The Vocabulary of Accounting
Assets, liabilities, equity, revenue, expenses — the five buckets that every transaction in your business falls into.
The five account types
Every account on your books is one of five things: an Asset (something you own), a Liability (something you owe), Equity (the owners' stake), Revenue (money earned), or an Expense (money spent to earn it). Master this and the rest follows.
The accounting equation
Assets = Liabilities + Equity. This identity must hold after every transaction. If your books don't balance, you've made an error — full stop. Modern software enforces this, but understanding why is what separates an operator from a data-entry clerk.
Cash vs. accrual
Cash basis records money when it moves. Accrual records revenue when earned and expenses when incurred. Investors expect accrual. Tax filings often allow cash. You will likely keep books on accrual and convert at year-end.
Key takeaways
- Every account is Asset, Liability, Equity, Revenue, or Expense.
- Assets = Liabilities + Equity must always hold.
- Default to accrual; convert for tax if needed.