The Core Accounting Equation and Elements
The foundation of double-entry accounting is the Accounting Equation:
$$\text{Assets} = \text{Liabilities} + \text{Equity}$$
Term Definition Examples
Assets Resources owned by a business that Cash, Accounts Receivable (money
are expected to provide future owed to you by customers), Inventory,
economic benefit. Equipment, Buildings.
Liabilities Obligations (debts) of a business to Accounts Payable (money you owe to
outside parties that must be settled in suppliers), Salaries Payable, Loans,
the future. Unearned Revenue (money received
for services not yet delivered).
Equity The owner's residual claim on the Owner's Capital, Common Stock,
assets after all liabilities have been Retained Earnings.
paid. It represents the value invested
by the owners plus retained earnings.
Revenue The money earned from the sale of Sales Revenue, Service Revenue,
goods or services. It increases Equity. Interest Revenue.
Expenses The costs incurred by a business to Rent Expense, Utilities Expense,
generate revenue. It decreases Equity. Wages Expense, Cost of Goods Sold
(COGS).
📑 Key Financial Statements
Accounting records are summarized in financial statements that present a company's financial
position and performance.
● Balance Sheet (Statement of Financial Position):
○ A snapshot of the company's Assets, Liabilities, and Equity at a specific point
in time.
○ It demonstrates that the Accounting Equation holds true.
● Income Statement (Profit and Loss or P&L Statement):
○ Shows a company's financial performance over a period of time.
○ Calculates Net Income (Profit) by subtracting Expenses from Revenue.
$$\text{Revenue} - \text{Expenses} = \text{Net Income}$$
● Statement of Cash Flows (Cash Flow Statement):
○ Tracks the movement of cash (inflows and outflows) over a period of time,
categorized into Operating, Investing, and Financing activities.
Transaction Terms
These terms relate to recording and managing day-to-day financial events.
Term Definition Note
Accounts Money owed to the business by Opposite of Accounts Payable.
Receivable (AR) customers for sales made on credit.
(An Asset)
Accounts Money the business owes to its Opposite of Accounts
Payable (AP) suppliers or creditors for purchases Receivable.
made on credit. (A Liability)
Debit (Dr) An entry on the left side of an Generally increases Assets and
account. Expenses; decreases Liabilities,
Equity, and Revenue.
Credit (Cr) An entry on the right side of an Generally increases Liabilities,
account. Equity, and Revenue;
decreases Assets and
Expenses.
General Ledger A complete record of all the financial Used to prepare all financial
(GL) transactions in a business's accounts. statements.
Journal Entry The first recording of a business Ensures that Debits always
(JE) transaction, showing which accounts equal Credits (Double-Entry
are Debited and Credited. Bookkeeping).
Depreciation A systematic way of reducing the Allocates the cost of the asset
value of a long-term tangible asset to the periods in which it is
(like equipment or a building) over its used.
useful life. (An Expense)
Accrual Basis Recognizes Revenue when earned Provides a more accurate
Accounting and Expenses when incurred, picture of a company's financial
regardless of when cash is performance.
exchanged.
Cash Basis Recognizes Revenue and Expenses Simpler, but less accurate for
Accounting only when cash is received or paid. measuring performance.