The accounting equation
Every business's financial position obeys one core equation: . This must always balance, since everything a business owns (assets) was funded either by borrowing (liabilities) or by the owner's own investment (capital).
Example 1: A business has assets of ₦500,000 and liabilities of ₦120,000. Find the owner's capital.
Rearranging the equation: .
The double-entry principle
Every transaction has two sides and affects at least two accounts: a debit entry in one account and an equal credit entry in another. This keeps the accounting equation balanced after every single transaction, and is the foundation of all bookkeeping.
Example 2: A business buys equipment for ₦50,000 cash. Identify the two accounts affected and which side (debit/credit) each is recorded on.
The equipment account is debited ₦50,000 (an asset increases). The cash account is credited ₦50,000 (another asset decreases, since cash was paid out) -- two accounts affected, keeping the equation balanced.
Branches of accounting
Financial accounting records and reports a business's transactions and financial position, mainly for external users (investors, tax authorities, creditors). Cost accounting focuses on tracking and controlling the costs of producing goods or services. Management accounting provides information to help internal management make decisions, focusing on planning and control rather than external reporting requirements.