Monday, February 12, 2007

Accounting for Non-Accountants 2

Survived my lecture on the topic. Let me then continue these notes for those who may be interested.

Accounting uses "accounts" to record transactions. A list of these accounts is contained in the chart of accounts, a primary document of an accounting system. In fact, when you hear an accountant say that he or she will be setting up the books of a business, one of the first things he or she actually does is to prepare a chart of accounts.

Accounts are generally classified into assets, liabilities, equity, revenue and expense accounts. Assets are the economic resources of a business. They are either current, meaning readily convertible to cash, or long-term or fixed assets, those not easily convertible. On the other hand, liabilities are the obligations of a business, or the claims of creditors to the resources of a business. Like assets, they are also classified into current and long-term.

Equity represents the rights of owners over the resources of the business. It is also to referred to as the net worth of the business - the value of its assets less liabilities. This is increased by revenues or income earned, and decreased by expenses, meaning the costs of operations and other activities incurred during the accounting period.

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