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The 4 Fundamentals to Accounting

4 Fundamentals to Accounting

If I had to sum up Accounting in just 4 things, it would easily be these:

1️⃣ Assets = Liabilities + Owners Equity

This one formula pretty much sums up accounting to me…and I imagine most would say the same

It may sound simple, but it is really so deep

Everything your business OWNS (assets)

Was funded by either CREDITORS (liabilities)

Or OWNERS (Equity)

And each of those things have so many examples, and so many things to expand upon

These refer to the Profit and Loss, Balance Sheet, and the Statement of Cash Flows

The Profit and Loss tells you how much you’re EARNING

The Balance Sheet shows you What OWN, vs OWE (to creditors & owners)

The Statement of Cash Flows shows you where you’re cash is going

All 3 of these are important…

Though the Profit and Loss + Balance Sheet are usually more popular

Since you can create a Statement of Cash flows using the data from those 2 statements

This is pretty much the language that accountants speak

Debits & Credits don’t actually mean anything…

They are just a way of describing whether something is INCREASING, or DECREASING

That means that depending on the type of account…

You can understand what is happening (IE the balance is going up or down), by hearing the words Debit or Credit

Cash basis of accounting means you are classifying all money in as income, and all money out as expenses (with some exceptions)…

Accrual basis of accounting means you are classifying income only when it’s EARNED, and classifying expenses only when they are INCURRED…regardless of cash activity

Accrual basis of accounting is much more popular for larger companies, and is required by GAAP

And this was the last part of the 4 Fundamentals to Accounting..


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