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In accounting
there is a balance sheet and an income statement. The
balance sheet keeps track of things like A ssets,
L iabilities and ownership OE.
It reports these things as of a moment in time, like the
end of the month. The formula for the balance sheet is:
Assets
are things like buildings, cash, equipment, accounts receivable,
inventory and many other things, tangible and intangible.
Assets can be short term or long term.
Liabilities are things like debt, accounts payable,
mortgages and more. Liabilities can also be short term or
long term. Owners
Equity is that part of your assets that are paid for
and that you own.
The income
statement keeps track of things like
I ncome, R evenue
and E xpenses. It reports these
things over a period of time, like a month, a quarter
or a year. The formula for the income statement is:
So if Income = Revenue
- Expenses, it is also true that Income + Expenses = Revenue.
To keep everything positive we will use the I+E=R formula.
Income is the amount of revenue left over after
you take out your expenses. Revenue consists
of sales and other things that put money in the business
as a result of something you do, like sell stock or sell
a building, beyond just making sales. Expenses
take money out of your business. Expenses may vary on
the basis of sales, may be fixed costs or may be other
costs incurred that are not a normal part of doing business.
Now let's turn
our formulas into ways to keep track of debits and credits.
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