Accounting I -1.01Understanding the accounting equation, debits, and credits.

Accounting–Accounting:

• is the planning, recording, analyzing, and interpreting of financial information.

–Accounting System:

• is the process for providing financial information that will be useful to management.

Accounting Equation• Accounting Equation:

– shows the relationship among assets, liabilities, and owner’s equity.

It is most often stated as:

Assets = Liabilities + Owner’s Equity• The accounting equation must be in balance.• The total of the amounts on the left side must

always equal the total of the amounts on the right side.

Accounting Equation• Assets:

– The values of all things owned.• On the left side of the accounting equation.

• Liabilities:– The values of all claims against the assets.

• On the right side of the accounting equation.

• Owner’s Equity:– The amount remaining after the value of all liabilities is

subtracted from the value of all assets• On the right side of the accounting equation. • AKA: The owners investment in the business or the amount owed

by the business to the owner.

Accounting Equation

• T-Account:– An accounting device used to analyze transactions.

Assets = Liabilities + Owner’s Equity

Left Side Right Side

Debit Side Credit Side

Accounting Equation• Debit

– An amount recorded on the left side. – Debit comes from the Latin word debere and is

abbreviated with dr.

• Credit– An amount recorded on the right side.– Credit comes from the Latin word credere and is

abbreviated with cr.

Accounting Equation• Normal Balance:

– is the side of the account that is increased. – Two basic accounting rules about increases

and decreases of account balances are:• Account balances increase on the normal

balance side of the account.• Account balances decrease on the side opposite

the normal balance side of the account.

Accounting Equation• Assets are on the left side of the accounting

equation.– They have a normal debit balance.

• Liabilities are on the right side of the accounting equation.– They have a normal credit balance.

• The Owner’s Equity Account is on the right side of the equation.– They have a normal credit balance.

Accounting Equation• Transactions are analyzed by asking four questions:

– What accounts are affected?– How is each account classified?– How is each classification changed?– How is each amount entered in the accounts?