You can’t build a strong foundation without understanding the 3 core principles of bookkeeping. Assets, liabilities and equity are what you need in order to understand how everything works together as one when it comes to bookkeeping.
You need to have a strong foundation in order build your business. These three aspects of any business will help you build it up strong by understanding what each one entails in order for there not be any problems or confusion later on down the road.
Understanding these basic concepts is imperative when looking into learning more about how the entire process works! Let’s break down each one and begin to gain an understanding on just how important it is to have a firm grasp on all three parts.
Foundation of Bookkeeping… 3 Terms To Understand
There are three terms that you are going to need to be familiar with as you start to understand what it takes to become a bookkeeper. These are Assets, Liabilities, and Equity.
“Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.”
Or, to put it into easy-to-remember terms, these are simply things that you own.
“A legally binding obligation payable to another entity. These are incurred in order to fund the ongoing activities of a business. Examples of liabilities are accounts payable, accrued expenses, wages payable, and taxes.”
Simply put, liabilities are things that you owe.
“Equity is the net amount of funds invested in a business by its owners, plus any retained earnings.”
The simple version of the definition of equity is simply what is left over.
Bear With Me Here
I get it, this isn’t the most intriguing or sexy thing in the world to read about, right? And I agree.
But, it is important to understand that these three terms lay down the foundation of becoming a bookkeeper. In fact, everything that you do to serve your clients revolves around these three things.
If you can understand what assets, liabilities, and equity are and how they work then you will understand what bookkeeping is and how it works.
The Accounting Equation
Yup, there is even an equation that you are going to want to understand to go along with this.
Assets = Liabilities + Equity
The most important thing that you are going to want to take away from this equation is that whatever you do to one side of the equation you must also do to the other side.
For example, let’s say that you purchase a car for your business for $20,000. You put $5,000 of your own money down and took out a loan for the remaining $15,000. Using our equation this is how it would look.
$20,000 = $15,000 + $5,000
Another way of looking at this equation is to think of a scale. To keep things balanced you need to have the same amount of weight on each side of it to have it balanced out, right?
In other words, if you are going to add 10 ounces of lead on one side of the scale you also have to add 10 ounces on the other side to balance it out.
It is important to fully understand this concept to be able to add value to your clients and make for an amazing bookkeeper!
How Can You Learn More?
Talking about assets, liabilities, and equity simply scratches the surface when it comes to bookkeeping. But realizing that everything about bookkeeping revolves around these three simple concepts is super important to grasp.
So, where do you go from here? What can you do to learn about bookkeeping and begin your own business?
What I want you to do to do now is check out my review of what I consider to be, hands down, the best bookkeeping course online. Within my review, you will see everything that you will learn and understand why it’s the best out there.
Not only will you learn how to become a bookkeeper but also how to market your business as well. Do yourself a favor and check it out and if it is not for you (because bookkeeping is not for everyone) at least you looked into it where you were able to make an educated decision.
If you have any questions, comments, or concerns please do not hesitate to reach out by dropping a comment below and I will be sure to get back to you ASAP!