# Accounting Made Simple Summary

Get Started. It's Free
Accounting Made Simple Summary

## 3. 3 lessons:

### 3.1. Accounting helps companies prepare for taxes and understand their finances through assets, liabilities, and owner’s equity.

3.1.1. The accounting equation, as it’s known, lets you get a picture of the financial position of your business using three terms:

3.1.1.1. Assets:

3.1.1.1.1. These include everything the company owns.

3.1.1.2. Liabilities:

3.1.1.2.1. Anything the company owes is in this category.

3.1.1.3. Owner’s (or Shareholder’s) Equity:

3.1.1.3.1. This value is what’s left of the assets after subtracting liabilities.

3.1.2. Two equations are always true of these terms:

3.1.2.1. Assets = Liabilities + Owner’s Equity

3.1.2.2. Owner’s Equity = Assets – Liabilities

3.1.3. An example:

3.1.4. You also have other accounts to work with these figures to understand your business’s money situation, including:

3.1.4.1. Balance Sheet:

3.1.4.1.1. This helps you sort out assets and liabilities more specifically and represents a specific moment in time, like a month.

3.1.4.2. Income Statement:

3.1.4.2.1. Creating this lets you see what your net income is after all costs.

3.1.4.3. Cash Flow Statement:

3.1.4.3.1. A record of inflows and outflows of cash, this account is vital to your company’s financial health.

### 3.2. Financial ratios like liquidity and current ratios will help you understand how well your company is doing at managing money.

3.2.1. There are a few different types of liquidity ratios:

3.2.1.1. The current ratio gives you an idea of how well you can pay liabilities with assets at the moment.

3.2.1.1.1. To calculate this, use this equation: Current Ratio = Current Assets/Current Liabilities

3.2.1.1.2. The higher the ratio, the better the health of your business.

3.2.1.2. A more revealing way to look at the liquidity ratio is through the lens of the quick ratio.

3.2.1.2.1. This is the same as the current ratio, but without inventory balances:

3.2.1.2.2. Quick Ratio = (Current Assets – Inventory)/Current Liabilities

3.2.2. An example:

### 3.3. Everything that goes into or out of a business is recorded twice, and understanding why will help you see how all accounting principles work together.

3.3.1. Take a new laptop, for example.

3.3.1.1. Say it costs you \$1,000. On your personal budgets, you’d see a negative \$1,000 show up

3.3.1.2. In a business, that money is debited, or taken out of your account, but the company owns the computer now.

3.3.1.3. That means one account has to increase and another must decrease for everything to balance correctly.

3.3.1.4. So on your business accounts, you would show both a debit of -\$1,000 and a credit of +\$1,000 on your assets side.

3.3.2. Any increase in assets is a debit, while a decrease is a credit.

3.3.3. Similarly for liabilities, an increase in liabilities is a credit and a decrease is a debit.

3.3.4. On your chart of accounts for the laptop example, you would see two lines with special indenting.

3.3.4.1. One represents the debit and the other is the credit to your assets, as shown here:

3.3.4.1.1. Dr. (debit) Office Equipment – Laptop \$1,000

3.3.4.1.2. Cr. (credit) Material expenses \$1,000