Accounting

Accounting The financial statements are based on the accounting equation, i.e. assets = liabilities + equity. Every transaction has a debit and a credit, which keep the accounts balanced. For example: James buys a tablet for $645. He borrowed $300 from a relative and spent another $345 earned from a part-time job. Now his assets are worth $645, liabilities are $300, and equity $345. This transaction affects only the balance sheet. Sandra asks James to do some research on his tablet for which James charges $50 an hour. The tasks takes 3 hours. Sandra promptly pays James. He debits cash for $150 and credits revenues for the same amount. Assuming the James' tablet is for business, he needs to depreciate it. Let's assume that the tablet is expected to last for 3 years, so $645/36 months equals $18. After one month and no other transactions, James has the following income statement and balance sheet. James' Consulting                   James' Consulting Income Statement                   Balance Sheet Revenues          $150         Assets Expenses:                        Cash     $150 Depreciation     $18                   Tablet (net of depreciation)    627 Total Expenses         18         Total Assets     $777 Net Income          $132 Liabilities Short-Term Loan     $300 Total Liabilities    $300 Equity    $477 Total Liabilities and Equity    $777 The above financial statements are very simple, but are meant to illustrate the basic idea. The income statment is temporary in nature and closed out to equity at the end of the period. Balance sheet accounts are permanent, which means that they are continually updated.