Basic Accounting - Lesson 1. Your life is full of Accounting - you just don't know it!
If you are just starting beginning your studies in accounting, don't worry. It isn't really as hard as you might thing. Actually, you do accounting in your every day life, day in and day out. You deal with Assets, Liabilities, and Equity, the 3 components of the balance sheet.
For instance, when you get your paycheck, or your direct deposit into your bank account, you now have more cash available to you then you had before you got paid. You increased your assets. Cash is the number one asset in both business and personal life. Why - because it is the most liquid. It is the thing that is easiest to exchange for something else of value such as clothes, or food, or movie tickets. So - cash is an asset. What else is an asset? Do you own a car? If you do, then that is an asset. Less liquid than cash and harder to exchange for other items, but still an asset because you could sell it and then use the cash to buy something else, or you could trade it in for another car.
So - if cash is an asset, what is a liability. Basically - it is when you have purchased something, and you will pay for it later. Instead of paying cash for that car you bought, you took a loan for part of it. So the car is an asset, and the loan is a liability. If your car is worth $3,000.00 and your loan remaining to pay on the car is $2,000.00, what it the difference called. Well - that is the equity - your value if you sold the car for $3,000.00 and paid off the loan for $2,000.00 you would have $1,000.00.
It works the same in business. Next post we will talk about personal and business Income Statements!