It is not just about mathematics, it is more than counting business. Accounting is “keeping score” … it is about “tracking stuff”. What score? What kind of stuff? How does one understand the basics of accounting?
ASSETS = LIABILITIES + OWNER’S EQUITY
Assets refer to all the “stuff” that the company keeps
Liabilities refer to the “stuff” that belongs to others
Owner’s Equity or Capital refers to the “stuff” that belongs to the owners
Simply translated, everything that the company keeps belongs to the owners or someone else. The equation can be converted just like this one :
Stuff the Company Keeps = Other People’s Stuff + Owner’s Stuff
From the business owner’s point of view, the stuff that he owns equals the total stuff that the company keeps minus the stuff that belongs to other people.
OWNER’S EQUITY = ASSETS – LIABILITIES
The company’s assets, liabilities and capital (owner’s equity) are all presented in a Balance Sheet, a report that shows their details and composition so that the viewing public can keep track of all the stuff.
Accounting keeps score of the business by recording, classifying and summarizing all business transactions and events. It is then presented in a report called the Income Statement which contains the details of the company’s sales revenues and all related costs and expenses. The results of the company’s operations refer to Net Income (or Net Loss).
SALES – COSTS & EXPENSES = NET INCOME
Should the costs and expenses exceed the total sales, the operations will result to Net Loss.
Keeping score, tracking stuff … these are the basics. But there are more areas of activities in Accounting. There are financial concerns, management concerns, audit concerns, tax concerns, fund concerns and more. Learning the basics is just an introduction to A-Counting Biz.