The 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
3️⃣ Debits & Credits
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
4️⃣ Cash vs Accrual
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..