Now for the fun stuff!  Everyone loves income, the more the better.  What is income?  Income is often referred to as revenues on the financial statements.  The official definition from the International Accounting Standards Board (IASB) is:  

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants. 

Did you get all that?  Income for a basic small business is revenue or money received from selling your service or product.  If you priced your service or product correctly this will increase your cash in your bank account which should increase your equity in the business.  You have to love accounting!

Everyone wants equity in a company.  Equity is what the shareholders or owners in a business are owed after all liabilities are paid.  A simple example is your company sells $1,000 worth of items and you paid $600 for the items.  The remaining $400 would eventually end up in the equity account.  The legal structure of the business will determine which equity accounts are used.  These may include owner's capital, owner's draw for a sole proprietorship or capital stock, common stock, and preferred stock for a corporation.

Now for liabilities.  In general liabilities in a business are amounts owed to others.  These may include:  accounts payable (invoices to vendors), wages payable, payroll liabilities (payroll taxes owed to federal and state agencies), sales tax payable, customer advances, bank loans, credit card payable and notes payable.  These are just a few examples of liabilities a company may have.  If your business owes money to someone else you have a liability. 

The chart of accounts is divided into sections to help keep your books in order.  The basic sections are:  assets, liabilities, equity, income and expenses.  Each section contains similar accounts which are grouped together to help form the financial statements.  These financial statements help you make decisions concerning operating the company.

The chart of accounts is the foundation of all accounting systems and needs to be organized with your specific business in mind.  The type of business and the way your company is structured will have an impact on the accounts used.  Think before you jump!

Next up...
What is an account?