The magic of the double entry
book keeping formula:

                          DR                       CR

A = C + L

Where…

A           is   Assets       (E.g. Bank account, Ute etc…)

C           is   Capital      (E.g. Owners Equity, retained earnings)

L           is   Liabilities (E.g. Owing money to supplier, bank loan)

DR:      is   Debit         

CR:      is   Credit

 

More exactly:

 

Increasing:          DR                              CR

A = C + L

Decreasing:         CR                               DR

 

So all you have to know is what two accounts are effected and what type of account are they are.
(I.e. Asset, Capital or Liability)

Similarly:

                       DR              CR

E = I

 

Where…

E           is   Expenses        (E.g. Phone, rent, salaries)

I            is   Income            (E.g. Sales, bank interest)

 

More exactly:

 

Increasing:          DR                   CR

E = I

Decreasing:         CR                   DR

 

 

So how does the P&L and Balance Sheet fit into all this?

 

§       Income and Expenses appear on the Profit and Loss Statement.

 

§       Assets, Capital and Liabilities appear on the Balance Sheet.

 

Profit and Loss is the performance of a business over a period of time

 …where as the…

 Balance Sheet is the status of the
business at a certain date.