Explaining Accounting Equations
Understanding liabilities and owners’ equity
Liabilities and owners’ equity are the two basic types of claims on the assets of an entity. The two-sided nature of the accounting equation is the basis for double entry accounting that records both sides of the entity’s transactions: what’s received and what’s given in the economic exchange.
Assets = Liabilities + Owners’ Equity
Knowing the rules for debits and credits
Here is your handy, at-a-glance table to help you remember the rules for debits and credits in accounting. Keep it by your calculator and never get confused again!
Financial effects of revenues and expenses
As you work your way through your accounting sums, remember the following simple accounting rule when it comes to calculating the financial effects of revenues and expenses:
Revenue = Asset increase (debit) or Liability decrease (debit)
Expense = Asset decrease (credit) or Liability increase (credit)