Accounting is the process where business normally records its financial transactions and presents them to internal and external clients or customers. All transactions are recorded on a company balance sheet by using the following basic accounting formula:
Assets: Assets are those that company has value. Assets can be divided in to two categories: fixed assets and current assets. Fixed assets include building, furniture, fixtures and long term assets whereas current assets include cash, bills receivables and short term securities. These current assets normally used to pay for current liabilities.
Liabilities: Liabilities can also be divided in to two categories: Current and non-current liabilities. Current liabilities include bills payable, short term notes. A non-current liability includes long term debt,and bank loans. These liabilities should equal to the current and non-current assets in the accounting equation, leaving the remaining balance in the owner's equity accounts.
Owner’s Equity: Owner’s equity is considered the startup money that owner has invested in the business. Money that is invested from external source is called shareholders equity and is included in the owner’s equity. Any money that business earns as a profit is considered retained earnings and if reinvested in the business is also included in owner’s equity.