#Accounting - What are Assets? Liabilities? Equity? Income? Expenses?

Question

In accounting, what are Assets? Liabilities? Equity? Income? Expenses?

Answer

• The simple way to think of Assets is to think of them as things the company owns. If the company owns equipment, furniture, the building it's in, it's cash - these are all assets. Sometimes things that are assets are not held by the company - money owed it by customers is an asset (called a Receivable) - the company may not have the money in-house but the fact that it is owed money means that it owns the right to that money. Assets tend to be natural Debit accounts.

• Again, working within simple explanations, Liabilities are those things that the company owes. When the company buys things on credit or takes out a loan, these are amounts that are owed by the company to other entities. Liabilities tend to be natural Credit accounts.

• The difference between what the company owns and what it owes is what the company is worth. This is its Equity (oftentimes called Net Equity, Net Worth, Owner's Equity, and other similar names). When a company is incorporated, the shares of the company are part of the equity (there will be some mention as to the equity per share or a way given to calculate it). Equity tends to be natural Credit accounts. 

• The way a company brings in money or other assets through the ordinary course of affairs is called Income (note that this is different than when a company does things such as selling an investment or raises money by obtaining a loan. These activities, while it will bring in money, is classified under Investing and Financing activities). Sales tend to be natural Credit accounts.

• In like manner, when money or other assets are expended through the ordinary course of affairs, these are called Expenses. Expenses tend to be natural Debit accounts.

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