SCHAUM’S Easy OUTLINES
BOOKKEEPING AND ACCOUNTING
By Joel J. Lerner, M. S., Ph. D.
Assets, Liabilities, and Capital
Nature of Accounting
An understanding of the principles of bookkeeping and accounting is essential for anyone who is interested in a successful career in business. The purpose of bookkeeping and accounting is to provide information concerning the financial affairs of a business. This information is needed by owners, managers, creditors, and governmental agencies.
An individual who earns a living by recording the financial activities of a business is known as a bookkeeper, while the process of classifying and summarizing business transactions and interpreting their effects is accomplished by the accountant. The bookkeeper is concerned with techniques involving the recording transactions, and the accountant’s objective is the use of data for interpretation. Bookkeeping and accounting techniques will both be discussed.
Basic Elements of Financial Position:
The Accounting Equation
The financial condition or position of a business enterprise is represented by the relationship of assets to liabilities and capital.
Assets: Properties that are owned and have money value – for instance, cash, inventory, buildings, equipment.
Liabilities: Amounts owed to outsiders, such as notes payable, accounts payable, bonds payable.
Capital: The interest of the owners in an enterprise; also known as owners’ equity.
These three basic elements are connected by a fundamental relationship called the accounting equation. This equation expresses the equality of the assets on one side with the claims of the creditors and owners on the other side:
Assets = Liabilities + Owner’s Equity
The accounting equation of Assets = Liabilities + Owner’s Equity should balance after every transaction.
Debits and Credits:
The Double-Entry System
Preparing a new equation A = L + C after each transaction would be cumbersome and costly, especially when there are a great many transactions in an accounting period. Also, information for a specific item such as cash would be lost as successive transactions were recorded. This information could be obtained by going back and summarizing the transactions, but that would be very time-consuming. Thus we begin with the account.
An account may be defined as a record of the increases, decreases, and balances in an individual item of asset, liability, capital, income (revenue), or expense. The simplest form of the account is known as the “T” account because it resembles the letter “T.” The account has three parts:
1. the name of the account and the account number
2. the debit side (left side), and
3. the credit side (right side).
The increases are entered on one side, the decreases on the other. The balance (the excess of the total of one side over the total of the other) is inserted near the last figure on the side with the larger amount.
Debits and Credits
When an amount is entered on the left side of an account, it is a debit, and the account is said to be debited. When an amount is entered on the right side, it is a credit, and the account is said to be credited. The abbreviations for debit and credit are Dr. and Cr., respectively.
Whether an increase in a given item is credited or debited depends on the category of the item. By convention, asset and expense increases are recorded as debits, whereas liability, capital, and income increases are recorded as credits.