There are five types of accounts, assets, liabilities,equity (balance sheet accounts), and revenue and expenses (income statement accounts). Assets increase on debit side, decrease on credit side. Liabilities and equity both increase on credit side, decrease on debit side. Then revenue accounts increase on credit side, decrease on debit side and expense accounts increase on debit side and decrease on the credit side. You might map out these increases/decreases and types of accounts on a sheet of paper and refer to it often. These are principles that will not ever change.
Next, remember that assets are things of value, i.e. cash is an asset. Note that revenue is not an asset because revenue does not equate to cash. We have been discussing the fact that revenue and cash aren’t one in the same, so it’s important to make that distinction. So, assets are things of value that are worth money. Liabilities represent what is owed to someone else, or debts. Equity is capital, or think about it this way: if assets represent everything of value, and assets = liabilities plus equity, then what’s left over after you subtract debt from assets will equal owner’s worth. Does this make sense? Capital represents value to the owner(s) after all debts are subtracted from all liabilities.
Now let’s think about revenue. Revenue is earned at the time of sale of a good or service, so revenue is the foundation of business profitability. From revenue we subtract expenses, and the expenses on monthly income statements represent expenses for the month that were required in order to generate the revenue we bring in that month. Revenue minus expenses = net profit (or loss), and this net profit is what increases the capital account on the balance sheet (or decreases capital if we have a loss).
Each of the five accounts all fit together, and information derived from the income statement affects the entire balance sheet (for example when we have revenue we debit accounts receivable on the balance sheet giving the asset section strength even though we have not collected the cash yet.)
Class: Please think through this information, begin a discussion so that we can help each other, and please ask specific questions.150-200 WORDS