1. Accounting Equation - Income Statement Financial Categories

   The income and expense accounts are reflected in the income statement and it has an effect on the accounting equation. These accounts are used to record and report on the financial performance of the business entity or organisation. The income statement reflects all the income accounts and expense accounts of the business. These income and expense accounts are also known as the nominal accounts. It consists of two basic Financial Categories:

   Financial Category	What do they tell us?	Examples of accounts
   Income accounts (Nominal accounts)	These accounts reflect the income sources of the business.	Sales Interest received
   Expense accounts (Nominal accounts)	These accounts reflect the expenses that the business incurs to generate the income.	Motor vehicle expenses Rent Telephone Salaries and wages Water and Lights

   The difference between the total of the income and the total of the expense accounts will reflect how much profit the business made or how much is the losses (if the Expenses are more than the Income) that the business has made.

   The profit is the return or remuneration the owner or owners of the business receives on their investment in the business. This difference or Profit / (Loss) is transferred to the Balance Sheet (Retained Earnings Account) as it will increase the owner / owners equity (interest) in the business.

    PROFIT = INCOME - EXPENSES

   ---

2. Accounting Equation - Balance Sheet Financial Categories

   There are three types of accounts which are normally reflected in the balance sheet (i.e. proprietary accounts, asset accounts and liabilities accounts). These accounts will reflect a snap shot (picture) of what the business is worth as at a specific date. This will also reflect what interest the owner has in the business or how much the business owes to the owner of the business. It will also indicate any monies owed to other parties, businesses or organisations as well as what assets the business owns and what it is worth.

   Financial Category	What do they tell us?	Examples of accounts
   Proprietary Accounts	These accounts are used to enter all the personal transactions between the owner(s) of the business and themselves. This reflects how much the owner(s) has invested in the business and how much they have taken out of the business.	Capital Drawings Retained Earnings
   Asset Accounts	These accounts will reflect all the assets owned by the business, which is used in the activities of the business.	Land and buildings Vehicles Equipment Furniture and fittings Machinery Debtors Bank Petty cash Trading stock
   Liability Accounts	These accounts will reflect all the liabilities of the business, to which the business owes money.	Loans Bank overdrafts Creditors

   CAPITAL = ASSETS - LIABILITIES

   The balance sheet is a snapshot of the business as at the date after all these transactions are recorded. It reflects a list of all the assets that the business owns and a list of how these assets are financed by own capital and money borrowed from the bank and credit granted by the suppliers. The balance sheet is nothing more than a list of the sources used to finance the assets of the business and a list of the assets which were financed or funded by these sources of financing.

   All capital that the owner invests in a business is also known as the owner's equity or the owner's interest in the business. Capital and liabilities finance all assets the business has acquired. This capital and liabilities are known as the sources of financing or capital employed. On the other hand, the assets that the business owns, is known as the employment of capital.

   ---

3. Accounting Equation - Financial Categories (Income Statement and Balance Sheet)

  ASSETS + EXPENSES = INCOME + CAPITAL + LIABILITIES