Financial Accounting — Fundamentals
The accounting equation
Every financial accounting concept traces back to one foundational identity: Assets = Liabilities + Capital (Owner's Equity). This equation must remain balanced after every single transaction — a business's resources (assets) are always financed either by outside claims (liabilities, like loans and payables) or the owner's own investment (capital). Understanding this equation as the reason double-entry bookkeeping works — not just an abstract formula — is essential: every journal entry is, at its core, a way of keeping this equation balanced.
Double-entry bookkeeping — debit and credit rules
Every transaction is recorded with at least one debit and one credit of equal value. The specific debit/credit rule depends on the account type:
| Account type | Increase | Decrease |
|---|
|---|---|---|
| Assets | Debit | Credit |
|---|---|---|
| Liabilities | Credit | Debit |
| Capital | Credit | Debit |
| Expenses | Debit | Credit |
| Income/Revenue | Credit | Debit |
A common beginner error is trying to memorize "debit = good, credit = bad" or similar — debit and credit have no inherent positive/negative meaning; their effect depends entirely on which account type is being debited or credited. Internalizing the table above, and why each rule follows from the accounting equation, is far more durable than memorizing isolated examples.
Journal entries — recording transactions
A journal entry is the first formal record of a transaction, following the format: Date | Account Debited (with amount) | Account Credited (with amount) | Narration (brief explanation). For example, a business purchasing furniture for cash would debit the Furniture account (an asset increasing) and credit the Cash account (an asset decreasing) — both are asset accounts, but one increases and one decreases, and the debit/credit rule correctly captures both movements while keeping the accounting equation balanced (total assets unchanged, just redistributed between two asset accounts).
Ledger posting
After recording in the journal (a chronological record), entries are posted to the ledger — individual accounts (like "Cash Account" or "Furniture Account") that collect all journal entries affecting that specific account, letting a business see the running balance of any given account at any point, rather than having to search through the entire chronological journal. The journal answers "what happened, in order," while the ledger answers "what's the current state of this specific account" — both views are necessary, and neither replaces the other.