There are three basic questions you ask as a manager—How much money came in? Where did the money go? How much money is left?
You’ll be a better manager if you think like an owner and keep the big picture in mind.
Because accounting can get dry, it helps to visualize the concepts to see the underlying dynamics. Thinking of cash as water is a useful tool to help understand the ways you can use an accounting system.
Double-entry bookkeeping keeps the books in balance.
We illustrate double-entry bookkeeping by writing transac- tions in T accounts. The left side of the T is always a debit. The right side is always a credit. Depending on where the account is classified within the equation ele-
ments, an increase or a decrease could be either a debit or a credit. For each transaction, the total debits equal the total credits.
The accounting system is based on a chart of accounts that establishes all of the pots where you’re going to record transactions.
The complete details of each transaction are recorded in
the general journal. Each account in the chart of accounts has its own ledger. A running balance is often kept in these account ledgers.
The statement of revenue, also called the income and expense statement, shows how much money came in,
where the money went, and how much money is left over a given period of time. It’s based on the equation revenue
– expenses = net income.
The balance sheet shows you how much money the com-pany is owed, how much it has, how much it owes, and
how much it is worth. It expresses the fundamental equation of accounting.
The accounting equation—assets = liabilities + equity—is the foundation of any accounting system. It assigns an
increase component and a decrease component to each element of the accounting equation, establishing normal balances for the increase of each type of account.