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We explain later that accountants decide how to record transactions, which are economic exchanges (see the later section “Focusing on Transactions”). Many people aren’t aware of the double duty of accountants in recording transactions. Accountants look at things from two points of view — the give and the take of the transaction. This is called double-entry accounting, which we explain in Chapter 3. The following example illustrates the two-sided nature of accounting.

Suppose a business reports $1,000,000 in total assets at the end of its most recent year. Most people, quite naturally, focus on the makeup of its assets (how much cash, for example). But the composition of its assets is only half the financial picture of a business. You’ve heard the expression that there are two sides to every story. Well, in accounting, there are two sides to the financial condition of a business.

Accounting deals with assets, of course. Accountants are equally concerned with the sources of the assets. In this example, the $1,000,000 in assets comes from three sources: $300,000 liabilities; $500,000 capital; and $200,000 surplus. You probably have a good idea of what liabilities are. Capital is money invested in the business by the owners. Surplus is profit that has been earned and not distributed to the owners. The sum of all three sources taken together equals the total assets of the business. The books are in balance.