>> Here we're going to have a look
at the basic accounting equation.
That equation says that assets equal liabilities plus equity.
In other words, the business owns assets.
The business owes other businesses
or other businesses have a claim against this business.
And then what's left over is its net value or net worth.
We can rearrange that slightly by subtracting liabilities
from both sides of the equation.
Obviously, if you take something from both sides of the equation,
you're not changing anything.
So this side will be assets minus liabilities.
Therefore, we have assets minus liabilities is equal to equity
because the liabilities here and the liabilities here cancel out.
It's just another way of looking at it.
But what it's saying is if the business subtracts the value
of its liabilities from the value of its assets,
what's left is the net worth in the business.
So let's just take this equation, bring it down here,
and let's look at what kind of accounts might be seen.
The most obvious one in a business is its cash.
I'm going to put checking in there in parentheses
because that's what it is.
Don't confuse it with currency and with coin.
It's the business bank accounts.
Another account that is frequently almost always seen is
accounts receivable.
That is actually abbreviated usually to A/R.
This is claims that -- services that the business has provided
but have not yet been paid for will go in here.
So for example, at the end
of the month I will invoice my clients
for the work I've done in August.
I don't expect them to pay me until ten days
into the next month, September.
Accounts receivable account will contain the dollar value of each
of the amounts that the clients owe me.
In fact, anything with the word receivable
in it must mean that it's an asset.
Other things that the company might have is supplies,
items that it consumes or uses up in running the business.
It may also have what is called prepaid expenses.
Examples of these will include prepaid rent, prepaid insurance.
We'll talk more about these.
Right now I don't want you to be concerned about what they are.
I just want you to know that they exist.
The business may also have inventory.
That's items that it has purchased for resale.
It may have equipment.
It may have buildings.
And it may have land.
Liabilities are easier because most
of them include the word payable.
And just as in assets we had accounts receivable,
here we have a accounts payable or A/P.
This is where I have received invoices
but my business hasn't paid them yet.
So for example, the utility bill for August comes
in at the end of August.
I don't have to pay it until towards the end of September.
But to remind me that I have to pay it,
I'm going to record it in accounts payable.
You will also have things
such as taxes payable, salaries payable.
A lot of businesses might pay the employees on the 5th
of the month for the work done in the previous month
from the 16th to the last day of the month.
They would then record the amount owed
to their employees in salaries payable.
When they actually pay the accounts payable
or the salaries payable or the taxes payable, we will take
out those amounts from these accounts and take out the cash
out of our checking account.
There's only one other item.
And like the prepaid expenses we will learn more about it later
but it is called unearned revenue.
And it's essentially where you have been paid for services
that you haven't yet provided for the client.
The prepaid expenses is where you've paid for something
that you haven't received.
So for example, a tenant business
in a large corporate building might have prepaid rent.
They may have paid the first three months rent up-front.
It's an asset because they haven't used it all up.
The landlord of that building will have unearned revenue.
He will have the rent
but he hasn't provided three months yet,
so we will recorded in there.
Again, I don't want you
to be too concerned about this right now.
We just want to lay out the kind of accounts that you see here.
And lastly under equity we have two accounts.
We have an account called retained earnings,
and we have the stock accounts.