The ultimate goal of bookkeeping is to record and show the financial state of the company. There is a very simple formula:
A - L = E
Assets minus Liabilities = Equity
Assets and Liabilities are on the Balance Sheet. Assets on the left, Liabilities on the right to be precise. So, on the Balance Sheet, Assets (what you have) go DEBIT, Liabilities (what you owe) go CREDIT. Since we just stated that Equity is the difference between Assets and Liabilities, and normally we want to have more possessions than liabilities, the Equity part will have to end up on the right to balance everything out.
As an example and to get the feel of things here the Balance Sheet per 31 December 2010 of a common company: the private household.
Balance Sheet as per 31 December 2010:
|Assets - Debit||€||Liabilities - Credit||€|
|Cash||1000||(218000 - 147000)||71000|
|Total Assets||218000||Total Liabilities||218000|
Capital or Equity can be split up further: Owners Equity and Third Party Equity or Stockholders Equity. Here, the Equity is Owners Equity. The other liabilities like Credit Card debt would be Third Party Equity. The mortgage bank is in fact a stockholder in the household, the house to be more precise, so the term Stockholders Equity could also be used. (Technically, no stock was issued, but you get the idea).
Most households are not used to preparing annual Balance Sheets, but it is not really a lot of work.. One fine day it will have to be done anyway, when your wife want a divorce or at the latest when you die, to record the value of the estate. If no records of the family household are available, a local solicitor will be glad to help out, invoicing the normal fee for their profession. As stated before, prevention is cheaper and quite simple.
Next: Equity changes
(First version from: Accounting DIY by Paul Tammes, 2010)