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