The easiest way to think of accounts is that they are like buckets or files in a filing cabinet.  Accounts are used for sorting financial transactions and grouping together items (or amounts) of a similar nature.

How you sort your items is determined based upon several factors which include: industry and/or accounting standards, how you might want to see your financial information presented that is important to you, or based upon tax law requirements.

For example, if you are paying bills and need to record what type of expenses you are paying, you would likely place your electric payments into one account and your insurance payments into another.  You generally wouldn’t group your utility costs with your insurance costs.  However, if you were paying two different types of insurances such as property insurance and an umbrella liability policy, you might decide to group these two together in one account as they are so similar in nature. read more

An asset is something that is owned.  A liability is something owed.  Equity is the difference between the two.

Assets, liabilities, and equity are parts of a balance sheet, which, in turn, can be part of a set of financial statements.

Assets

Think of things you own.  A car, a bank account, a house, a pen or pencil… they are all assets.  An asset is usually something of value.  This doesn’t mean an asset has great value, just that is has a value.  A pen might be worth $1 while a building might be worth $100,000.  There is a big difference in their values but they still are both assets. read more

A bank reconciliation is performed for two main reasons: first, to determine exactly how much there is in your bank account and, second, to make sure what is recorded in your accounting records agrees to how much you have.

Although you can reconcile your bank account at almost any time, the most common time to do this is when you receive your monthly bank statement.  When you get your statement, the statement will tell you what the balance in your account is.  But, most times what the bank is telling the balance is, is not really how much money you have.  This is due to several factors including checks that you have written that have not been deducted from your account yet and deposits that you have made that have not been added to your account yet. read more

The concepts of prepaid and accrued expenses can sometimes be confusing and, unless you deal with them all of the time, it can be easy to forget how to account for them properly.

First off, prepaid and accrued expenses generally are taken into account when your accounting records are prepared on the accrual basis.  When you are keeping your books on the cash basis of accounting, you are deducting expenses when you pay them; therefore, from purely an accounting point of view, you won’t have any expenses that you paid ahead of time or any expenses that you will owe someone for (even if you do still do owe someone for them).  You can read more about the cash versus accrual basis of accounting here. read more

One question that comes up often is what is: the difference between the cash basis of accounting and the accrual basis of accounting.

Essentially, there are two main ways to maintain your accounting records and report your earnings: the cash basis of accounting and the accrual basis of accounting.  There are other less used ways, but cash and accrual are the two most widely used methods and the two which we will talk about here.  Our discussion will focus on the difference in the reported earnings of a company.  It should be noted that there are balance sheet differences as well which are outside the scope of this limited explanation. read more