The fundamentals of accounting (in particular double-entry bookkeeping) are simple, but they're often presented or understood as a series of unconnected facts that must be memorized.

It doesn't have to be this way!

Start with this identity:

  Equity = Assets - Liabilities

This is self-evident: the owners of the company have a claim on the company's assets, but only after any liabilities (like debts to other companies) have been subtracted.

That identity can be rearranged:

  Assets = Equity + Liabilities

This tells us that for everything the company owns, it also owes something. It has debts to some other entity (liabilities) and anything left over is owed to shareholders (equity).

Accounting transactions are made when something happens in the business. Each transaction changes the balance sheet. The balance sheet is made up of the three items in the identity, but there's more granularity. For example Assets might have a 'cash/bank' account and also an 'inventory' account

Any accounting transaction touches one or more than one of these three accounts.

Got some new equity funding? It increases Assets (cash in the bank) but also increases Equity (paid up share capital) by the same amount. So the identity is preserved.

Sold a product and collected some cash? Assets go up: yes, inventory decreased $10, but cash went up $15. So now Equity (retained earnings) goes up by $5 and the identity still holds.

The P&L (aka Income Statement) shows how the balance sheet changed between two points in time. Profit is the change in Equity between those two points (after removing any increase decreased from share issuance or buybacks).

If you've read this far and want some intuition about debits and credits, I wrote a brief post here: https://www.encona.com/posts/debits-and-credits