LIABILITY
OtherEQUITY
-1000
-400
0
0
0
0
1/2/97
1/3/97
1/4/97
loan
Jones contract
purchase
400
750
-500
0
We can know many things by looking at the totals on the bottom line of
figure 5:We know INCOME is -$750 and EXPENSE is $500, the sum of which—
the Profit—is -$250; this is the amount by which EQUITY has been increased
(now it is -$1,250). We also know that ASSET is $1,650 (this would be the bank
account balance, if that were the only ASSET); and $400 is owed to someone
other than the owners of the entity. We can check that the amount of EQUITY
the owners have in the entityis $1,250, by mentally paying off the loan:we would
subtract $400 from $1650, and have $1,250 remaining, which is the EQUITY, the
amount owed to the owners of the entity. We see that the horizontal line of
account balances sums to zero; this is the Trial Balance, a term you may have
heard accountants and bookkeepers use. And what of the accounting axiom that
Assets = LIABILITY? We see that “1650 = 400 +1000 +750 -500” conforms to
the axiom, and that the values on the right-hand side of the equation appear in
their familiar form, with their signs reversed.
That is the essence of accounting. All that remains is building on this
foundation. Such additional issues include:1). further subdividing the Account
categories to reflect the financial activities of the entity; 2). addressing
compound entries, in which more than two entries are made, but all still sum to
zero, as always; 3). compiling a catalogue itemizing how various transactions should
be handled; 4). a discussion of accounting periods and accruals; 5). adding
different types of transactions, as they occur; 6). choosing a method to record
transactions; 7). a word on depreciation; 8). another word on taxation; 9).
arranging the Account balances (totals) into the customary financial statements;
and 10). a discussion of “T” accounts.
