Wednesday, 26 June 2013

All you need to know about debit, credit and the accounts equation

Do you know why accounting is so authoritative? This is because it is based of a simple accounting equation:

Assets = Liabilities + Stockholder's Equity

Assets-Liabilities-Stockholder's Equity = 0

Stockholder's Equity = Assets – Liabilities

Liabilities = Asset - Stockholder's Equity

All the equations mentioned above are one simple equation. With the help of the accounting equation, you can get tons of information. When you break this equation, the financial analysts, accountants and banks come up with complicated ways to assess a company. For example, you may break the assets into present assets and also long term assets.

Once you are aware about the power of the equation, read on to know about what debits and credits are all about. To understand them in a better way, go through the equation carefully that has been stated below.

Assets - Liabilities - Stockholder's Equity = 0

Debit and credits guarantees that the equation is in balance always. Most people consider a debit and a credit as a positive or a negative thing. Before you know about them properly you find yourself in a confused mess already. They are just two opposites that balance each other when being on the same side of the equation. Debit and credit always equal each other. This maintains a balance of the equation. They enable the parts of the equation to alter but the result still remains zero.

Zero provides the function of a check figure. A credit always equalizes a debit creating no net affect. Although the numbers change, the balance still remains the same. This is how you can keep a track of the changes that takes place in the financial picture of your business. This entire procedure is known as dual entry accounting.

Most often it is seen that people get confused over a little accounts trick. In simple words, it is how you can develop your income statement. You need to know that all the information related to accounts is used to bring an effect on the balance sheet. The income statement is made by dividing a part of the entries into the income and expense accounts.

The conclusion of the income sources and expenses are collected in preserved earning at the end of the accounts period. The net effect of all the entries made to income and expense accounts relates to the amount that is kept into the retained earnings, that is in balance with the assets and the liabilities. Thus, it can be said that accounting is just the documentation of a deal that you have done.

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