- Whew, you made it.
That may not have been the easiest thing you've ever done,
but by golly you made it.
Feel good about that.
Now you may not feel a hundred percent confident
that you've mastered all the intricacies
of debits and credits, but you're off to a good start.
It's true that you're probably not as comfortable as I am
with the topic, but keep in mind that I've been at this
for three and half decades.
You've just started.
But hey you started.
Let's review what we now know.
First the accounting equation,
assets equal liabilities, plus owner's equity,
that must always balance, always.
Second, debit means left and credit means right.
That's all, debit left, credit right.
Third, assets go up with debits and down with credits.
For liabilities and owner's equity accounts,
it's exactly the opposite.
They go up with credits and down with debits.
Fourth, journal entries are the building blocks
of financial statements.
Fifth, with each journal entry debits must always
equal credits, always.
And sixth, every journal entry requires the answer
to three questions.
What accounts?
Did the accounts increase or decrease?
And by how much did each account change?
Financial statements are just your reward
for getting these things right.
Turns out financial statements
don't just fall out of the sky.
They're not a figment of someone's imagination.
Financial statements follow directly from journal entries.
You get the journal entries right,
the financial statements follow.
So what now?
Well first take a well-deserved rest, you've earned it.
Okay, your break's over.
Now that you know how financial statements are created,
you might want to know how they're commonly used.
My brother and I have developed a course called
Understanding Financial Ratios, that you might consider.
In that course, we discuss common techniques
for analyzing financial statements and using the results
of that analysis to make decisions.
So what else can you do?
Well be prepared to see things differently.
Now when you go to the grocery store,
you will think in your mind as you walk out,
debit food, credit cash.
When you go to the movies, you will think,
debit entertainment, credit cash.
When you get paid, debit cash, credit revenue.
You will begin to see how little transactions
become part of the bigger financial picture.
Hey, you've seen behind the accounting curtain,
you know what goes on back there.
It's no longer a mystery.
Welcome to the club.