Summary Business economics 1
© Nathalie Wittendorp
Left = debit Right = credit
On the left side, the debit side of the balance are: the assets.
On the right side, the credit side of the balance are the: liabilities
Equity = vermogen = everything the company owns (assets) – liabilities
Debit side - Alle spullen wat je hebt, dus: buildings, equipment, inventories, + wat je krijgt, accounts
receivable, en je eigen geld op je bank op dat moment, bank.
Accounts receivable = when there is in an exercise “on account” or “on credit”
Credit side - Het geld wat je moet betalen, dus: interest, bank loan, accounts payable.
Debit Title and date (in €) Credit
Buildings 350,000 Equity 190,000
Equipment 89,000 5% Mortgage 170,000
Inventories 16,000 6% Bank loan 101,000
Accounts receivable 18,000 Accounts payable
17,000 Bank 5,000
478,000
478,000
Figure 1: example of a balance sheet
-Revenues and profits ALWAYS credited
-Expenses and costs ALWAYS debited
-Same side when the account goes up!
-Other side when the account goes down!
Specialized equity accounts are also often referred to as profit and loss accounts.
We can now conclude that revenues or profits are always credited!
Consequently, expenses or costs are always debited!
Accounts examples for the expenses and costs are:
Rent
Wages and salaries
Depreciation
Interest
General costs
Two types:
- on the balance sheet, so they are showing assets/liabilities
- specialized equity accounts, showing profits and expenses and costs = income statement
, Opening = copying the amounts that you see on the balance sheet on the same side of accounts. The
description is simply “balance”.
Updating/preparing ledger accounts = After the opening, all accounts need to be updated on a
regular basis. The journal indicates where you have to put the amounts in the ledger accounts, debit
or credit. You have to figure out where all the amounts come from.
Just put all the things at the right places inventories with inventories etc.
Closing ledger accounts = at the end of the month. You have to set up the balance at the end of the
month.
To check whether there is a balance, you can make a balance sheet.
Calculation new equity:
credited income statements – debited income statements = net loss (dit moet je aan de debit kant
van equity zetten)
Oude equity – net loss = nieuwe equity
The main components are already covered in chapter 1, 2 and 3, however, to save some time we will
make a summary of the most important overviews, the balance sheet and the income statement. This
can with the 8 column. The aim of the 8 column is to create a new balance sheet.
Ledger accounts Trial balance Balances Income statement Balance sheet
Debi
t Credit Debit Credit Debit Credit Debit Credit
Total
Layout of the 8 column.
Trial balance
Before closing the ledger accounts, you have calculated the end balances. These end balances of all
the ledger accounts can be copied to ‘Trial balance’. (so, not the totals) The trial balance has to be
balanced.
Balances
The columns of ‘balances’ are made by calculating the differences between the debit- and credit side
of the trial balance. The difference is put on the side of the highest amount. The balances has to be
balanced as well.
Income statement – balance sheet
Within the third and fourth columns, the amounts of the balances have to put either to the income
statement(profit or loss) or to the balance sheet.
step 1: decide for each amount, except equity, whether it belongs on the income statement or on the
balance sheet. Debit is debit, credit is credit.
step 2: calculate the totals and see if it is a profit or a loss. The income statement will be balanced
with the profit or loss. Debit higher = loss credit higher = profit.
step 3: if you have profit, add it to the equity. If you have a loss deduct it form the equity. This is the
new equity amount. The balance sheet is balanced now.
