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The process of recording information in books is an essential part of accounting. Credits, which represent income on your balance sheet, and debits, which represent deductions, generate all transactions that are recorded in the books. Regardless of whether accounting is traditionally carried out by the double entry method or if it is carried out through accounting software, bookkeeping allows you to enter credits and debits in one of the five main types of accounts.
Expense accounting consists of entering all business costs. The expense record represents the daily operating cost in a short period of time. For example, common expense records are costs of raw materials for production, expenses for office supplies, payment of wages for work rendered, and the cost of company insurance. Expenses are recorded as debits, or negative income, in the accounting.
Income records represent the money the company collects. It consists mainly of income from the sale of goods and services. Big sales translate into higher revenue, while poor sales keep revenue low. Together, income and expenses determine the profit or loss of the company; when income exceeds expenses, the difference is a profit. Otherwise, the company has a loss equal to the difference between expenses and income for the period analyzed.
Another way of accounting for the records is to use a balance sheet. The first thing we find are the assets. Asset records come from the cash value of items that the company owns. Assets include tangible items such as inventory of merchandise, property, and cash. Accounting for other assets is difficult because some are intangible, such as patents and trademarks, and their value can fluctuate widely based on what other companies are willing to pay for them. Asset value records depend on how much the asset will influence future revenue generation for the company.
Accounting for liabilities represents future commitments of money that a company has on its balance sheet. They take the form of debits and indicate long-term deductions. Liability records include items such as future wages to be paid, mortgage payments for company property, debt or loan obligations, and taxes payable.
A company’s balance sheet includes capital records that indicate what shareholders have contributed. The capital will depend on the assets accounted for. The general accounting equation indicates that the assets of a company are equal to the sum of its liabilities (in absolute value) and its net worth. Because the value of assets changes due to causes such as depreciation or market trends, shareholders’ equity will also change in value, since a share represents a portion of the company, and the value of the company depends on the value of its assets.