2.1 Accounting Equation and Double-entry Accounting

To understand accounting information, we need to know how an accounting system captures relevant data about transactions, and then classifies records, and reports data.

2.1.1 Accounting Equation

The accounting system reflects two basic aspects of a firm: what it owns and what it owes. Assets are resources that owned or controlled by a company and could bring benefits to it in the future, such as cash, supplies, equipment, and land.The claims on a company's assets （what it owes of a firm） are separated into liabilities and equity. Liabilities are what a company owes its creditor in future payments, products or services. Equity （also called owner's equity or capital）refers to the claims of its owner（s）. Together, liabilities and equity are the source of funds to acquire assets. The relation of assets, liabilities, and equity is reflected in the following accounting equation:

Assets = Liabilities + Equity

In this equation, liabilities are usually shown before equity because creditors’claims must be paid before the claims of owners. The accounting equation applies to all transactions and events, to all forms of companies and organizations, and to all points of time.

assets ['æset] 资产

liabilities [laɪə'bɪlɪtɪ] 负债

equity ['ekwɪtɪ] 权益

2.1.2 Double-entry System

The double-entry system is the mechanic requiring that every transaction should be recorded in the debit side and credit side of one or more accounts with the equal amount. Such combination is called accounting entry. If there are only two accounts are involved in an accounting entry, the amount of debit account and credit account is equal. If more than two accounts are involved, the total of debit accounts must be equal to the total of credit accounts.

The double-entry system is based on the accounting equation. The increase or decrease of different types of accounts would be recorded as follows:

The recording of accounting transactions under double-entry system may be formulated in the following four rules:

（1） The increase of asset should be debited to asset accounts and the decrease of asset should be credited.

（2） The increase of liability and owners’ equity items should be credited to liability and owners’ equity accounts and the decrease should be debited.

（3） As revenues eventually increase owners’ equity, the increase of revenue should be credited to a revenue account, and the decrease should be debited.

（4） As expenses eventually decrease owners’ equity, the increase of expense should be debited to an expense account, and the decrease should be credited.

transaction [træn'zækʃ（ə）n] 交易