The process of bookkeeping is an essential part of business accounting. Credits, which represent additions to an account balance, and debits, which represent deductions, make up all bookkeeping transactions. Whether accounting takes the form of a traditional double entry ledger or a piece of computer software, bookkeeping allows you to enter credits and debits into one of five major types of accounts.
Expense accounting consists of entering all of a business's costs. Expense entries represent the day-to-day cost of operating over the short-term. For example, common expense entries are the cost of raw materials for production, office expenses, near-term payroll expenses for labor and the cost of business insurance. Expenses take the form of debits, or negative entries, in accounting.
Revenue entries represent the money that a business earns. It consists primarily of income from selling goods or services. High sales translate into greater revenue, while slow sales keep revenue credits low. Together, revenue and expenses make up a business's profit or loss; when revenue exceeds expenses, the difference is a profit. When expenses are greater then revenue, the business has a loss in the amount of the difference for the time period in question.
Other forms of accounting entries occur on a business's balance sheet. The first such type is assets. Asset entries in accounting come from the cash value of things that a business owns. Assets include tangible items such as merchandise inventory, property and cash savings. Accounting for other assets is difficult because some assets, such as patents and brand names, are intangible and can fluctuate widely in value based on what other businesses would be willing to pay. Asset value entries rely on how much an asset will likely earn for a business in the future.
Liability account entries represent future monetary commitments that a business has on its balance sheet. They take the form of debits and indicate long-term expenses. Liability entries includes items such as future payroll obligations to employees, mortgage payments for a business's property, debt obligations on loans and upcoming business taxes.
A business's balance sheet includes equity entries to indicate the value of ownership shares. Equity is dependent on assets in the accounting process. A general accounting equation states that a business's assets are equal to the sum of its liabilities (noted as a negative number) and its equity (noted as a positive number). As the value of a business's assets change because of appreciation or market trends, the equity that owners hold also grows in value.