The Accounting Equation Edit
Assets = Liabilities + Stockholders' Equity
Assets = Liabilities + Common Stock + Retained Earnings - Dividends + Revenues - Expenses
Double-Entry Accounting System Edit
While accounting can technically be done in any number of ways, the typical accounting system will be some form of a double-entry system. Under this system, a company records the two-sided effect of each transaction in its appropriate accounts.
Debits and Credits Edit
Debit means left, and credit means right; these terms do not necessarily mean increase or decrease, but instead describe where a company makes entries for transactions. All amounts recorded on the left side of an account are called debits, and all amounts recorded on the right side of an account are called credits. When total debits of an account exceed credits, the account will have a debit balance. Similarly, when credits exceed debits, the account will have a credit balance. Generally, asset and expense accounts are increased with debits, and decreased by credits; this means that asset and expense accounts have a normal debit balance. On the other hand, liability, stockholders' equity, and revenue accounts all have a normal credit balance, which means they are increased with credits and decreased by debits.
The Accounting Cycle Edit
First, transactions are journalized, which means they are recorded in the General Journal as a double-sided entry with debits and credits; debits must equal credits so that the accounts can balance. The journal entries are then posted to the General Ledger accounts. Next, a Trial Balance is prepared to make sure that the debits side balances with the credits side for each account. Then, Adjustments are made for accruals, prepayments, and estimated items. Once the adjusting entries are journalized and posted to the ledger, an Adjusted Trial Balance is prepared. From the Adjusted Trial Balance, the four financial statements (Income Statement, Statement of Stockholders' Equity, Balance Sheet, and Cash Flows) are prepared. Finally, Closing Entries are made to close the nominal or temporary accounts (revenues and expenses) to retained earnings, followed by a Post-Closing Trial Balance.
Generally Accepted Accounting Principles is the standard that any publicly held company must use.