| Why is accounting so powerful? It is because it is | | | | Zero serves the function of a check figure. A |
| all based off of one simple accounting equation: | | | | credit always offset a debit creating no net |
| Assets-Liabilities-Stockholder's Equity = 0 | | | | affect. That is it. The numbers change but the |
| Assets = Liabilities + Stockholder's Equity | | | | balance remains. This is how we keep track of |
| Stockholder's Equity = Assets - Liabilities | | | | the changes occurring in our business's financial |
| Liabilities = Asset - Stockholder's Equity | | | | picture. This whole process is referred to as dual |
| Yes, all of these are one simple equation. Just a | | | | entry accounting. |
| bunch of different variations, to say the same | | | | People generally get confused over a little |
| thing. Always in balance, always able to provide | | | | accounting trick. Basically, it is how we develop an |
| information. The accounting equation is able to | | | | income statement. All accounting information is |
| provide tons of information. By breaking this | | | | used to effect the balance sheet. The income |
| equation out further accountants, financial analysts | | | | statement is created by separating a portion of |
| and banks come up with more complex ways to | | | | the entries into an income and expense accounts. |
| evaluate a company. For instance assets can be | | | | Since, the offsetting side to these accounts |
| broken into current assets and long term assets. | | | | usually have an effect on an asset or liability. |
| By doing this the greater the ability to to evaluate | | | | The culmination of these income sources and |
| key financial measure like liquidity. Liquidity ratios | | | | expenses are collected in retained earning at the |
| answer a simple question, "Does X Company | | | | end of the accounting period. The whole time |
| have enough money to pay the bills?" A simple | | | | being offset by assets and liabilities. The net |
| and vital question to answer. | | | | effect of all the entries made to expense and |
| Now that you understand the power of the | | | | income accounts relates to the amount put into |
| equation let's discuss debits and credits. To | | | | retained earnings, which is in balance with assets |
| understand debits and credits focus on the | | | | and liabilities. |
| equation when it is stated: | | | | This allows for balance and difference to co-exist. |
| Assets - Liabilities - Stockholder's Equity = 0 | | | | Obviously, you want to be able to tell what |
| Debit and credits ensure that the equation is | | | | you've earned so take expenses from income |
| always in balance. Most people think of a debit and | | | | and that positive number (hopefully) leftover is |
| credit as a positive or a negative a left or right. | | | | your profit. The difference. In the end of the day |
| Before you know it your lefts and rights are all | | | | the credit to income eventually turns into a credit |
| mixed up and you find yourself in a tangled mess. | | | | to retained earnings increasing what the owner's |
| They are just two opposites that offset each | | | | portion of the balance sheet. |
| other when on the same side of the equation. | | | | Bring accounting down to the level of simple |
| Debit and credit most always equal each other. | | | | concepts. Accounting is the documentation of a |
| This creates a balance of the equation. They allow | | | | transaction that is it, don't over-complicated the |
| the parts of the equation to change but the result | | | | process. |
| to be the same, zero. | | | | |