• Proper accounting helps a company keep track of its financial transactions.business accounts image by Nicemonkey from Fotolia.com
  
  Accounting is a method to keep track of a company's financial transactions. Transactions of a company are recorded in the general ledger as journal entries. The transactions in the general ledger are then used to compile a trial balance, which creates the financial statements. The most basic accounting rules deal with the accounting equation, debits and credits and financial statements.
  
  

Accounting Equation

• The accounting equation is one of the must fundamental principles of accounting. The accounting equation states that the balance sheet assets will always equal liabilities plus stockholders' equity. Assets are the things the company owns. Liabilities are what the company owes and stockholders' equity are ownership claims of the company. Accountants can manipulate the equation to solve for liabilities or stockholders' equity.
  
  

Debits and Credits

• Debits and credits either add to an account or subtract from the account depending on the type of account. A journal entry records a transaction. Each journal entry consists of debits and credits. For each journal entry, the amount of debits will always equal the amount of credits. This is known as double-entry accounting. For example, if a company buys $10,000 of widgets, the company would debit "purchases" for $10,000 and credit "cash" for $10,000. When debiting an asset account, the asset is increasing. When debiting a liability account, the liability is decreasing. If crediting an asset account, the asset is decreasing. If crediting a liability account, the liability is increasing. In our example, the debit to "purchases" increases the purchase account. The credit to "cash" decreases the cash account.
  
  

Financial Statements

• When an accountant compiles the transactions, he will create a financial statement. The financial statement has several parts to it. First is the income statement, which shows the company's revenues and expenses for the period. Next, is the balance sheet, which lists assets, liabilities and stockholders' equity. Next is the cash flow statement, which shows how the "cash" account changed during the year. The cash flow statement has three sections for different types of cash flows: the operating, financing and investing. Finally, there are the notes to the financial statements. Notes disclose various information about the company's performance for the year as well as the accounting methods used by the company.