When the business sells something, or in the case of a non-profit, receives a donation or member dues, the income has to be recorded. If the income was in cash, the account for the bank has to be updated. If the income was in the form of a promise to pay, the loan is recorded as an asset called Accounts Receivable. However, the customer chooses to pay, the income must also be recorded in the account set up to represent income from a specific source.

Setting Up the Chart of Accounts

Consider for a moment that the books were set up as the business was established and put into operation. Initially the only asset that would have a value is the bank account. There would be one or more equity accounts showing ownership. If money was borrowed to start the business, there would be a liability account for each loan.

As the business gets into action, equipment, rent, inventory, etc. need to be purchased. Employee pay and other expenses need to be paid. The bookkeeping actions consist of creating transactions that lower the cash in the bank and update the asset accounts for equipment and inventory or update the expense accounts for rent and employee pay.

Purchases of inventory, equipment and services may not have required an immediate cash payment. Depending on the business’s industry, vendors may offer terms. For large ticket items, extended terms may be offered. Noted above is that these purchases can provide the business with assets the value of which are put in asset accounts. If the purchases were by short or long term loans, the loans need to be recorded in liability accounts such as Accounts Payable, Notes Payable, etc.