One of the first little fact sheets Jacem prepared was for SME business owners to understand double entry book keeping. It was surprising that so many business owners got hung up on all the debits and credits and truely had trouble understanding why a lot of income appeared on their balance sheet but not on their profit and loss statements. So reproduced here is the almost famous Jacem ‘Magic of double entry book keeping formula:
So here is the crucial formula – know this and you know double entry book keeping:
DR CR
A = C + L
Where…
A is Assets (E.g. Bank account, Ute etc…)
C is Capital (E.g. Owners Equity, retained earnings)
L is Liabilities (E.g. Owing money to supplier, bank loan)
DR: is Debit
CR: is Credit
More exactly:
Increasing: DR CR
A = C + L
Decreasing: CR DR
So all you have to know is what two accounts are effected and what type of account are they are. (I.e. Asset, Capital or Liability)
Similarly:
DR CR
E = I
Where…
E is Expenses (E.g. Phone, rent, salaries)
I is Income (E.g. Sales, bank interest)
More exactly:
Increasing: DR CR
E = I
Decreasing: CR DR
So how does the P&L and Balance Sheet fit into all this?
Income and Expenses appear on the Profit and Loss Statement.
Assets, Capital and Liabilities appear on the Balance Sheet.
Profit and Loss is the performance of a business over a period of time
…where as the…
Balance Sheet is the status of the business at a certain date.
Till next time!