When you are doing a quick profit-loss assessment in your business, you are probably using one or more “T-accounts,” which simply list inflows of value on one side and outflows on the other. I use the word “value” because it is not necessarily cash—inventory holds future value for you and so you account for it with a dollar figure. For example, let’s say that you buy inventory for $5,000. In this transaction, you will debit your inventory T-account for $5,000 and credit cash for $5,000. Both of these T-accounts are in the asset category, and you are converting money into goods that hold future value for you. Continue reading →