The principle equation for accounting is Owner’s Equity + Liabilities = Assets. Several business owners understand the vitality of these words, but they fail to know their meaning. If you mix up credits, debits, ledgers, and some journals, they had might start going in different directions. Most terms in accounting sound strange to people who have not had a chance to attend an accounting class. Below are approved approaches you can use to understand accounting terms.
- Group your account into liabilities and assets
An asset means an item that gets owned by the business, and its value involves cash. Examples of a business’s assets include vehicles, office equipment, crush, investments, buildings, and Inventories. On the other hand, Liabilities include debts that the company owes other businesses, vehicle loans, building mortgages, and credit card balances.
- Ensure that you understand the difference between Credit and debit
These terms get used in the representation of money that gets in and leaves the business. For instance, when there is an increase in an asset, it is debited, and when the same asset gets decreased, it has gotten credited.
For liabilities, the reverse of the process is correct; when the Liability increases, it is credited. When it gets decreased, it is, on the other hand, debited.
- Differentiate between General Ledger and the general journal
The general journal entails the recording of daily transactions. It holds the account balances, including payable accounts, receivable account, and equipment account.
- Develop an examination of the balance sheet and income statement
The balance sheet and income statement are the mirrors of how your business is doing health-wise. The income statement illuminates the expenses, the total sales, and the net loss or net profit. It gets paid monthly and yearly, but some businesses can also do it quarterly. On the other hand, the balance sheet illuminates all the balance is available for the business accounts and uses the accounting equation.
- Rules of accounting credit and debit
Credits and debits are a critical part of the system of accounting. They are used to record the transactions that a business makes and track its assets or liabilities. Anything valuable in terms of money is recorded as credit or debit, which also depends on the transaction type.
- Rules of debits
The debit is responsible for increasing the assets and decreasing the owner’s equity and liabilities. In case a business purchases a car, it increases the business assets through a debit to the vehicle’s account. In case the business bought a car with a loan, then the payment becomes a decrease to the statement of liabilities.
- Rules of Credit
Credit increase liabilities and decrease assets. From the above example of the car, if the business utilizes the money to pay the vehicle loan, the asset account’s cash decreases.
- How to use credits and debits
As you record entries, ensure that you list your debt first. Debit appears as the first entry in the general journal in the first line with the amount situated on the ledger’s left side. The credit account appears on the second line and the right side of the ledger.