DC ADE LER
DC ADE LER might sound like some gibberish, but it’s actually a helpful acronym to help categorize transactions from a financial standpoint.
Debits and Credits
Debits and credits represent the duality of all financial transactions. Thinking of each transaction as a coin having two sides will help reinforce the double-sided nature of each transaction.
When recording any transaction there must be two records, one under debits and one under credits. Its key to note that anything classified as a debit or credit is considered neutral. Neither is good or bad. The benefits will depend on the context of the business. It’s a common mistake to consider one to be better than the other.
Assets
Assets are resources controlled or owned by an entity such as a business or corporation. The expectation of an asset is to provide a monetary gain in time.
Properties of assets:
· It can be owned
· Can be bought or sold
· A resource to generate future-benefits
Assets can be tangible or intangible. For example, machinery is physical while a patent is a right issued by the government, both are considered assets to a company.
Common assets:
· Cash (cash is one of the most common assets a company has)
· Land
· Machinery
· Patents
· Intellectual property
· Stock
Draw
A draw happens when the owner of a company takes out funds or assets for personal gain. Only certain entity structures will allow this such as Sole proprietorships, Partnerships, and Limited liability companies (LLC).
When taking a draw, the money is not taxed upon the business’s income. Instead, the money or assets are taxed based on the owner’s income.
Expense
An expense is money, or costs incurred, in hopes to generate revenue for a company.
For example, rent, basic utilities, and office supplies would all be considered expenses for a company.
Liability
A liability is where one party has an obligation to pay another. Usually, it’s a loan in which the funds will be paid over a period of time. This can also include cash payments made to another party.
Equity
A company’s equity is the money that would go to shareholders if a company were to be liquidated. After all the debts are paid off and assets sold the remaining cash would be considered the company's equity.
Equity is often looked at when determining a company’s overall health.
Revenue
A company’s revenue is determined by sales and money gained through regular business activity. Often this will be through sales of products or services but can also range to interest and royalties.
Statements
When using this you can easily figure out two very important statements. One is the income statement, which is just a combination of expense and revenue.
Assets = liability + equities is the formula that determines the assets and what comprises a balance sheet.
