Beginning Bookkeeping Review 📈

Lesson 1: What is Bookkeeping?

Bookkeeping is the process of recording all the financial transactions a business makes. Think of it as keeping a detailed diary of every dollar that comes in or goes out.

Why do we do it?

• To make good decisions: You can't decide to buy new equipment if you don't know if you have the cash.
• For tax purposes: The government requires you to report your income and expenses accurately.
• To track performance: Are you making a profit or a loss?

A transaction is any business event that has a monetary impact. For example:

• Making a sale to a customer.
• Paying your electricity bill.
• Buying a new computer for the office.

Quiz: Lesson 1

Lesson 2: The Accounting Equation (The Foundation)

All of bookkeeping is built on one simple, powerful idea: The Accounting Equation.

Assets = Liabilities + Equity

Let's break that down:

• Assets: Things the business owns that have value.
  Examples: Cash in the bank, computers, delivery vans, buildings.
• Liabilities: Money the business owes to others.
  Examples: Bank loans, credit card debt, money owed to suppliers (called "Accounts Payable").
• Equity: The owner's remaining claim on the assets after all liabilities are paid. It's the "net worth" of the business.
  (Equity = Assets - Liabilities)

This equation must always be in balance. Every single transaction will affect at least two parts of this equation to keep it balanced. This is the core of "double-entry" bookkeeping.

Quiz: Lesson 2

Lesson 3: The "Big 5" Account Types

We can expand the accounting equation to include the two things that change Equity: Revenue and Expenses. This gives us the 5 main account types you'll use every day.

1. Assets: What you own (Cash, Computers, etc.)
2. Liabilities: What you owe (Loans, Credit Cards, etc.)
3. Equity: The owner's net worth in the business.
4. Revenue (or Income): Money you earn from sales or services.
   (Revenue makes your business richer, so it increases Equity)
5. Expenses: Money you spend to run the business.
   (Expenses make your business poorer, so they decrease Equity)

So, the "expanded" accounting equation looks like this:

Assets = Liabilities + Equity + (Revenue - Expenses)

Quiz: Lesson 3

Lesson 4: Introduction to Debits & Credits (The "How")

This is the part most people find tricky, but it's just a system for making the accounting equation balance. "Double-entry" bookkeeping means every transaction has two sides: a Debit and a Credit.

• Debit (Dr): An entry on the left side of an account.
• Credit (Cr): An entry on the right side of an account.

Crucial rule: For any transaction, the total amount of Debits MUST equal the total amount of Credits. This is what keeps the equation in balance!

How Debits and Credits affect the 5 account types is the most important rule to memorize:

Mnemonic Tip: Remember D.E.A. (Debits increase Expenses & Assets). If you remember that, you know the other three (Liabilities, Equity, Revenue) are the opposite!

Example: You buy a $500 computer (an Asset) with cash (also an Asset).

• Your Computer asset account increases by $500. To increase an Asset, you DEBIT it.
• Your Cash asset account decreases by $500. To decrease an Asset, you CREDIT it.
• Result: $500 Debit (Computer) = $500 Credit (Cash). It balances!

Quiz: Lesson 4

Lesson 5: Introduction to Financial Statements (The "Why")

After recording all your transactions, the final step is to summarize them into reports called Financial Statements. These reports tell you the story of your business's health.

There are three main statements, but we'll focus on the first two:

1. The Income Statement (or Profit & Loss Statement)
   • What it shows: Your performance over a *period of time* (like a month or a year).
   • The formula: Revenue - Expenses = Net Income (or Profit)
   • The question it answers: "Did I make any money?"


2. The Balance Sheet
   • What it shows: Your financial position at a *specific point in time* (like December 31st).
   • The formula: It's just the accounting equation! Assets = Liabilities + Equity
   • The question it answers: "What is the company's net worth?"

The Income Statement's result (your Net Income) flows into the Equity section of the Balance Sheet. They all work together!

Quiz: Lesson 5

🎉 Review Complete! 🎉

Congratulations! You've just completed your reviewe of the fundamental building blocks of bookkeeping. You now understand the accounting equation, the 5 account types, debits & credits, and the main financial statements.