Financial_training_DAX2009(4)

1. Basic concepts

The circle demonstrates the basic accounting equation: Assets = Liabilities + Owner’s Equity. The accounting equation should always be in balance. It guarantees that the money cannot appear from anywhere. In our case the company cash (Assets) was given by the owner (Liabilities).

The field of accounting—both the older manual systems and the today’s basic accounting software—is based on the 500-year-old accounting procedure known as double entry. Double entry is a simple yet powerful concept: each and every one of a company’s transactions will result in an amount recorded into at least two of the accounts in the accounting system. In our case, the first transaction records the amount to the “Cash” and “Owes the owner” accounts.

Owe the owner => $10 000 => Cash

The transaction could be recorded in the following manner:

Cash Owe the owner

10 000 $ 10 000 $

The dual form of transaction is caused by natural law. Nothing is lost in the universe, it is only

changed. You can transfer an apple from one hand to another and you can also observe it separately: for the 1st hand –minus one apple, for the 2nd hand – plus one apple.

The accounting equation is in balance: $10 000 (Cash) = $0 (Liabilities) + $10 000(Owner’s Equity). Purchase Vehicle for Cash

The Company decides to purchase a used delivery car which costs 1200 $ by writing a check for $ 1 200. In this case, the new account which is called Vehicles (or Delivery equipment) is required. Vehicles is an Asset account.

The list of all company accounts is named the Chart of Accounts. The chart of accounts is a listing of the account names that a company has identified and made available for recording financial

transactions. A company has the flexibility to tailor its chart of accounts to best suit its needs, including adding accounts as needed.

This transaction records the amount to the Cash and Vehicles accounts.

Cash => $ 1 200 => Vehicles

The transaction could be recorded in the following manner:

Cash Vehicles

$1 200 $1 200

According to the Double entry procedure, one amount is used for the two accounts. Because the amount cannot be taken from anywhere. In our case it is $1 200.