Accounting Equation and Debits & Credits: Accounting Basic Foundations

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Accounting Equation and Debits & Credits: Accounting Basic Foundations.
Time Markers:
The Accounting Equation 0:44
Double-Entry Accounting 2:06
What the Accounting Equation Measures 3:56
Assets 5:03
Liabilities 6:50
Equity 8:02
Debits and Credits 12:55
A Few Example Transactions 19:56

THE ACCOUNTING EQUATION
The Equation: A = L + E.
Accounting is about Measurement.
Assets = Liabilities + Equity.
The Equation MUST always balance ...and this is linked to double-entry accounting.

DOUBLE-ENTRY ACCOUNTING
It’s history dates back to the 15th century.
Accounting is about measurement …and double-entry accounting is a system to record/measure transactions.
Every transaction will impact the accounting equation at least TWICE (hence the term ‘double-entry’).
Plus the accounting equation must always remained balanced.
They impact the accounting equation (Asset = Liabilities + Equity) via Debits (Dr.) and Credits (Cr.) ...and we will look at this specifically later.

WHAT THE EQUATION MEASURES
Accounting is about Measurement (Asset = Liabilities + Equity)
The Equation Measures: Resources controlled by the entity & Claims on those resources.
The left hand side (Assets) are the resources.
The right hand side (Liabilities & Equity) are the claims on the resources.
Liabilities are External claims Equity are Internal claims.

ASSETS: THE LEFT HAND SIDE
Resources:
1) Controlled
2) Past Event
3) Value Reliably Measured
4) Lead to an Inflow of Economic Resources
…Simply: Things the entity ‘owns’.
They are often the income generating side of the business.
Examples: Cash, Accounts Receivable, Building

LIABILITIES: THE RIGHT HAND SIDE
Obligations:
1) Past Event
2) Value Reliably Measured
3) Lead to an Outflow of Economic Resources
…Simply: Things the entity ‘owes’.
They external claims on the assets, i.e. obligations to outsiders (creditors) paid from assets.
Examples: Accounts Payable, Bank Loan

EQUITY: THE RIGHT HAND SIDE
What’s left over for the owners.
Residual interest in Assets once all Liabilities paid off.
Rearranging the Accounting Equation: Assets - Liabilities = Equity
Internal/insider claims on the assets.
The complexity of equity accounts is often dependent on entity size.
Examples: Owners Equity/Share Capital, Retained Earnings, Reserves

Note: Revenue & Expenses are Equity Accounts.
Revenue is a Credit to Equity Expenses are Debits to Equity.

A BIT OF ACCOUNTING LOGIC...
All assets are funded via liabilities or equity (hence their respective claims).
Assets then generate income which itself boosts assets levels.
These higher level of assets are then returned to the claimants.

DEBITS & CREDITS
Remembering that A = L + E must always balance…
And remembering that we use double-entry accounting to record all transaction... and these transactions impact the equation…
How then do we record transactions within the accounting equation?

The answer:
Debits (Dr.) & Credits (Cr.)

DEBITS & CREDITS EVERY transaction:
Broken down & categorised into a set of Debits & Credits.
And the debits value must ALWAYS equal the credits value.

DEBITS
A debit (or Dr.) represents:
An INCREASE in Assets or
A DECREASE in Liabilities or Equity
Note: There is an opposite effect either side of the equation

CREDITS
A credit (or Cr.) represents:
A DECREASE in Assets or
An INCREASE in Liabilities or Equity
Note: There is an opposite effect either side of the equation Note: The impact is the reflection/opposite of a debit

THUS
When in business and a transaction occurs:
Look underneath and try and find the (at least) 2 impacts on the accounting equation.
Does an asset change? Does a liability change? Does equity change?

THEN: Record the entry as follows
Debits are recorded first (write ‘Dr.’ then the account and finally the financial value).
Credits are recorded at the bottom (with same formatting but the credit line(s) are Tab indented).
Dr. ‘account’ $xxx
Cr. ‘account’ $xxx

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[calvronwachter]

Why aren't the 80 dollars paid in cash counted towards the final equation? Wouldn't it be as asset, as they are adding to the business with the 80 dollars worth of property? If not, where does the 80 dollars go? I understand the 60 dollar liability pretty easily, however. Great video!!!

[gigigi]

I see some people put the balance sheet in different formats as below:
Format 1
Fixed Assets
Current Assets
Current Liabilities
Net Current Liabilities
Long Term Liabilities
Net Liabilities

Shareholder Equity

Format 2
Current Assets
Fixed Assets
Total Assets
Current Liabilities
Long Term Liabilities
Shareholder Equity
Total Liabilities & Shareholder Equity

Which one is correct? Which one is better?

[davidgraham-parker]

I was enjoying the video right up to the point where you did the examples, then the headaches started.

[accofina]

First comment posted! Please reply, comment or otherwise get in touch if I can be of any help or clarify anything...
Thanks for watching! If you enjoy the video please Subscribe at youtube.com/accofina or visit accofina.com direct.
Cheers,
Axel

[natashanoneya]

Thank you for your time Axle. I am studying to be a medical assistant. Now it is crunch time. So I am just refreshing on this class I has since last year. Thank you for your time again.

[gigigi]

Re: Deferred Tax Liability Question
I/  
In Accounting Book

Net Profit   100
Taxation Rate 16.5%
Taxation in accounting book: 16.5

Dr Taxation 16.5
Cr Tax payable 16.5

2/ 
In Taxation Book
Net Profit 50
Taxation Rate 16.5%
Taxation in taxation book: 8.25

-- Occur deferred tax liability: 8.25
3/
Should we do the below entry?
Dr Tax payable 8.25
Cr Deferred tax liability 8.25
Is that entry correct for deferred tax liability?