2 Million Dollar Bills

I have discussed the importance of accounts and bookkeeping in my article The Importance of Accounting and Bookkeeping for Entrepreneurs I feel that the following article by Russell Tyson he manages to provide a basic understanding of accounts and bookkeeping and does so in a manner, which is easily understood

 Basic accounting and bookkeeping are things people do not know enough about. And by not teaching yourself this important discipline you cheat yourself out of knowledge that can assist you in all aspects of your life, both professional and personal.And if you think that accounting is complex, you’re wrong. Although there are some terms you may not understand, the actual math of basic accounting is just an applied version of the math you learned at eight years-old.

There are only two basic concepts you need to know:

1. The Accounting Equation

Asset = Liabilities + Equity is the equation at the base of all accounting. Every financial transaction can be understood using this equation.
2. Double Entry Bookkeeping

This is the system that ensures the accounting equation always remains in perfect balance.

By the way, if it would help, here is a basic definition of accounting:

Accounting is a system of recording and summarizing financial transactions in such a way that they can later be analyzed or used to communicate with others.

Hopefully, this provides a bit better understanding of what accounting actually is. Because accounting actually really simple. It is just a system that bundles and packages financial information so that it can be used for a variety of individual or business purposes.

Now here’s more of what you need to know about the accounting equation and double entry bookkeeping.

The Accounting Equation

Earlier in the article you learned that the basic accounting equation is Asset = Liabilities + Equity. What this really means is that, from an accounting perspective, the value of things you have (assets) is equal to the value of what you owe for the things (liabilities) plus what you, as weird as it sounds, the value you don’t owe for (equity).

Here’s how the accounting equation works in practice:

Imagine you buy a car (an asset) for $30,000 dollars. If you borrowed $10,000 (a liability) and paid the balance with your own savings, here is what the accounting equation would look like: $30,000 car asset = $20,000 car loan liability + $10,000 equity in the car.

Transactions can be a lot more complicated than this, but the principles remain the same.

Double Entry Bookkeeping

Double entry bookkeeping is closely related to the accounting equation. In fact, it is double entry bookkeeping that makes the accounting equation always remain in balance.

Here’s how it’s done.

Remember learning algebra in school? Maybe, maybe not. Anyway, do you remember the rule that what you do on one side of an equation has to be done on the other side? Yes, no?

Well, that’s all the ‘double’ in double entry accounting means. When you put an increase of x dollars on one side, you have to put an increase of x dollars on the other side as well- two entries. That’s the rule. In the double entry bookkeeping system, there are at least two entries for every transaction.

Look again at the car example above. See that on one side there is $30,000 of car assets and on the other is a $20,000 car loan and $10,000 of equity? This transaction has three entries yet it still isn’t very complex. In double entry bookkeeping all you do is look at what happened in a transaction and ensure that you make proper sense of it.

In the car example, you know what happened. A car was purchased for $30,000 dollars and a $20,000 loan was taken out to pay for it. The other $10,000 was paid by you. 30 = 20 + 10. Simple.

Double entry bookkeeping has some nuances that you can learn later, but those are the basics.

Now…

Learning these two concepts wasn’t so hard was it?

Basic knowledge of accounting and bookkeeping is something you should have. By making an effort to learn this stuff, other money, business, and finance related things will start to make a lot more sense. And that can only be beneficial to you. Tyson Russell is the founder of Learn Basic Accounting.com. Tyson is a part-time accounting professional and part-time stay-at-home-dad. He simply wants to help people learn accounting in an enjoyable manner.