Assets = Liabilities + Owners Equity
Assets(You control) = Liabilities(Other entities share of the equity)+Owners Equity(Your share of the equity)
Equity is the liquid value of. Liquid means the going sale price more or less.
Assets – Liabilities = Owners Equity (The part that is yours)
This is a very elegant way to express the flow of money against the value of things. And the most complex math required is addition and subtraction. Just think, your whole financial status can be shown in an elegant algebraic equation.
Its difficult to do business without debt, but if we did then the equation would be…
Assets = Equity (Owners)
Actually Equity is (Liabilities + Owners Equity) So the most basic form of the equation is Assets = Equity. Equity is broken into Liabilities+Owners Equity. Owners Equity is broken into (Income-Expenses). And it keeps breaking down further as it is designed for your situation. Finally into exact accounts.
In a double entry book keeping system there are two entries for every transaction into accounts (books or ledger). This has a purpose in that it checks against human error in the system and in the record keeping itself. After making all the entries the equation is calculated and both sides must be equal. This is called being balanced. Its called balancing the books. If they are not equal then there was an error in the recording or the system(where they were recorded). Even if they are equal there might still be logical errors, but at least some errors are already eliminated.
Its simple and elegant. Any business should use book keeping if they want to stay in business. And computers are the tools to use these days. Though I wouldn’t begrudge anyone for using paper and a calculator. In 1996 I kept up with my home finance using this double entry book keeping method for a year and a half. I wrote a QBasic program that would handle 100 accounts and it would fit on a floppy disk along with the one and half years data and room to spare. I did all of this as an exercise. I also worked it up in a database and a spreadsheet as well, and ported my data. Again as an exercise.
I found that I typically generated about 5 to 10 transactions per day. Daily habits in keeping records and documents make all the difference if you do this properly at only 5 to 10 transactions per day. Proper book keeping may take you only 15 to 20 minutes per day. If you enter transactions daily its not a huge job. If you let it pile up then it might become overwhelming fast and kill the system. This is a part time job actually and it can pay off, sometimes more and sometimes less. But probably more in the long run. Managing receipts and types and places of transactions can make a lot of difference. Simplifying by eliminating types of transactions can make a huge difference. One thing a person can do if you want to categorize expenses is to sort things by expense category at the checkout stand. This gives you an easy way to come up with totals for each category. Otherwise a huge Walmart(retailer) receipt can be a nightmare to figure out. That goes for Krogers (grocery) and Home Depot(hardware) as well.
For sorting documents I used stacked office trays, legal size. I had 3 stacks of 12. I could use those 3 stacks for 3 years of paperwork. I could also use them for a month of paperwork because 31 days fits into 36 trays. Binder clips held each 1/2 month in order by day. I circled dates and amounts on receipts with a highlighter or pen. On many receipts if you run a high lighter across the value or date it wipes it so that its not readable. When operating a cargo van in expediting I kept every receipt in a shoe box just after any purchases. This box was kept right beside the driver seat. A wallet is a terrible place to keep modern receipts because the printing will wear off. And sun light fades many modern receipts so that they are unreadable. Some modern receipts should be copied because they will even fade with time, as if disappearing ink was used.
The accounting system has to be designed properly with the proper types of accounts for your situation. It can be altered over time but is best if setup properly the first time as conversions can require a lot of work. If you design it with too many accounts then you create extra complexity and more transactions. This means more work in the end that you may or may not have time for. So it is best as in many things to keep it simple. Probably the best time to change the system is at the end of the year.
An accounting system like this has what is known as debits and credits. These are two sides of an account column. One increases the account and one decreases. These work slightly differently on the asset side than on the equity side of the equation. For every transaction you have exactly one debit and one credit. The debit affects one account and the credit another. This shows flow of money or value.
Most people don’t do full blown systems but simply do income and expenses, they even just figure liabilities in as payments(expenses). In the accounting equation there are accounts for income and expenses under the Owners Equity value. You can see that if you ever own anything of the Assets you control its because your owners equity is growing larger than zero as liabilities are being reduced. I’ve often said the homeless man who only owns the shirt on his back owns more than I at times.
Value is a funny thing too. For anything to have value a transaction must take place. This is an exchange or trade. In real estate it is said that a given piece of property is only worth what a willing seller is willing to sell it for and what a willing buyer is willing to pay for it. Its the same for any kind of other transaction. And its these transactions that make the currency worth more than the paper they are printed on. Transaction is the gauge of value. Transactions are the gauge of the health of an economy.
Its said that the borrower is slave to the lender and this is true. What you control is what you own. The lender may give you some of his stuff to take care of for him, you control that stuff on his behalf. He lets you use it but he expects something return more than interest which is your support and loyalty (employer/bankster duopoly). Recall the old song “St. Peter I can’t go I owe my soul to the company store.” If you take on too much debt you have indeed been bought. You have sold yourself into slavery. Being the slave of a good master is one thing. Being the slave of a bad master quite another.
If you need a free simple accounting app use the one I wrote using the Java Programming Language Java Ledger