Basic elements of accounting

The basics of accounting involve three fundamental elements; assets, liabilities and equity. These elements make up the basis for financial reports such as balance sheets, ledgers, and other means accountants use to maintain financial records for businesses, corporations and individuals. In accounting, it is vital that the equity that makes up the assets and the liabilities all balance mathematically.

Assets :

An asset is a resource that a corporation, organization, or person owns and utilizes to maintain the functionality and operation of a business or lifestyle. Assets, for businesses, can be classified into several categories. Necessities are assets that, without, a business could not function. On a large scale, examples could be factories or heavy equipment, and, on a smaller scale, assets could be paper to run a cash register or shelving to display merchandise. Assets can also be convenience items, such as a water cooler in the break room, or useful items, such as company cars, office furniture, or lighting. Individuals also possess assets, from real estate to vehicles to high-definition televisions. Another way to think of assets is something a business or person owns that can be used as collateral against a loan, such as a house or property.

Liabilities :

In accounting terms, liabilities refer to debts or obligations that a business or an individual owes. A liability is not necessarily considered a negative function, in these terms, since obligations to creditors are a necessary function of business and personal life. Businesses need to pay for inventory, equipment, and real estate, and credit is the life blood for such activities. The same principle can be applied to individuals, who must make auto and home mortgage payments, credit card payments, and payments for medical or school bills. In a healthy business or household ledger, assets will outweigh liabilities, while problems occur when liabilities become too large and owners have difficulty keeping up with payments to creditors.

Owner's Equity :

Owner's equity refers to the difference between what a person or a business owns and what is owed. Totaling the owner's assets and liabilities is another way to measure the total assets. Equity in business increases when the business either generates revenue or investors add cash as an investment in business growth. Individuals can gain equity through adding money through personal savings, gifts, or investment growth. Decrease in equity occurs when a businesses or individual withdraws funds from accounts or makes regular or large purchases. The measure of an owner's equity is constantly changing as assets and/or liabilities rise and fall and, in accounting, it is vital to make sure all balance out properly.