| Accounting is basically information, and this | | | | Namely, 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 where | | | | As you can probably see, the use of accounting will |
| all your money is being spent. Accounting principles | | | | tell you exactly how much money you have, how |
| are designed to accommodate this need in an | | | | much you owe and how much your business is worth |
| organized fashion. To the untrained eye, it may look | | | | at 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: Accounts | | | | and taking care of monetary responsibilities in a |
| are divided into three types, namely assets, liabilities | | | | timely 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 a | | | | these methods worked and were functional, the |
| vertical centerline. All you need to do is make a large | | | | advances of the Internet and computers have |
| T. Each side of the "T" will record increases or | | | | greatly streamlined the accounting process. Complex |
| decreases in that account balance in the form of | | | | software is available that allows you to make your |
| debits or credits. Debits are always on the left side | | | | entries 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 in | | | | previous 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 credits | | | | These pieces of software will allow you to print |
| as decreases. Liability and equity accounts are the | | | | documents detailing specific transactions, financial |
| exact opposite. | | | | reports, print checks and some even feature the |
| For every debit, there must be a corresponding | | | | ability to send payments to creditors via E-check |
| credit. This is so that there is a balance that can be | | | | online. The real advantage of using this software is |
| tracked. All this sounds a bit confusing, but it really is | | | | the minimum amount of paper files you need to |
| simple and it is an absolute necessity for any person | | | | have. 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 your | | | | designed to hold this information. |
| business. That cash is an asset of your company. So | | | | All of your important information is at your fingertips, |
| you would enter a $5000 debit to the asset account | | | | you always know exactly where you stand and you |
| and a corresponding credit to an equity account. If | | | | will be able to report pertinent information should |
| you apply the accounting equation | | | | Uncle Sam come around asking for records. |
| (assets=liability+equity), you will see how that works. | | | | |