Accounting is a vital function on our world. It serves as the basis for a company to track its possessions, its income, the amount of money the owner’s have, and, ultimately, the amount of income to report to the government for tax purposes.
The basis for accounting lies in a simple accounting equation expressed as so:
Assets = Liabilities + Owner’s Equity
Let me explain what an asset is. An asset is, essentially, anything you own. It can include:
A liability is something you owe others. Say, perhaps, that you purchase a tractor for your business and you agree to pay the seller the money at a later time, this amount is recorded as a liability. Other liabilities include:
Dividends payable (These are payments you will pay later to stockholders.)
Unearned Income payable (If you receive money before you earn it, this amount is considered a payable and will gradually be converted to income at periodic intervals during the accounting cycle.)
Wages payable (This is, obviously, wages you will pay your employees later.)
Owner’s equity is the amount of money your owners can claim is theirs. For a small business with one or a few owner’s, each owner has his or her own equity account. Money the business makes it disbursed into the appropriate equity account depending on the business. In a company that is owned by stockholders, the money the company makes is disbursed into an account called retained earnings. More on this later.