Accounting is somewhat of a foreign language to me because I am not very good at organizing and balancing my expenses verses my income but I do own a car as well as have a mortgage and all the bills that follow so it does get taken care of.
The place to begin when attempting to explain the basics of accounting is by follows a simple equation were the assets of the company (cash, equipment, supplies, any type of capital, furniture, and banking accounts) must be equal to the liabilities (bills, wages f employees, mortgages, and loans) plus owners/shareholders equality, which is the profit left over for the owner(s) (Editorial Board [Deed], 2012, p. 10). In simple form Assets=Liabilities+Unreliability, it is very important that the two sides are always even.
Debits and credits are to equal the same for a given amount such as when a new piece of equipment is to be purchased for $500. 00 the amount payable is considered a liability which is a credit but the company now has a new asset worth he same $500. 00 as a debit, the plus $500. 00 debit= plus $500. 00 credit. The auto body shop is in need of some products such as a new paint sprayer ($275), paint ($100), primer ($50), and clear coat ($50) totaling $475 for new products.
Example of Journal entry for balance sheet Equation: 475 of new assets= 475 the cost of product + O equality Date Description Feb. 12 Supplies Cash Debit Credit 475 The body shop is able to now complete 5 vehicles paint Jobs for $250, $225, $200, 230, and $240 totaling $1,145. Example of Journal entry for income statement New equation: 1 , 145 (amount paid to shop) = 475 (supplies) + 670 (take home profit) Feb. 12, 2013 Revenue- 1,145 Expenses- 475 Net Income- 670 At any given moment the auto body shop will be able to open the books to view how the company is doing financially.
By these two entries it is easy to see the final amount made by the company as well as what the money was used for. The balance whet is a Journal that keeps a daily log of all financial transactions and the income statement shows the amount of profit that was either made or lost.