Posted by Managementguru in Accounting, Financial Accounting
on Feb 14th, 2014 | 0 comments
Double Entry System of Book Keeping Accounting is not to be feared Accounting is a subject that is intertwined with our day-to-day lives yet people think it is quite a complicated subject to deal with. The fancy of the subject is such, that many of us fail to understand that it is quite simple, un-complicated and all it talks about is balance. Rather than barging into equations that make us grip with fear, let us start with the basic question of WHAT=WHO? “What” deals with whatever we have in hand or otherwise ASSETS and “Who” deals with the claims, both other’s claims and our own claims on the product we have in hand. Other people’s claims are known as LIABILITIES and our own claim on the product is called Owner’s equity. Now if we take “WHAT=WHO”, it can be translated into the following equation ASSETS= LIABILITIES+OWNER’S EQUITY Accounting: Get Hired Without Work Experience UNDERSTAND WHAT = WHO What = Who Stuff = Who Assets = Who Assets = Who Has Claim Assets = Claims Assets = Other People’s Claims + My Claims Assets = Liabilities + My Claims Assets = Liabilities + My Equity Assets = Liabilities + Owner’s Equity Simple Equation to Remember There are two types of claims: other people’s claims and my claims. Assets = Other People’s Claims + My Claims Claims are also referred to as equities. Assets = Other People’s Equities + My Equity. Accountants have a fancy word for other people’s equities. These are known as liabilities. Assets = Liabilities + My Equity Because I am the owner, we will call My Equity Owner’s Equity. Assets = Liabilities + Owner’s Equity This is the formal equation of accounting. The structure of accounting is based on this one perspective. Accounting students memorize it. And try to decipher it. You are way ahead of the game because you understand that what = who! WHAT ARE ASSETS AND LIABILITIES Assets are on the left of the Big T. Asset accounts increase with debits. Liabilities and Owner’s Equity are on the right of the Big T. They increase with credits. Income ultimately increases owner’s equity so it behaves like owner’s equity: it increases with a credit. Expenses increase with debits. The best way to improve your expertise in accounting procedure is to practice; in due course your hand movement and thought process start synchronizing. Examples of Asset accounts – Vehicles, Furniture, Cash Examples of Liabilities accounts- Accounts payable, Owner’s equity Purchasing a TV- Example ASSETS (what) = LIABILITIES + OWNER’S EQUITY (who) Say if you invest Rs.5,000 as down payment from your end and take a loan of Rs.20,000 from the bank to purchase the product. Now, the bank has a claim on your asset to the extent of Rs.20,000 and your claim is Rs.5000. Here liability is Rs.20,000 and Owner’s equity is Rs.5,000. On the asset side we have a TV worth Rs.25,000 You can see that the value of the asset is equal to the value of liabilities, i.e., what = who. ASSETS = LIABILITIES + OWNER’S EQUITY 25,000 = 20,000 + 5,000 Just how you see a hand with five fingered palm on one side and five fingered nails on the other side, this accounting equation has two different perspectives to strike a balance between assets and liabilities. The Big Balancing ‘T’ The Big Balancing ‘T’ BIG “T” FOR PRODUCT PURCHASE WHAT (ASSET) VEHICLES (Rs.25,000) = WHO (LIABILITIES) ACCOUNTS PAYABLE (Rs.20,000) + PAID IN CAPITAL (Rs.5,000) Do I Debit or Credit? When we receive cash for completing a consulting job we know that cash has increased so we debit cash. The corresponding account...