Understanding Accounting

To understand accounting you must understand the basics which are debit and credit. Debit and credits are used to group the accounts. To understand debit and credit you must understand the equation A=L+C or assets = liabilities + capital. An increase in assets means an increase in debits. Credit is a deduction to assets. In liabilities and capital, the opposite is true. An increase in credit means an increase in liability and capital.

Debit entries are deducted to liabilities and capital. In order to understand the A=L+C equation, you need to understand what are assets, liabilities and capital. Those that fall under the assets are accounts that are considered the resources used by business such as cash, accounts receivables, buildings, equipments and others. Liabilities are what the business owes such as accounts payable, accrued interest payable and others. Capital is the investment used to acquire or produce assets. Accounts under assets, liabilities and capital are found in the balance sheet.

Income statement refers to the income earned by the business in the course of its operations. Income statement requires sales and cost of sales. Sales pertain to the gross sales of the business. Gross sales deducted by the cost of sales would arrive at the net sales or the net income before other income and tax. The amount arrived at in net income after tax could be used as the capital of the business which leads us back to the equation A= L+C. This equation serves as the core of accounting.