Fundamentals of Accounting
Accounting Equation, Journal Entries & Financial Statements
In This Lesson
The Accounting Equation
Assets = Liabilities + Owner's Equity
This equation must always balance!
Assets
Resources owned by the business
- Cash
- Accounts Receivable
- Inventory
- Equipment
- Land & Buildings
Liabilities
Amounts owed to others
- Accounts Payable
- Notes Payable
- Loans Payable
- Unearned Revenue
Owner's Equity
Owner's claim on assets
- Capital (Investment)
- Revenues (+)
- Expenses (-)
- Drawings (-)
Expanded Equation
Assets = Liabilities + Capital + Revenue - Expenses - Drawings
Debit & Credit Rules
Remember: Debit is the LEFT side, Credit is the RIGHT side of an account. Every transaction has at least one debit AND one credit that are equal.
DEBIT Increases (+)
- A Assets
- E Expenses
- D Drawings
Memory tip: "DEA" or "ADE"
CREDIT Increases (+)
- L Liabilities
- O Owner's Equity
- R Revenue
Memory tip: "LOR" or "LORE"
| Account Type | Normal Balance | To Increase | To Decrease |
|---|---|---|---|
| Assets | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Owner's Equity | Credit | Credit | Debit |
| Revenue | Credit | Credit | Debit |
| Expenses | Debit | Debit | Credit |
Journal Entries
The Accounting Cycle
- Analyze transactions
- Journalize (record in journal)
- Post to ledger
- Prepare trial balance
- Adjusting entries
- Financial statements
- Closing entries
Journal Entry Format
Date: March 15, 2024
Cash
10,000
Service Revenue
10,000
To record revenue earned for services
Example: Purchased Equipment with Cash
Equipment (Asset +)
50,000
Cash (Asset -)
50,000
Example: Paid Utilities Expense
Utilities Expense (+)
5,000
Cash (Asset -)
5,000
Financial Statements
1. Income Statement
Shows profitability over a period of time
Revenue
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Net Income (or Net Loss)
2. Balance Sheet
Shows financial position at a specific date
Assets
- Current Assets
- Non-Current Assets
Liabilities + Equity
- Current Liabilities
- Long-term Liabilities
- Owner's Equity
3. Statement of Changes in Equity
Shows changes in owner's investment
Beginning Capital
+ Additional Investment
+ Net Income (or - Net Loss)
- Drawings
= Ending Capital
4. Statement of Cash Flows
Shows cash inflows and outflows
- Operating Activities: Day-to-day business operations
- Investing Activities: Buying/selling long-term assets
- Financing Activities: Loans, owner investments, dividends