In the last post Debit And Credit I talked about and gave examples of how changes in one account is reflected in another account, I explained the concept of T accounts, and finally highlighted the concept that For every transaction the total debits must be equal to the total credits and therefore balance.
In this article I will take principle and relate them to reality. Lets start with this equation again.
Assets + Expenses = Equity + Liabilities + Income
You might have asked yourself by now, How do I use this equation to manage the financials of my business? or at least you should ask yourself how your accountant is doing so. How do I calculate the amount of Assets, Liabilities, Income, Expenses, or Equity to use this equation. Of course you could do so in 100 ways, but accountants came to agree to create Three Financial Report Papers that carry within them all the numbers used in the above equation. Those Financial Papers are: Balance Sheet, Income Statement, And Cash Flow Statement.
In the Next three articles I will be talking about those three financial statements
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