Accounting Basics

Terms you need to know

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Ledger: A group of accounts. General Accounting Equation: Assets = Liabilities + Owner’s Equity Assets : Items owned by the business that have a future worth Liabilities: Debts of the business (or what the business owes) Owner’s Equity: Net worth of the business (after deducting liabilities from assets) Expenses : costs that are incurred running the business (e.g. rent, hydro) Credit: recorded on the right side of a T-Account Debit: recorded on the left side of a T-Account T-Account: a simple account form used to demonstrate relationships between accounts and to show recording of Credits and Debits

Types of Accounts
Category Types of Accounts Cash Accounts Receivable Supplies Equipment Automobiles Land Buildings Prepaid Insurance Prepaid Rent Category Types of Accounts Accounts Payable Notes Payable Long Term Notes Payable Rent Payable Salaries Payable Category Types of Accounts Owner’s Capital Fees Earned (Revenue) Unearned Fees Owner’s Withdrawals Rent Expense Telephone Expense Utilities Expense Insurance Expense Salaries



Owner’s Equity

but also to indicate decreases to certain groups of related accounts.Expense NOW. Alternatively. Accounts Payable). and 2.increases $1000. the bank debits our accounts. the account is Debited. with less regularity than we withdraw). handle debits and credits differently. decrease equity.decreases Liability accounts (i. forget about the banking system.00. Let me explain these two points.e. If we were to increase the Cash account of our business by $1000. cards which directly debit our accounts upon making a transaction. Credits and debits are used not only to indicate increases. Accountants have developed a system for crediting and debiting that is quite different from that of their banking cousins. most of us now own and frequently use ‘Debit cards’. Owner Equity accounts such as Expenses and Owner Withdrawals. back to the accounting system. you need to do the following: 1. In fact. Ex. Ex.00 Credit side . However. Now. When we withdraw money from our accounts. Accounts Receivable) are increased with a DEBIT and decreased with a CREDIT! The exact opposite to what happens with our bank accounts. Ex. . normally are only debited because expenses and withdrawals. the bank credits our accounts to show the increase. Accounts Payable T-Account Debit side . Let me demonstrate. we would record it as follows: Cash T-Account Debit side . remember that accounting is a "building block" type of course.increases Owner Equity accounts such as Capital and Revenue increase with Credits and decrease with Debits. Asset accounts (such as Cash. in order to proceed successfully with accounting. On the other hand. for the most part. when we add money to our accounts (unfortunately. on the other hand. When a Liability account is decreased by a specified amount. Most of us have bank accounts and are familiar with the system of withdrawing and depositing money. the account is Credited when the balance is increased.decreases Credit side .

One last thing. Therefore. accounting is a ‘building block’ type of course.advice which conveniently leads me to my next point. it will only become more difficult if you do not carry a fundamental understanding of accounting terminology. It will not go away. it is important that you spend the time necessary to conquer and master the basics of accounting in the first few chapters of your text. a word of advice. The more accounting problems that you attempt and successfully complete.increases Credit side . practices.decreases Don’t start to fret yet. Mastering the art of debits and credits takes a little bit of patience and a lot of practice.Rent Expense T-Account Debit side . but it may become "do-able". What is learned in the first few chapters lays the foundation for the next few chapters and so on and so on. As previously mentioned. and principles with you. the better. do all of your homework all of the time . These rules have been formulated to standardize and regulate accounting practices. By this I mean accounting is progressive. accounting is a very structured discipline governed by set rules and principles. accounting may not become entirely enjoyable to some of you. If you take the time to understand and learn the basics of accounting. In fact. . Thus. not to make your introduction to accounting difficult.

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