Before one can even begin to dive into the accounting world, one must understand the accounting equation. The accounting equation is the basis and foreground of understanding and applying accounting concepts. The accounting equation consists of three main accounts; assets, liabilities, and equity. The accounting equation simply states that assets are equal to the sum of liabilities and equity.
Assets are defined as resources owned or controlled by a company. Just to mention a few, assets may consist of cash, accounts receivable, notes receivable, land, buildings, equipment, vehicles, and supplies. Accounts receivable and notes receivable are accounts that define what you will receive from completing work or a service. In other words, it is what the company is waiting to be paid. An example would be waiting for a customer to send in their payment for the bill you have already sent out for a job you have already completed. Another type of asset is prepaid accounts. Businesses may pay for six months of health insurance or three months of car insurance. Because the service is prepaid, it is considered an asset that will be used in the future. In addition, cash is not just defined as the physical amount of currency a business has in its possession. Cash also consists of the amount of money that is in the business’s bank accounts. Lastly, the inventory a business has in its possession is also included in a business’s assets.
On the other side of the accounting equation, liabilities are the creditors’ claims on assets. In other words, what the company owes to another person, company, bank, or government. Liabilities consist of accounts payable, notes payable, taxes payable, wages payable, accrued liabilities and unearned revenue. Accounts payable and notes payable are the opposite of accounts and notes receivable; they are what you owe on bills rather than what you expect to receive. Accounts payable are made up of the bills that the company needs to pay for in the near future. If a company were to buy a new truck on credit, then the purchase would become an account payable because the business that purchased the vehicle will need to pay off the purchase in the future. Taxes payable are such taxes that are due to the government such as sales tax. Wages payable are the wages that the company owes its employees. Rather than paying employees at the end of each day, businesses will pay their employees in increments of time such as weekly or bi-weekly. After an employee has finished a day of work the hours they have worked increases the wages payable account until the employees are compensated for the wages they have accrued. Accrued liabilities are the opposite of prepaid accounts. Accrued liabilities are liabilities which have occurred, but a business has not yet been billed for. Once the company is billed for the service, then the accrued liability becomes an account payable. Unearned revenue is revenue that has been received in advanced for work that has not yet been completed. A simple example is ticket sales. Bands receive money in advanced from ticket sales although the concert has not yet taken place. Because they have received this money, they are obligated, or liable, to perform the concert.
Along with liabilities, equity is on the other side of the accounting equation. Equity is the owner’s claim on assets. Equity is made up of common stock, retained earnings, dividends, revenues, and expenses. To start a business, often investors will contribute to the new business and in return receive common stock, which represents ownership in the company. Dividends are a portion of the company’s profits that are paid to its shareholders.
Defining accounting consulting for insurance experts
Retained earnings explain the amount of money the business has in its possession after all expenses and dividends have been paid. Within Equity there is another equation. Equity is equal to common stock minus retained earnings. Retained earnings are then broken down even more to equal the sum of dividends and revenues minus expenses. These and more accounting consulting definitions can be well explained and applied if you consult a reputable accounting firm to run your books