Financial Accounting · §3.1
Ledger
What a firm owns is financed by what it owes plus what its owners invested — no more, no less.
Definition 3.1.1 — The accounting equation
Assets = Liabilities + Owner's Equity
A firm's resources equal the claims against them — creditors' claims plus owners' claims.
Two sides, one balance
Both sides carry equal width — take in a resource and a matching claim appears with it.
Why it can't fall out of balance
One pool, counted twice.
Every entry moves both sides by the same amount — so the beam always holds level.
Definition 3.1.2 — Debits & credits
∑ Debits = ∑ Credits
A debit is an entry on the left; a credit, on the right. The words say only which side.
The bookkeeper's T-account
Debit left, credit right — equal amounts, so the entry balances.
The rules of increase
Assets rise left · Liabilities & equity rise right
An account's normal balance is simply the side that increases it.
Worked Example 3.1.1 — owner invests $10,000
+10,000 Assets = 0 + 10,000 Equity
Cash is debited, Owner's Capital credited — two accounts, equal and opposite.
Prove the books — the trial balance
$15,500 = $15,500
The debit and credit columns agree. Equality is necessary — not proof every account is right.
§3.1 — carry this forward
Assets = Liabilities + Owner's Equity — true after every transaction, without exception.