Basic Accounting Equation

Basic Accounting equation is based on the fact that business recources (Assets) are created through two sources:
• Owner's investment (Capital)
• Getting Loan (Liability)

For instance, Mr. John starts his business with the investment of $100,000. At this stage his books will show the position as:
Assets = $100,000
Capital = $100,000
The equation will show;
Assets = Capital

Afterwards, Mr. John is successful in getting loan from a commercial bank for $500,000. The position of business after getting loan is
Assets = $150,000
Capital & Liabilities = $150,000
It means:
Assets = Capital + Liabilities

Chart of Accounts

Chart of Accounts is grouped into five main categories:
1. Assets
2. Liabilities
3. Capital
4. Expenses
5. Revenues

Assets:
Assets are the recources of business, which a business utilizes to get future economic benefits. Assets are sub-grouped into two categories:
1. Current Assets
2. Fixed Assets

Current Assets:
Current Assets are recources, which a business usually utilizes with a year. Some of the current assets are: Cash in hand, Cash at bank, Bills Receivable, Notes Receivable, Inventory etc.

Fixed Assets:
Fixed Assets are recources of business, having a life more than one year. The assets purchased for resale are not included in Fixed Assets. Some of the fixed assets are: Land, Building, Machinery, Furniture etc.

Liabilities:
Liabilities are the Debts. Some of the examples of Liabilities are:
* Accounts payable- the parties from which goods are purchased on credit.
* Loan from Bank- usually provided by Commercial Banks.

Capital:
Capital is the amount which owner provides for operating business activities. Capital is increased when recources of business are increased when Owner additionally invests cash or other asset and the business earn profit.

Expenses:
Cost intended to benefit the near future like, Salaries, Rent, Bank charges etc.

Revenues:
The term Revenue stands for sale of product, service and merchandise or earnings from interest, dividends, rent etc, or gains from sale or exchange of assets. Some of the revenues are sales, rent income, commission income etc.