Bean Counting 101

Lesson 1

Lesson 1 - Intro to Accounting

Hello, and welcome to Arnold Grundvig’s crash course in business accounting. The course is affectionately subtitled: “Bean Counting 101.” This course is intended as an introduction to the basics of accounting. CPAs and other professionals who might be offended by the title, “Bean Counting 101,” can be assured that this is not a course intended for them.

In the days of old, accounting was literally done by bookkeepers writing in books. These books were called journals, or ledgers. In these days of computers, anyone with a computer and accounting software can do accounting. However, having a computer and accounting software does not guarantee that we understand accounting. So, we need to understand:

• what accounting is
• how accounting works
• what debits and credits are
• what journals and ledgers are
• what a balance sheet is
• what an income statement tells, and
• what accounting information reveals

Now what exactly is accounting? Well first, it’s a numerical history of our business. Second, it’s a photograph of our financial status. And how does accounting work? Business transactions are entered into our books, and each entry has two components, a positive and a negative. The positive part is called a debit. The negative part is called a credit. This is known as double entry bookkeeping. It works because the positives are always equal to the negatives. That keeps our accounts in balance. So, let’s see what this means.

Let’s start a business. We’ll start with $20,000 cash. Now, how do we account for it? Before we can start, we need a chart of accounts, which is nothing more than a listing of categories for our assets, such as cash, equipment, and the like; liabilities, such as accounts payable, loans, debts, and the like; income, such as sales; and expenses, such as payroll, rent, and the like. Before we go on, let’s compare a debit and a credit. All of our transactions will have two entries: a debit and a credit. And we need to remember that the debit is the positive part of the transaction and the credit is the negative part of the transaction. Now, back to the $20,000 we started our business with. We need to debit cash, and we need to credit equity.

Well, what is equity? If we are a corporation, equity is common stock, or capital stock. If we are a proprietorship or partnership, equity is owner’s equity. We didn’t list equity as a category of accounts before. Equity is a special kind of liability. Equity is the amount a business owes to its stockholders or its owners. So, we have $20,000 to account for. Our entry is to debit cash for $20,000, because we’ve added $20,000 in cash. And we will credit common stock for $20,000. Debit equals credits, so our transaction is balanced.

Let’s look at our financial statement and see what it looks like. Notice that the only accounts with amounts are cash and common stock. Notice also that total assets equals total debts and equity. That part of the financial statement, the amounts above the line, is called the balance sheet. It’s called a balance sheet because the left side is always in balance with the right side. The bottom part of our financial statement, with expenses and income, is called the income statement, or the profit and loss statement.