Accounting Crash Course
This page is meant to be an accounting crash course for free. This isn’t everything that you need to know about accounting, but is a basic accounting course. This like taking an accounting 101 course on a budget.
Let’s get right into it.
The basic accounting equation is Assets = Liabilities + Equity. Assets, Liabilities and Equity are all things that you would see on a balance sheet.
I’m just telling you that equation because if you ever meet an accountant, they will definitely be bringing that up. However, you just really need to know that a balance sheet needs to balance. That equation is a way to make sure that you balance it out.
We can also walk through a simple example. For example buying some property. In order to buy property, you need to spend cash. Let’s say you buy $500 worth of property with cash. This would only effect the assets side if the equation.
|Assets =||Liabilities +||Equity|
If you purchased property with credit for $500, this would have an impact on assets and liabilities. Assets would increase by $500 and liabilities would increase by $500. Your equation remains balanced.
|Assets =||Liabilities +||Equity|
In order to book entries onto a balance sheet, you need to make entries. They are typically called journal entries.
Debits & Credits
Those journal entries are made up of debit & credits. Debits and credits are something that you will also hear a lot if you talk to accountants.
Normal Debit entry accounts
Normal Credit entry accounts
The general ledger is where all the journal entries are recorded. It can also be called many other things. This is where all the transaction level detail is held in a company’s accounting system.
The general ledger is closed out and creates something called a trial balance. The trial balance should have all the company’s account codes, account descriptions and final balances. It should also have an accounting period for which it covers. It can be a month, quarter, year, etc.
Everything should balance
An important principle about debits and credits is that they also need to balance. This means you can’t book a journal entry of 100 to a debit and nothing to the credit. The credit side must also be 100. This doesn’t meant that the number of entries must be the same. You can have different quantities of debits and credits as long as the total on each side of the entry match up. Debits are on the left side of the entry and credits are on the right side.These are all just basic accounting concepts. You can look into each of these more if you want to.
Another common thing you will hear in accounting is financial statements. Financial statements are what matters. This is what banks and wall street care about. They don’t want to look through your transactional data. They want to see how much money you are earning, and then they want to see how you are managing that money.
You can think of this as something similar to your bank statement or credit card statement.
How much money you are earning is reflected on your income statement.
How well you are managing your money is your balance sheet.
Not everyone thinks of accounting this way, but it is the way that I look at accounting. Who cares how much revenue a company is making if they are only using someone else’s cash to do it. If they are using someone else’s cash, then that is what is called a liability. For example, a bank might loan you money. That would be a liability. You can take that money and invest in a certificate of deposit. That certificate would probably pay you less than the interest you are paying to the bank. In this case, you would have revenue, but you would also have expenses greater than your revenue. This could also be seen on your balance sheet. Your liabilities would be greater than your cash or assets if this was the only activity you had in your business.
Another good examples is silicon valley. They are also provided cash in the form of investment. When they get this cash, they book an asset and equity. This why silicon valley refers to their investments as equity. However, if the company goes and spends all that cash on things that don’t turn a profit, their assets will go down while their expenses will go up. This can decrease the equity of the company.
You can begin to see how all these financial statements work and how everything balances and works in the accounting world. There are many complex components of financial statements, but I will just be covering some of the basic components of a financial statement.
What are some common components of an income statement?
Revenue – Revenue is how much money you are earning or bringing into your business. Revenue is commonly booked as a credit entry.
Expenses – Expenses are the cost of running your business. This could be marketing expenses, taxes, cost of goods sold, etc. These are commonly booked through a debit entry.
Net income – this is revenue minus your expenses. It’s just math. It is not an entry.
What are some common components of a balance sheet
Assets – These are things that you have earned through income or have already been paid. Common assets are cash, property, prepaid expenses, prepaid insurance and accounts receivable.
Liabilities – These are things that will be expenses. They can also be things that you received in advance but have not yet been earned. Common liabilities are accounts payable, notes payable, income taxes payable, unearned revenue etc.
Equity – Equity accounts are accounts that contributed to the company’s assets. Common equity accounts are common stock, preferred stock, additional paid in capital, accumulated other comprehensive income, and retained earnings.