Basic Accounting:

Making Sense of Your

Money
By: Ethan Carriedo
What is
Accounting?
The process of recording,
analyzing, and interpreting
financial information.
• Assets are resources that a business owns that are expected to provide
some future economic benefit to the business.
Liabilities represent the form of debt or
obligation(s) from a company.
 Equity represents the residual Is the portion of a company's value
amount in the assets of a company that belongs to its owners, also
after its liabilities are deducted. known as shareholders.
 The Equation

Assets = Liabilities + Equity

Assets are what the business owns,
Liabilities are what it owes, and
Equity is the difference between the
two
Double-Entry
Accounting

Every transaction has two equal and

opposite effects on the accounting
equation.
Debits increase assets and decrease
liabilities and equity, while credits do
the opposite.
Double-Entry • Under this system, your entire business is organized into individual
Accounting accounts.
 Basic Rules for
Debits and
Credits
The effects of debits and credits on accounts
depend on the type of account involved.
The basic rule for debits and credits is as
follows:

• Debit entries increase asset accounts and

decrease liability and equity accounts.
• Credit entries increase liability and equity
accounts and decrease asset accounts.
• Credit entries also increase revenue
accounts and decrease expense accounts.
 •When money enters a bucket, we record that as a debit
Debit •For example: if you deposited $300 in cash into your business
bank account you would debit it as it is an asset account.

Account Debit Credit

Cash 600
 •When money goes out of a bucket, we record that as a credit
Credit •For example, if you withdrew $600 in cash from your business
bank account you would credit it as it is an asset account.

Account Debit Credit

Cash 600
 How debits and • Let’s imagine that you want to get some extra cash for your
credits affect business. So, you take out a $1,000 bank loan, and you
increase (debit) your cash account by $1,000.
liability accounts
 How debits and
credits affect • But apart from adding $1,000 to your cash bucket, we would
also have to increase your “bank loan” bucket by $1,000.
liability accounts
 How debits and
credits affect
liability accounts
Account Debit Credit
Cash 1000
Your “bank loan bucket” measures
Bank Loan 1000 not how much you have, but how
much you owe.
How debits and credits affect equity
accounts

Let’s say your mom invests $1,000 of her own cash into your
company.
First, your cash account would go up by $1,000, because you
now have $1,000 more from mom.
How debits and
credits affect
equity accounts

That’s not the only bucket that

changes.
You mom now has a $1,000 equity
stake in your business, so the
bucket labelled “equity (Mom)”
also increases by $1,000.
 How debits and
credits affect equity
accounts
Account Debit Credit
Equity accounts don’t measure how
much your business has.
Cash 1000 They measure all the claims that
investors have against your business.

Equity 1000
(Mom)
 Example
• If you receive $1,000 cash from a
customer for a sale, you would
debit Cash (to increase the asset)
and credit Sales (to increase
revenue and to increase the equity
account.)
BALANCE SHEET

A snapshot of what a company

owns (assets) and owes
(liabilities) at a specific point in
time, as well as what's left over
for the owners (equity).
 INCOME
STATEMENT
Also know as P&L, shows how
much revenue a company
earned and how much it spent
over a specific period, and
whether it made a profit or a
loss.
 CASH FLOW
STATEMENT

Tracks the inflow and outflow of

cash from a company's
operations, investments, and
financing activities.
AND IF THAT’S TOO MUCH TO REMEMBER JUST…
“Debit all that comes in and credit all that
goes out.”
- Charles E. Sprague