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Basic Accounting

Accounting

Accounting Basics

Accounting

Let's spend a little time discussing why we need to know this simple equation and begin to understand how it works.

This is The Basic Accounting Equation

A s s e t s=L i a b i l i t i e s+O w n e r ' sE q u i t y

W h a tac o m p a n yo w n sm u s ta l w a y se q u a l( = ) w h a ti to w e st oi t sc r e d i t o r s p l u s( + )w h a ti to w e st ot h eo w n e ro ro w n e r s

The DEBIT - CREDIT Rule Each of the accounts in a Ledger will have a Debit Column and a Credit Column. Debits and Credits increase or decrease amounts on a ledger page account without having to use a plus (+) or minus (-) sign. No matter what - always DEBIT on the LEFT and CREDIT on the RIGHT. This basic rule never changes. _____________________________________________________

"T" Accounts
Notice in this graphic that DEBIT is on the LEFT and that CREDIT is on the RIGHT in each of the "T" s.
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Again, always DEBIT LEFT and CREDIT RIGHT

"T" Accounts Expanded

Now that we know that we always debit on the left and credit on the right we can begin to discuss how we INCREASE and DECREASE the balances in accounts. The ( + ) sign means INCREASE and the ( - ) sign means DECREASE. Note that when you cross over the ( = ) sign you reverse the way accounts increase and decrease.

Assets

To INCREASE ( + ) the balance in Asset Accounts you DEBIT To DECREASE ( - ) the balance you CREDIT To INCREASE the balance in Liability Accounts you CREDIT To DECREASE the balance you DEBIT To INCREASE the balance in Owner's Equity Accounts you CREDIT To DECREASE the balance you DEBIT

Liabilities

Owner's Equity

T's within T's

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For Single Proprietor and Partnerships

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For Corporations

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The next step is to fill in these Ledger pages using the amounts in the General Journal and show how Posting to Ledger pages is done.

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Thus

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Next we will make a Trial Balance to be sure that all the different accounts are in balance.

Thus

The concepts learned here will help you understand what's happening behind the scene when using various accounting software programs. The Chart of Accounts is simply a list of accounts. For now, accounts in the Chart of Accounts can ultimately be plugged into the Basic Accounting Equation.

A s s e t s=L i a b i l i t i e s+O w n e r ' sE q u i t y

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