In the Old Days, Things Were Different
If you’re new to the arithmetic and logic of profit calculation — which is mostly what modern accounting is all about — you won’t be surprised to hear that not all that long ago, most people couldn’t and didn’t do much profit calculating.
What they did instead was monitor a business’s financial condition. They used — well, actually, they still use — a balance sheet to monitor the financial condition. A balance sheet just lists a business’s assets and its liabilities at a particular point in time.
Say that at the start of your first day in the rowboat-rental business — before you pay Peter Gruntpaw — you have $5,000 in your checking account. To make the situation interesting, $4,000 of this money is a loan from your mother-in-law, and $1,000 is cash that you invested in your business.
A business’s assets are composed of things that the business owns.
Liabilities consist of the amounts that the business owes.
Equity is the difference between the business’s assets ...