Now how do these two affect the accounting equation? Well, as the. business earns revenues by selling products or servic
1- Account Types and the Basic Accounting Equation This is the first in a series of videos on the basics, accounting basics, and today we’re going to look at something that is one of the most basic concepts in accounting, which is account types and the accounting equation. Now if you have read your chapter, you may have read the accounting equation, it’s assets equal liabilities plus stockholder’s equity. But, what is an asset? What is a liability? What is stockholder’s equity? In order to understand that equation you have to have a good understanding of what these words are. So, assets are resources owned by the business. Some examples, every business should have some cash, the resource cash, also supplies, and accounts receivable, that would be money that is owed to the business by their customers, and land, buildings, vehicles, any type of equipment they may have, those are all assets of the business. Liabilities, in one word, are debts, and most end in the word payable, and some examples that you should see in your book, are accounts payable, money that we owe to our vendors, and notes payable. You might also see salaries payable, and then the third one down here is stockholder’s equity. That is the stockholders’ right to the assets of the business, and there’s really two types of accounts that we will be using with stockholder’s equity in the first several chapters, and those are capital stock (that would be the capital that’s been issued to the shareholders or owners in the business) and retained earnings, which are all the earnings that have been retained in the business since it started minus any dividends that might have been paid to the shareholders. Okay, once we have an understanding about those particular account types, the accounting equation begins to make more sense, because if we look at our assets, they are either owned by our creditors or by our stockholders. Okay, going on to the next page, there are handouts to download with most all of these videos in the series and if you’ve done that there are a few problems. So, go back again, I’ve put the accounting equation up here again, assets equals liabilities plus stockholder’s equity. Alright, if we know in a business what one of these groups are we can figure out what the other is. Okay, in Best Buy we have assets of $12,758,000 and liabilities of $8,274,000. All we need to do is subtract to get the $4,484,000 that must be the stockholders’ equity. In Hewlett-Packard if they had assets of $113,331,000 and liabilities of $74,389,000 all we’d need to do is subtract to get their stockholders’ equity of $38,942,000. Alright, let’s just step it up a little bit. If we know what one of these categories are we can figure out the others. So, if we know what our liabilities are in this next equation, we know our liabilities are $70,000 and our stockholder’s equity is a $120,000, so, if assets equals liabilities plus stockholders’ equity, all we need to do is add the $120,000 plus the $70,000 to give us a $190,000 in assets. Going down to the next one, if we know what our assets are, and what our stockholders’ equity is, then all we need to do is subtract to get our liabilities. The assets of a $160,000 minus the liabilities of $70,000 is going to give us $90,000 liabilities, and down here on the last one, if we know what our assets are and we know what our liabilities are but we don’t know our stockholders’ equity, we’re going to take the assets minus the liabilities to get our stockholders’ equity. Once that is said we’ve kind of mastered that equation. There are two more account types I want to show you today that we’re going to account for. There’s actually five basic types of accounts: (1) assets, (2) liabilities, (3) stockholders’ equity, (4) revenue and (5) expenses. Revenue and expenses were not in the accounting equation. I am going to talk a little bit later on how they impact the accounting equation,
but revenues are what we do when we’re selling products or services to our customers, and I think an account we will see used a lot in our book is fees earned. In a service business a revenue account might be fees earned. If we were a merchandising business it might be sales. Alright, again, this is what we are in business to do: to bring in revenues, and then expenses are just basically the cost we’ve expensed to earn revenue. Some examples would be rent expense, utility expense, salaries expense, telephone expense, just paying those regular on-going day-to-day activities of the business. We could have things like advertising expense we do periodically; maybe we have to fix our vehicle, so we have some maintenance expense. Whatever the category is, if you write the word expense after it you always have an expense account. So, expense accounts end in the word expense. Now how do these two affect the accounting equation? Well, as the business earns revenues by selling products or services to their customers, they’re actually increasing the stockholders’ rights to the assets of the business, so revenues increase stockholders’ equity. Expenses, on the other hand, those costs that we had to incur to earn the revenues would take away from the stockholders’ equity in the business.
