Financial Accounting Basics: Part 1 – Getting Started
Financial Accounting Basics: Part 2 – Double Entry Accounting
Financial Accounting Basics: Part 3 – Post to the General Ledger
Financial Accounting Basics: Part 4 – Unadjusted Trial Balance
Financial Accounting Basics: Part 5 – Posting Adjusting Entries
Financial Accounting Basics: Part 6 – Adjusted Trial Balance
Financial Accounting Basics: Part 7 – Creating Financial Statements
Financial Accounting Basics: Part 8 – Post Closing Entries
This article is an introduction to double entry method for financial accounting and your journal entries.
What is Double Entry Accounting?
The first thing you need to know is that Financial Accounting is built on one simple idea; Assets = Liabilities + Equity. The things that your business owns are equal to the things your business owes. We call the things your business owns Assets. These are the valuable resources that your business owns, things like cash and inventory. On the other side of this formula, we use two different words to describe the things your business owes. Liabilities, which are what the company owes to third-party suppliers or lenders, these are your obligations that you will need to fulfill in the future. The other is Equity, which is the owners interest in their company, in this case BIG News. This represents your claim on the business’s net assets. So:
Assets= Liabilities (For Third Parties) + Equity (For Owners).
This little formula is called ‘The Accounting Equation,’ and it has big implications. The foundation of double entry accounting is the theory that there are at least two equal and opposite sides to every transaction, and because this accounting equation is always true, it must always balance.
Debits and Credits are the words we use to reflect these two sides. Credits represent the sources that economic benefits flow from and Debits represent the destinations that it flows to. Nowadays almost every large business in the world uses double entry accounting and so does BIG News. In this case you debit cash by $30,000 to increase your assets and you credit subscription revenue by $30,000 to record your income.
In summary, the advantage to double entry accounting is that following the equation [Assets= Liabilities + Equity], your final number should always equal the same on each side, if it doesn’t than something is amiss and quick review should help locate the problem.
This concludes part 2 of our 8 part series on Financial Accounting for Start Ups and Entrepreneurs, learn more about Financial Accounting in Part 3 where we discuss Posting to the General Ledger to store all your financial data.