Every finance role is built on a handful of principles. Understand these and everything else — statements, software, tax — makes sense. This is the single most important guide in the sector.
The accounting equation
The whole of accounting balances around one equation:
Assets = Liabilities + Equity
- Assets — what the business owns or is owed (cash, stock, equipment, money customers owe).
- Liabilities — what it owes to others (loans, suppliers, tax).
- Equity — what's left for the owners (capital + retained profit).
This equation must always balance. That's why it's called the balance sheet.
Double-entry bookkeeping
Every transaction affects at least two accounts — one debit and one credit — and the totals must be equal. This self-checking system is 500 years old and still underpins all accounting software.
Simple rule of thumb (DEAD CLIC):
- Debit increases Drawings, Expenses, Assets.
- Credit increases Liabilities, Income, Capital.
Worked example
You buy £500 of stock, paying by bank:
- Debit Inventory (an asset) £500 — assets go up.
- Credit Bank (an asset) £500 — cash goes down. The books still balance.
Accruals vs cash accounting
- Cash accounting — record income/expense when money actually moves.
- Accruals accounting — record income/expense when it's earned or incurred, regardless of when cash moves. This is the standard for most businesses because it matches revenue to the costs of earning it.
Accruals (costs incurred but not yet invoiced) and prepayments (paid in advance) adjust the accounts so each period is fair.
Key concepts every employer expects you to know
- Matching (accruals) concept — match income to the costs of earning it, in the right period.
- Prudence — don't overstate assets/income; recognise likely losses early.
- Going concern — assume the business will continue operating.
- Consistency — apply the same methods period to period.
- Materiality — focus effort on amounts big enough to matter.
Put it to work
Take three everyday transactions (a sale, a wage payment, buying a laptop) and write the debit and credit for each. Then try the bank reconciliation lab.