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Perhaps one of the most difficult concepts to understand in beginning accounting is the relationship between assets, liabilities, income and expenses. I discovered the most lucid explanation of this relationship in Robert T. Kiyosaki's book Cash Flow Quadrant. Let's define these terms in a way that is easier to grasp. Kiyosaki defines an asset as something that puts money into your pocket. That is, assets generate income. Conversely, liabilities take money out of your pocket. Expenses not paid with cash generate liabilities. For example, the mortgage on your home is a liability; so is the outstanding balance on your credit cards. In the double-entry accounting system customarily used by business and taught in accounting classes, the assets and income must counter-balance each other. In a solvent business, assets acquired are recorded as a debit amount; income is entered as a credit amount. To counterbalance the asset and liability entries, we enter income as a credit amount... read more

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