This book will teach you how to prepare the income statement and the balance sheet of a company WITHOUT using debits, credits, or T accounts. You can use an Excel Template or this website’s accounting tool to visually see the income statement and balance sheet being constructed.

No Debits, Credits, and T accounts

Debits, credits, and T accounts are a legacy of the historical accounting methods. Many still believe that you cannot prepare financial statements without using debits or credits or T accounts!  This is incorrect. You do NOT need to use debits or credits or T accounts to prepare a company’s income statement and balance sheet.

How Will We Convince You?

To convince you that you do not need debits and credits to prepare the financial statements of a company, we will walk you through the entire accounting process from the beginning to the end in this book. We will start with identifying a transaction and end with the financial statements.

Here are some common activities a business undertakes. We will teach you how these activities can be analysed and recorded in the accounting system of a company. We will then show you how these activities are summarised and presented in the income statement and balance sheet.

1. Mark invested $20,000 to start a business in exchange for 1,000 shares on January 1^st.
2. The business borrowed $30,000 from ABC bank at an interest rate of 10% per year on January 2^nd.
3. Equipment worth $25,000 was purchased and paid for immediately on January 4^th.
4. On January 6^th, inventory worth $40,000 was purchased by the company on a 60-days credit note.
5. Three customers walked into the store to enquire about prices and products on January 12^th.
6. $10,000 worth of inventory was sold for $30,000 in revenue on 30-day credit on January 15^th.
7. $5,000 of wages were paid on January 31^st.
8. The rent for January was $2,000 and was paid on January 31^st.
9. On January 31^st, $10,000 of accounts receivable was collected from the customer related to sales made on Jan 15^th.
10. The equipment would last for 5 years. The straight-line depreciation method is used to account for depreciation expenses.

What will the company’s income statement and balance sheet look like after each of these transactions is complete? What will the company’s income statement and balance sheet look like at the end of the year? We will analyse and record all the above transactions, place them in the accounting system, and present the company’s income statement and balance sheet. We will do all this without using debits, credits or T accounts.

Note: The statement of cash flows can be prepared from the company’s income statement and balance sheet. We will keep the preparation of the Statement of Cash Flows for another lesson.