Blue Elevator Blog

Two Five Two

Accounting is as simple as two five two.

Back Story

I graduated from the California State University at Fullerton with an Accounting degree in May of 1987.  And, if that wasn’t a miracle enough, I thank God I was blessed to graduate with highest honors and was named ‘Most Outstanding Accounting Student.’  Concurrent with my last semester, I was also blessed to pass all four parts of the CPA exam.

From there, I began my career as an auditor at the Big 8 accounting firm of Coopers & Lybrand.  And, it was there where I received my CPA credential.

Now, in part, I share this background with you as many years of experience can be summarized very simply into two five two.

God willing, if you memorize these concepts (and can work with them), then you will be well-equipped as a CEO.

Keep It Simple

Accounting isn’t all that it’s cracked up to be.  Are you intimidated by it?  Some people are.  So, my mission is to debunk this myth.  It’s really as simple as two five two.

Two Five Two

There are only two basic statements.  Only five types of accounts.  And, only two types of balances.  That’s it.

Two Statements

The two statements are as follows:

• Balance Sheet.  This statement is a “snapshot” of various account balances usually shown at the end of the month.  For example, January 31, February 28, March 31, etc.
• Income Statement (Also called Profit & Loss or P & L, for short).  This statement shows the results of activity for a period of time.  For example, for the month-ended June 30, or for the twelve months ended Dec. 31, 20XX.

Five Accounts

Next, we’ll tackle the five accounts.  As I mentioned, there are only five types of accounts.  And, they are as follows:

Balance Sheet Accounts.  On the Balance Sheet, you will see three types of accounts:

• Assets (DR).  Assets are what you own.
• Liabilities (CR).  Liabilities are what you owe.
• Equity (CR).  Equity is what’s left over when you subtract liabilities from assets.

The standard accounting equation is Assets = Liabilities + Equity.  Additionally, algebra will tell you that Assets – Liabilities = Equity.

Income Statement Accounts.  On the Income Statement, you will see two types of accounts:

• Revenue (CR).  Revenue (or income) represents what you earned for selling goods or services.
• Expenses (DR).  Expenses represent what you incurred for costs in either selling or providing goods or services.

Two Balances

Lastly, we’ll go over the two types of balances.  You might have noted the letters above: DR and CR.

• Debits (DR)
• Credits (CR)

Every type of account has a “natural balance.”  Additionally, you can see the natural balance next to each account above.

Now, this is where a lot of people get lost.  Don’t think of debits (DRs) and credits (CRs) as good or bad.  It’s just what they are.

Everything Works Out

Additionally, the great thing about accounting is that everything works out.

Balance Sheet

• Debits always equal Credits.  [DRs = CRs]
• [Assets = Liabilities + Equity]
• Or, [DRs = CRs + CRs]

Income Statement

On the Income Statement, Revenue – Expense = Net Income or Net Loss.  And, you will “close-out” this net amount to the Equity section on the Balance Sheet.

Additionally, for the Income Statement, you can think of it this way:

• CRs – DRs = either a) net CR or b) net DR.
• Now, if Revenue is greater than Expense, then you will have a net CR.  This net CR is called Net Income.
• Conversely, if Expense is greater than Revenue, then you will have a net DR.  This net DR is called Net Loss.

Summary

Well, there you have it.  Those are the basics.

Next, be encouraged to read the article: Debits and Credits.

Contact us if you would like to learn more!