The ideas of keeping accounting records for an entity and of measuring money are easy to understand. The third idea, double entry, is more complicated. You need to understand this idea clearly because the whole of accounting is based on it.
The main two end products of an accounting system are the income statement and the balance sheet. The income statement reports the entity's financial performance during an accounting period. The balance sheet reports its financial status at a specific point in time. The income statement is by far the more important of the two, but the idea of double entry is easier to understand if you start with the balance sheet.
A balance sheet shows the financial position of the accounting entity on a specific date. A balance sheet is always dated as of a certain date. For example, the balance sheet as of the 31st of December, 2007 shows the entity's financial position as of the end of 2007. A balance sheet as of the 31st of January shows the financial position as of the end of January. In effect the balance sheet is a "snapshot" of the financial status of the business at a specific point in time.
We shall start to prepare a balance sheet for Art Supplies Ltd., using the following format.
Note that the balance sheet has two sides. The left-hand side is called the assets side. Amounts listed on that side show the resources owned by the entity. The right-hand side is called the liabilities side.
The amounts shown on the right-hand side can be explained in either of two ways, both are correct. In one view, liabilities are claims against the assets. In the other view, liabilities show the amount of funds that have been supplied to the entity from various sources. As you proceed, you may find that one of these views makes more sense to you than the other. Use the one that you find it easiest to grasp.