Assets (what it owns)· • Liabilities (what it owes to others)· • Owner’s equity (the difference between assets and liabilities)

It is a chronological record of the transactions of a business. However, the journal should not be confused with the ledger—the collection of accounts used by the firm and the real heart of the accounting system.

A transaction is an exchange between a business (or some other type of organization such as a nonprofit firm) and one or more external parties, or it is a measurable internal event such as certain adjustments for the use of assets in operations. Transactions have an economic impact on an organization; they have some impact on the accounting formula

Also, to make this easy, assume there are only four assets: cash, inventory, equipment, and accounts receivable.

Assets = Liabilities + Stockholders’ Equity

Stockholders’ equity is the amount left over After liabilities are deducted from assets: Assets - Liabilities = Stockholders’ Equity Owner’s or stockholders’ equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.

Economic Entity: The accounting for an entity (i.e., a business) should be kept separate from the accounting for the owners of that entity. This assumption establishes the idea that economic resources and obligations shown on the balance sheet should not be confused with the resources and obligations of the owners of the entity. Owner’s assets shou

An account is a standardized format that organizations use to accumulate the dollar effect of a transaction. Account balances are kept so that financial statements can eventually be prepared.

Accountants memorize these rules: • Credits increase liabilities and equity; credits decrease assets. • Debits decrease liabilities and equity; debits increase assets.