Hi Class,

Please let me know specifically if there are problems you are having trouble understanding. If it is just the overall basic principles of accounting, we can go through them until you get the idea. Below is a brief overview:

The financial position of a company is measured by the following items: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Owner’s Equity (the difference between assets and liabilities)
The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other.

The accounting equation for a sole proprietorship is:

Assets = Liabilities + Owner’s Equity

The accounting equation for a corporation is:

Assets = Liabilities + Stockholders’ Equity

If a company keeps accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of a company’s accounts.

For example, when a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount. For instance, if the company borrows $10,000, Cash (a normal debit balance account) would be increased (debited, left side) for $10,000, and Notes Payable (this is a normal credit balance account) would be increased for $10,000 (credited, right side). The entry in the General Journal (the record of all entries) would look like this:

Debit Credit

July 5, 2010 Cash $10,000 Notes Payable $10,000

When a company purchases inventory for $5,000 cash, one asset will increase and one asset will decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double entry accounting.

The entry in the General