For those still confused about Assets, Liabilities, Equity, Credits, and Debits, let me see if I can give you a more intuitive primer:<p>Assets = Money you have.
Liabilities = Money you borrowed from someone else.
Equity = Money you earned.<p>All the money you have you either (i) borrowed from someone else or (ii) earned. In other words:<p>Assets (money you have) = Liabilities (money you borrowed) + Equity (money you earned).<p>When recording a transaction all you have to do is ask yourself two questions:<p>1. Where did the money come from? (what is the Source)
2. Where did the money go? (what is the Use)<p>Suppose you borrow $100 from a bank:<p>1. Where did the money come from? -> you borrowed it from someone else, so increase Liabilities by $100.
2. Where did the money go? -> to your checking account (money you have), so increase Assets by $100.<p>Adjustments to Source accounts (where money comes from) are Credits, adjustments to Use accounts (where money goes) are Debits, so we could revise the above statement to:<p>1. Credit Liabilities $100
2. Debit Assets $100<p>That's basically it. The rest is just breaking things down into sub accounts (e.g. Assets:Checking or Equity:Income).<p>Hope that helps.
As a student, I really started to grokk accounting when I started thinking of double-entry accounting as the business application of Newton's law "For every action, there is an equal and opposite reaction." Whenever a change happens to one side of the financial statements, an exact and simultaneous change happens to the other side. Aggregated over a period of time, the financial statements both categorize and summarize these various changes.<p>The rule that Assets = Liabilities + Equity is important because Liabilities and Equity can be viewed as opposing forces. Notwithstanding the financial engineering and nuance around debt, liabilities in their purest sense are a balance of how much you've taken beyond what you've earned, while equity is a measurement of how much you've earned beyond what you've taken. The assets show what you have, but L&E show how everything was acquired.<p>As I get older, I've come to appreciate how accounting also serves as a prism through which to view the world, because the financial concepts that apply to billion dollar businesses also apply to small mom-and-pops and individuals. One can think of themselves as a company, of which they are the CEO and sole employee. They earn revenue (from a job), incur expenses, and may have physical assets (homes, cars, computers) or liabilities (student/car/home loans). Every decision that's made is financial in nature, and thinking about decisions as an exchange of money or time helps me prioritize what I do personally and professionally.<p>Accounting is a wonderfully beautiful system and I hope it becomes more common knowledge because it is absolutely fundamental to living in our modern time. The largest governments and businesses are bound by the same rules of accounting, and so are we -- whether we are aware of it or not.
I think at least a 100-level knowledge of bookkeeping is beneficial to nearly every developer. Bookkeeping is, arguably, one of the oldest and longest-practiced "data processing" disciplines. It seems arbitrary and somewhat old-fashioned until you grok the reasoning and history behind it (double-entry sourced from summaries of various different "journals" to facilitate separation of duties, closing periods and rolling-up detail entries into totals because human computational power is limited, an equation that balances implicitly when there aren't entry errors, etc.)<p>Odds are that your work somehow impacts the revenue or expenses of your business and will need to interface with accounting or finance people at some point. I found it increased my perceived credibility when I could speak using terminology from the accounting or finance person's area of expertise.<p>I also agree with other posters who would argue that everyone should have some basic proficiency in double-entry bookkeeping. That's probably way too optimistic, though.
The double entry for purchasing raw materials would be the other way round: Dr Materials; Cr Cash.<p>Cash is an asset so debiting it would increase your cash balance. Likewise, Materials is an expense code in the P&L and debiting it will show it as a cost. You would only credit to the P&L for income transactions.
To people who haven't tried keeping track of their personal finances using double-entry bookkeeping, I strongly recommend it.<p>It's not just about reducing error (although it does that really well too.) It's also about increasing transparency, for two reasons: it makes many things explicit that would otherwise be easy to hide, perhaps by accident; it also provides very strong support for querying your finances in various ways.<p>Whenever I'm budgeting for something (a project among friends, the wedding with my wife, and so on) I always try to start out "simpler" but I also always end up doing something like double-entry bookkeeping because all other "simpler" solutions make it very hard to figure out where money is actually coming from and where it is going.<p>This is as good a place as any to start: <a href="https://plaintextaccounting.org/" rel="nofollow">https://plaintextaccounting.org/</a>
Looks pretty solid to me.<p>The part about brands and patents being treated as an expense is wrong though<p>Even stuff like website development cost can be capitalized as an asset under some circumstances<p><a href="https://www.ifrs.org/issued-standards/list-of-interpretations/sic-32-intangible-assets-web-site-costs/" rel="nofollow">https://www.ifrs.org/issued-standards/list-of-interpretation...</a>
"These backwards-looking representations aren't terribly useful when thinking about the future. Financial statements now account for only 5% of the information that investors use to evaluate companies, and key accounting metrics, like Earnings and Assets, have stopped correlating with stock prices. To fill these gaps, almost all companies report custom non-GAAP metrics in their financial reports, to paint a better picture of their business. WeWork famously defined a Community Adjusted EBITDA metric that ignored most of their costs to suggest that they were actually, sort of, profitable. You can decide for yourself whether WeWork's metrics made sense. But that's precisely the problem — without consistent standards, "creative accounting" can cloud our judgment and our economy suffers."<p>This has been a topic i've been curious about for a while now - if the way business performance is measured has changed, why have the standards not evolved as well?
I like this and explains the basic mechanics in a simple way for me to understand.<p>I want to highlight the What counts as revenue section because I think it is the most crucial. Deferred Revenue is well explained and very necessary for SaaS. I think it will also be good to highlight account receivables, where you have delivered the good but haven't received the cash. Even though this rarely occurs in a SaaS model, but it is important to state that account receivable is not revenue, which some awkward mistake can be easily made.
Nice overview. Khan Academy[1] actually has some resources on the basics of financial statements as well.<p>[1]: <a href="https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-stateme" rel="nofollow">https://www.khanacademy.org/economics-finance-domain/core-fi...</a>
Another good, and dynamic, introduction to accounting, with examples of entries for all documents:
<a href="https://www.odoo.com/documentation/functional/accounting.html" rel="nofollow">https://www.odoo.com/documentation/functional/accounting.htm...</a>
For another light but slightly more in-depth introduction, you might enjoy <i>Financial Statements</i> by Thomas Ittelson. It uses running an applesauce factory as an ongoing example throughout the book. As a programmer with no accounting/finance background, I found it very easy to follow.
So if<p>Assets - Liabilities = Shareholders Equity<p>Then<p>Liabilities & Equity = Assets<p>So why are there separate totals (showing the same amount) for "Assets" and "Liabilities & Equity", if they are by definition the same thing?
I really liked causal.app when I tried it briefly. Nice way to build interactive dashboards from spreadsheets, with a range of outcomes - and they have some excellent templates
I was thrown into the deep end of the bookkeeping pool when I began managing an establishment owned by three CPA's. It proved to be a valuable and highly transferable skill that served me throughout my working life...
"Every month a notable company goes public. Every week a hot startup raises millions of dollars. And every day moms, pops, and teens check on their stocks."<p>"Once the shoeshine boy and the taxi driver offer stock tips, it’s time to sell."