Basic Accounting for Teens
Written by Eddy Hood
In today's world, a degree beyond high school can lead to success. Many high school students, however, struggle to make a decision regarding which field to enter beyond high school. It can be a difficult decision to make, but students can narrow their choices by learning more about each possibility that peaks their interest. Doing this helps individuals make informed decisions. One popular field many teens consider entering after high school is accounting. Accounting may seem like it is all mathematics, but those specializing in (accounting services) must know a lot of business information, as well.
What are Accounts?
Business accounts are very similar to personal checking accounts. A business sets up a checking account with a bank to ensure that their money is properly secured and managed. Unlike personal checking accounts, however, businesses have multiple accounts. These accounts ensure that money is readily available for withdrawal to pay employees and business expenses. Some of the business expenses include money that is owed to other businesses for services or money that is owed to a bank for a mortgage or a business loan. When money is received or deducted from the account, it usually then goes into a specialized branch of the business accounts like "accounts receivable" or "accounts payable" in bookkeeping terms. Keeping the business accounts properly managed is essential to the success of the company and can even help the business to establish lines of credits or loans with their bank. Using these accounts also ensures that the company has readily accessible records of their financial transaction history. This makes it simpler to balance the money that is coming into the business with the money that is leaving the business for expenses.
What are Debits and Credits?
Debits and credits are used in a system of bookkeeping known as "double-entry" bookkeeping. Bookkeeping is simply the act of maintaining records relating to financial information within a business. Double-entry bookkeeping means that two records are kept for each transaction to lessen the likelihood of an error occurring. These debit and credit (otherwise known as DR and CR) transactions lead to the total balance of an account, with debits listed on the right side of the account and credits listed on the left side.
What are Assets?
An asset is any type of resource that a company has control over that can be sold or used to obtain value. Assets fall into one of two categories: tangible or intangible. Tangible assets include any type of physical item, such as properties or products and usually in most instances, money. Intangible assets generally include items such as copyrights or patents. If necessary, either type of asset could be sold or used to increase the amount of money that a company has.
What are Liabilities?
In accounting, liabilities is a simple way of saying "money that is owed". Generally speaking, a liability is the amount of money that is owed to companies that provide services or products to the business. For instance, a company that produces clothing may buy their fabric from another company. This other business is known as a "supplier". Until the company pays their supplier for the fabric, there is a liability that must be recorded for the amount due. Other liabilities include money that is owed to a person or a bank as the result of a business loan.
What is Equity?
Equity is essentially how much a company is worth. The equity of a company must take into account the amount owed in liabilities. After all debts are deducted from the amount of assets and profit a business has, the amount left over is known as the company's equity. Equity can be owned solely by the business owner or by shareholders. Shareholders own a portion of the company's equity known as "shares," which entitle them to a certain amount of the money that is left over after all debts are settled. The amount of the equity they receive is based on the amount of shares they own.
What are Revenue and Expenses?
Revenue refers to the amount of money that is made solely from a company conducting their business. For instance, the revenue of a restaurant would only take into consideration the amount of money the restaurant received from customers buying their prepared dishes. Expenses, however, refers to the amount of money that is spent maintaining the business. Expenses for the same restaurant, for example, might be the money that is deducted to pay the chef and waiters, the cost of a bookkeeper for accounting services, the cost of preparing the foods, and the total amount that must be paid to operate from their location. For a business to be considered successful, the amount of revenue that is generated must exceed the total amount of their expenses.
Additional Links for Learning
- Risk Vs. Reward Investments for Teens
- Keys to Credit (PDF)
- Accounting 101
- Accounting Basics (PDF)
- Rules of Debits and Credits (PDF)
- Debits and Credits Summarized
- Overview of Accounting
- Balance Sheet: What does it mean?
- Matching of Expenses and Revenues
- Equity-to-Asset Ratio
- Equity, Debt or Assets?
- Teenagers and Money
- Revenue, Expenses and the Break-Even Point (PDF)
- Returns on Equity and Assets