tricky is determining which accounts are a debit increase and credit decrease and which are a debit decrease and a credit increase. For example, one cannot assume that just because one particular account is a debit increase does not mean that all the other accounts are a debit increase. Each account must be looked at individually.

And finally the last major aspect of accounting is the income statement. The nice thing about accounting is that one thing builds on another, so knowledge about both the basic accounting equation and debits vs. credits are crucial in creating and reading a balance sheet. Basically the balance sheet is like a very detailed equation of assets equals liabilities plus stockholder's equity in a chart form. At the top of the balance sheet is the name of the company, and the date. The date is included at the top of the sheet, because the balance sheet represents a business or company's financial condition at a point in time. On the left hand side are all the assets listed and at the bottom the total assets. On the right hand side appear the liabilities and stockholder's equity and at the bottom, the total of both the stockholder's equity and liabilities. Just like the basic accounting equation, the total assets on the bottom left-hand side of the balance sheet must equal the total liabilities and equity on the bottom right-hand side.

So there you have it, the three most basic yet crucial principles of accounting, the basic accounting equation, debits vs. credits, and the balance sheet. Hopefully, accounting no longer seems as intimidating and scary. If you ever own a business one day or even have to pay your own bills, think back to these simple concepts. Maybe like any true accountant, you will be able to save yourself a little bit of cash and do the math yourself, rather than spending the money to hire a professional.

Basic Guide to Accounting

By: Alexandra DiVito

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