Accounting Principles
Do you remember the scene from the end of The Wizard of Oz where the great big voice says, “Pay no attention to that man behind the curtain!”? Accounting is kind of like that. Behind all the terms and rules and reports, there are a few levers and gears that keep the whole thing working. In this chapter, we’re taking you behind the scenes. You’ve already learned the most basic principle—double-entry bookkeeping to keep the books in balance. Let’s look at a few more.
• All accounts are assigned a type. These are the most basic types of accounts:
– income
– expense
– asset
– liability
– equity
• Each type of account has a normal balance, a side of the T account where normal entries (that increase the account balance) are made.
– Asset and expense accounts are debit accounts, with normal entries that increase account value on the right side of the T account.
– Liability, equity, and income accounts are credit accounts, with normal entries that increase account value on the left side of the T account.
• Income and expense statements always have a period, from a beginning date to an ending date.
• Balance sheets have a single date, reporting the status of the company on that date.
• An income and expense statement shows the change in the balance sheet from the start date to the end date of the income and expense statement.
In our example, the company started on June 1, 2003, with no assets or liabilities in each account. Can you trace every item on the balance sheet for June 5, 2003 to an item on the income and expense statement for June 1 to 5, 2003 (called “month-to-date”)?
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