In order to function, every business involves some form of accounting because accounting encompasses buying, selling, banking, assets, liabilities and taxes. The basics of business accounting are the same from one company to the next, with differences in the details depending on the type of company and how it does business. A business cannot operate without at least some basic accounting principles in place.
Debits and Credits
In a business accounting system, debits and credits are the backbone. They exist in every aspect of the system, because every entry in a general ledger for a business will contain both a debit and a credit. All debits and all credits must be equal, otherwise an entry is out of balance and will throw an entire balance sheet off as well. Debits and credits increase and decrease the balance of the account. With assets, debits increase and credits decrease. With liabilities, debits decrease and credits increase. The same is true with income and expenses, where debits decrease and credits increase income, and debits increase and credits decrease expenses.
Assets and Liabilities
Assets and liabilities make up the accounts on a balance sheet. There are separate sections for different assets and liabilities depending on the type of business. Assets increase with debits, and decrease with credits. Liabilities increase with credits and decrease with debits. Assets are anything that a company has that is of value, such as cash, vehicles, inventory, objects, claims and rights that belong to the company. Assets may also be intangible, such as trademarks. Liabilities are the opposite, and are obligations that one company has to another company. Examples of liabilities include credit cards and loans.
Income and Expenses
The purpose of the income and expenses section of a balance sheet is to show where money is coming from and where money is going. Income accounts should exist for each different line of company business. Income accounts include sales revenue, interest income, asset sale income and consulting income. Expense accounts show where money is going in a business, such as rent, interest, amortization, depreciation of assets, maintenance, repairs, telephone, salaries, wages and utilities. Income and expenses should be updated whenever money comes into or goes out of the business to show how the company is doing financially.
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