Understanding Accounting Concepts

Accounting is basically information, and thisNamely, your assets (now $5000) equal your liabilities
information is published periodically in business as a($0) plus your equity ($5000). See how the two sides
profit and loss statement, or an income statement.balance out? This is the basis of accounting.
A necessary part of any business is knowing whereAs you can probably see, the use of accounting will
all your money is being spent. Accounting principlestell you exactly how much money you have, how
are designed to accommodate this need in anmuch you owe and how much your business is worth
organized fashion. To the untrained eye, it may lookat any given time. It is important to know these
like pandemonium, but it really is simple.things for many reasons. Primarily for tax purposes
The principles of accounting are as follows: Accountsand taking care of monetary responsibilities in a
are divided into three types, namely assets, liabilitiestimely fashion.
and equity. Each account type has it's own properties.Accounting used to be done by hand using "T"
The accounts can be represented as simple "T"accounts, debits and credits or ledger books. While
accounts with a left and right side separated by athese methods worked and were functional, the
vertical centerline. All you need to do is make a largeadvances of the Internet and computers have
T. Each side of the "T" will record increases orgreatly streamlined the accounting process. Complex
decreases in that account balance in the form ofsoftware is available that allows you to make your
debits or credits. Debits are always on the left sideentries and track your accounts in minutes.
while credits are on the right.Accounting software is simple to use and while no
TIP: Since the words "right" and "credit" have R's inprevious experience is necessary, it does help to
them, that's how you can remember this.have some background knowledge in accounting.
Asset accounts use debits as increases and creditsThese pieces of software will allow you to print
as decreases. Liability and equity accounts are thedocuments detailing specific transactions, financial
exact opposite.reports, print checks and some even feature the
For every debit, there must be a correspondingability to send payments to creditors via E-check
credit. This is so that there is a balance that can beonline. The real advantage of using this software is
tracked. All this sounds a bit confusing, but it really isthe minimum amount of paper files you need to
simple and it is an absolute necessity for any personhave. Everything is located on storage devices like
doing business anywhere. Take the following example:CDs, floppy discs (old) or a separate hard drive
Suppose you get a loan of $5000 to open yourdesigned to hold this information.
business. That cash is an asset of your company. SoAll of your important information is at your fingertips,
you would enter a $5000 debit to the asset accountyou always know exactly where you stand and you
and a corresponding credit to an equity account. Ifwill be able to report pertinent information should
you apply the accounting equationUncle Sam come around asking for records.
(assets=liability+equity), you will see how that works.