There are a few (and only a few) things you need to understand in order to make setting up your accounting system easier.

Debits and Credits

These are the backbone of any accounting system. Understand how debits and credits work and you’ll understand the whole system. Every accounting entry in the general ledger contains both a debit and a credit. Further, all debits must equal all credits. If they don’t, the entry is out of balance.

Accounting Basics – 5 Basic Accounting Types:

  • Assets
  • Liabilities
  • Equity
  • Income and
  • Expenses

Balance Sheet Accounts

The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the changes in the value of things you own or owe.

Assets are the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically, you could sell the item for cash.

Liabilities are the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time.

Equity is the same as “net worth.” It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.

Income and Expenses Accounts

The two Income and Expense Accounts are used to increase or decrease the value of your accounts.

Income is the payment you receive for your time, services you provide, or the use of your money.

Expenses refer to money you spend to purchase goods or services provided by someone else.