Before we can start classifying and recording transactions, we need to understand the Accounting Equation.
The Accounting Equation must always balance!
What you have (ASSETS) = Who owns it (LIABILITIES + OWNER'S EQUITY)
Assets is what the business has: Cash, Inventory, Equipment, Money Owed to the Business (Accounts Receivable)...
HOW DID WE GET THESE ASSETS? We got them from the next two categories.
Liabilities is what the business owes:
Accounts Payable - purchased assets by placing on an account from a supplier that we will pay in the future.
Owner's Equity is what the business invested to obtain or purchase assets:
Original Investment - this could be cash or equipment.
Retained Earnings - this could be profit that you are putting back into the business.