Today’s post is by Technical Support Specialist and accounting guru Andrea Whitney.
Accounting, debits and credits… anyone scared yet? Well, I wanted to try to break it down so that accounting is not such a scary, almost foul word to people.
First, let’s look at the original basics: debit and credit. Sometimes people try to attach each one to a type of account, then get confused when they need to use the other item. Start by thinking of debit and credit as two columns on the same page: debit is the left column, while credit is the right. No reason to make this any more complicated than that.
Next, we want to build on this. Accounting always involves at least two entries, and it must be balanced, meaning the left column amount has to equal the right column amount. Think of it as accounting posture: you always want to be balanced.
Okay, so now that you know you have to have good accounting posture, next are the elements of that posture: accounts including Assets, Liabilities, Owner’s Equity, Income and Expense.
Upon knowing the names of accounts, we need to know what financial reports they reside on. The home of Assets, Liabilities and Owner’s Equity is the Balance Sheet. Income and Expense live in the Profit and Loss Statement (also known as the P&L or Income Statement).
The Balance Sheet has a balanced equation: Assets = (Liabilities + Owner’s Equity) or (Assets – Liabilities) = Owner’s Equity. When looking at the Balance Sheet, you should always see your total Assets match your total Liabilities plus your Owner’s Equity. The Balance Sheet is posted as of a specific date with the start date being the beginning of time.
The P& L Statement, meanwhile, is a results statement. Its basic premise is: take all your income, then subtract all of your expenses to get the net result. If you have more income than expenses, you have a net income; if you have more expense than income, you have a net loss. The P&L is a period of time statement, usually covering one calendar year. If your company has decided to start their financials on a different date than January 1st then the P& L would be in a fiscal year.
Okay, this should be enough to get your head spinning for now. 🙂 We will be diving even deeper into Accounting in the coming weeks, when the accounting series is continued.