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Accounting 101

Last updated 2026-07-25

This article covers the basics of accounting!

1) The Accounting Equation: Assets = Liabilities + Equity

To get started, define a list of accounts, each of which will have a balance as you go about your businesses. Each account must either be an asset, liability, or equity account:

Asset = business owns	Liability = business owes	Equity = business earned
Cash	Accounts Payable	Sales Revenue
Accounts Receivable	Sales Tax Payable (until paid to gov't)	Interest Revenue
Inventory	Payroll Taxes Payable (until paid to gov't)	Credit Card Expense
		Rent Expense
		Salary Expense

The list of all of your accounts is called your chart of accounts. The basis for ALL accounting will be updating these accounts in your general ledger. You can think of the general ledger as a spreadsheet containing three things: (1) the timestamp, (2) the account, and (3) an increase or decrease.

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NOTE: some frameworks split out Equity and Expenses but (income - expenses) is retained earnings, which lives in equity.

The accounting equation simply says that the sum of the balances of all asset accounts must, at all times, equal the sum of the balances of all liability and equity accounts.

Let's look at two example balance sheets:

1. Owner invests $100

Assets		Liabilities & Equity
Cash	$100	Stock	$100
Total	$100	Total	$100

2. Receives $100 of inventory on credit

Assets		Liabilities & Equity
Cash	$100	Accounts Payable	$100
Inventory	$100	Stock	$100
Total	$200	Total	$200

2) Debits increase Assets = Credits increase Liabilities or Equity

How do the balances get updated? Via journal entries.

Journal entries will debit and credit the accounts to increase and decrease their balances. Journal entries are called "double-entry" because each journal entry MUST have debits and credits that sum to equal one another.

The biggest thing to remember is that increases to assets should be debits, and increases to liabilities or equity should be credits. The reverse is true as well: decreases to assets should be credits, and decreases to liabilities or equity should be debits.

Please enjoy the world's simplest table:

	Asset	Liability / Equity
Increase	Debit	Credit
Decrease	Credit	Debit

3) Examples: Journal entries and the resulting balance sheet

Now, we can dive in with many more examples, all of which live in this spreadsheet.

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NOTE: The following transactions are all incremental. Each step builds on the previous

1. Owner investment

Debit Cash, Credit Stock

Type	Account	Debit	Credit
Asset	Cash	$100
Equity	Stock		$100
	Total	$100	$100

Assets		Liabilities & Equity
Cash	$100	Stock	$100
Total	$100	Total	$100

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NOTE: to minimize tax obligations when they withdraw money, this could be a loan.

Type	Account	Debit	Credit
Asset	Cash	$100
Liability	Shareholder Loan		$100
	Total	$100	$100

2. Receives inventory

Debit Inventory, Credit Accounts Payable

Type	Account	Debit	Credit
Asset	Inventory	$100
Liability	Accounts Payable		$100
	Total	$100	$100

Assets		Liabilities & Equity
Cash	$100	Accounts Payable	$100
Inventory	$100	Stock	$100
Total	$200	Total	$200

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NOTE: we could keep eco fees as a separate inventory line

Type	Account	Debit	Credit
Asset	Inventory - product	$95
Asset	Inventory - eco fee	$5
Liability	Accounts Payable		$100
	Total	$100	$100

3. Sell in cash

Credit Inventory and Debit Cost of Goods Sold (COGS) the COST of the inventory, Debit Cash the sale total, Credit Sales the pre-tax total, Credit Sales Tax Payable the sales tax.

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Technically, Sales are "Income" and COGS are "Expense" accounts. They don't show up on the balance sheet and instead the difference between all income and all expense will show up on the balance sheet as an equity account called Retained Earnings. This is the same thing as "Net Profit" or "Net Income". "Income" follows the same terminology as Equity in that an increase in "Income" is a "Credit", but "Expense" is reversed as an increase in "Expense" is a "Debit".

Type	Account	Debit	Credit
Asset	Cash	$110
Expenses	COGS	$50
Income	Sales		$100
Liability	Sales Tax Payable		$10
Asset	Inventory		$50
	Total	$160	$160

Assets		Liabilities & Equity
Cash	$210	Accounts Payable	$100
Inventory	$50	Sales Tax Payable	$10
		Stock	$100
		Retained Earnings	$50
Total	$260	Total	$260

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NOTE: card fees would be debited out if they pay with credit card

Type	Account	Debit	Credit
Asset	Cash	$107
Expenses	Credit Card Expense	$3
Expenses	COGS	$50
Income	Sales		$100
Liability	Sales Tax Payable		$10
Asset	Inventory		$50
	Total	$160	$160

4. Sell on credit

This is the EXACT same as the above except instead of debiting the total to Cash, we debit it to Accounts Receivable to be paid later.

Type	Account	Debit	Credit
Asset	Accounts Receivable	$110
Expenses	COGS	$50
Income	Sales		$100
Liability	Sales Tax Payable		$10
Asset	Inventory		$50
	Total	$160	$160

Assets		Liabilities & Equity
Cash	$210	Accounts Payable	$100
Accounts Receivable	$110	Sales Tax Payable	$20
Inventory	$0	Stock	$100
		Retained Earnings	$100
Total	$320	Total	$320

5. Account Payment

We debit (increase!) our cash and credit (decrease!) our accounts receivable.

Type	Account	Debit	Credit
Asset	Cash	$100
Asset	Accounts Receivable		$100
	Total	$100	$100

Assets		Liabilities & Equity
Cash	$310	Accounts Payable	$100
Accounts Receivable	$10	Sales Tax Payable	$20
Inventory	$0	Stock	$100
		Retained Earnings	$100
Total	$320	Total	$320

6. Interest

Interest is revenue! So we credit the interest income account and debit receivables.

Type	Account	Debit	Credit
Asset	Accounts Receivable	$1
Income	Interest Revenue		$1
	Total	$1	$1

Assets		Liabilities & Equity
Cash	$310	Accounts Payable	$100
Accounts Receivable	$11	Sales Tax Payable	$20
Inventory	$0	Stock	$100
		Retained Earnings	$101
Total	$321	Total	$321

7. Pay vendor

Credit the cash used to pay, and debit the payables down.

Type	Account	Debit	Credit
Liability	Accounts Payable	$100
Asset	Cash		$100
	Total	$100	$100

Assets		Liabilities & Equity
Cash	$210	Accounts Payable	$0
Accounts Receivable	$11	Sales Tax Payable	$20
Inventory	$0	Stock	$100
		Retained Earnings	$101
Total	$221	Total	$221

8. Pay taxes

This is the same for sales tax, payroll tax, and any other tax liability that accrues and then is paid down periodically. Simply credit cash and debit the liability.

Type	Account	Debit	Credit
Liability	Sales Tax Payable	$20
Asset	Cash		$20
	Total	$20	$20

Assets		Liabilities & Equity
Cash	$190	Sales Tax Payable	$0
Accounts Receivable	$11	Stock	$100
Inventory	$0	Retained Earnings	$101
Total	$201	Total	$201

9. Write off aka "Bad Debt"

Unfortunately, this is not as simple as writing down accounts receivable because of sales tax. The store is entitled to decrease their sales tax liability if any underlying sales were written off. Credit receivables, debit both bad debt and sales tax payable.

Type	Account	Debit	Credit
Expenses	Bad Debt	$10
Liability	Sales Tax Payable	$1
Asset	Accounts Receivable		$11
	Total	$11	$11

Assets		Liabilities & Equity
Cash	$190	Sales Tax Payable	($1)
Accounts Receivable	$0	Stock	$100
Inventory	$0	Retained Earnings	$91
Total	$190	Total	$190

10. Salaries

Just as with a sale and sales tax, they must credit a liability to cover all payroll taxes for both the employer and employees until they are remitted to the government.

Type	Account	Debit	Credit
Expenses	Salary Expense	$60
Asset	Cash		$40
Liability	Payroll Taxes Payable		$20
	Total	$60	$60

Assets		Liabilities & Equity
Cash	$150	Sales Tax Payable	($1)
		Payroll Taxes Payable	$20
		Stock	$100
		Retained Earnings	$31
Total	$150	Total	$150

11. Expenses

I'll bucket all other expenses into this guy. Rent, marketing, food, and more can simply be a credit to cash and a debit to the expense account.

Type	Account	Debit	Credit
Expenses	Rent Expense	$20
Asset	Cash		$20
	Total	$20	$20

Assets		Liabilities & Equity
Cash	$130	Sales Tax Payable	($1)
		Payroll Taxes Payable	$20
		Stock	$100
		Retained Earnings	$11
Total	$130	Total	$130