If you purchase something on credit then that means that you will recieve a bill for a future payment you are required to fulfill. The cost on this bill goes under "Accounts Payable" (Liability) as an increase AND under "Expense" (Owner's Equity) as a decrease.

YET, when this bill is later payed, the cost then goes under "Cash" (Asset) as a decrease AND "Accounts payable" (Liability) as a decrease.

I notice that things usually go under "Expense" (O.E.) or "Revenue" (O.E.) and one other thing, such as "Equipment" (A), "Cash" (A), etc. Other than that they are rarely under Liability. The exceptions are when its a yet-to-be paid bill either to or from the client/creditor.

Is this assumption correct?

Your model is too simple. You have to make a distinction between capital accounts which record the acquisition and disposition of assets with a useful life greater than one year, and cash flow, income and expense, or operating accounts which record the flow of money and the incurring of expenses for goods and services that don't directly adjust the company's net worth but fund its profit making operations.

At the end of your fiscal year you will prepare two reports. One is the operating statement, profit and loss, or whatever you call it, which summarizes all of those transitory accounts. How much did you receive in gross revenue, how much did you pay for salaries, raw materials, services, energy, rent, insurance, etc? The difference between income and expense is gross profit. There are obviously some transactions caught in midstream that will be completed in the next year.

I left out depreciation on capital assets, taxes, and all the other complicated stuff you'll learn in later years. They all fit into this same model.

The other report is the balance sheet. This is where you keep track ofThe current value of your assets (computed if possible, assessed if not)--including accounts receivable (one of the loose ends from the P&L), capital equipment, real estate, inventory (another loose end) software libraries, patents, etc., and goodwill, which merits a discussion of its own. Your liabilities--including accounts payable (loose end), mortgages, bonds, etc.; and Owner's equity, which is assets minus liabilities.Notice that your balance sheet does not really balance, you stuffed in a figure called owner's equity to make it come out that way.

I've omitted a lot of arithmetic, such as turning some or all of this year's profit or loss into an increase or decrease in owner's equity, and the entire stock thingie, which will have its own class.

I have a degree in accounting but this is the way I would explain Accounting 101 to a physicist. He would call it a "conservative field." A gambler would call it a "zero-sum game."

Well, Fraggle has done fairly well explaining.
I don't have a degree, but I'm about to get a diploma...

If you purchase something on credit then that means that you will recieve a bill for a future payment you are required to fulfill. The cost on this bill goes under "Accounts Payable" (Liability) as an increase AND under "Expense" (Owner's Equity) as a decrease.

YET, when this bill is later payed, the cost then goes under "Cash" (Asset) as a decrease AND "Accounts payable" (Liability) as a decrease.

I notice that things usually go under "Expense" (O.E.) or "Revenue" (O.E.) and one other thing, such as "Equipment" (A), "Cash" (A), etc. Other than that they are rarely under Liability. The exceptions are when its a yet-to-be paid bill either to or from the client/creditor.

Is this assumption correct?
No. Well, sort of...

You need to create a classified balance sheet. That would be useful to you...
Here's in a nutshell: Current Assets, Capital Assets, Current Liabilities, Long-Term Liabilities and Equity. Current items are high in liquidity.

Liabilities are very important in business. Let's begin with the definition. It meets 3 criteria:
- the company has a future obligation
- the company is currently bound to it
- it's the result of a past transaction

Let's go back to the accounting equation:
A = L + OE

A is all the resources that you have. L and OE are the two ways to fund businesses. Liabilities is money from other people. OE is money that you get from selling a part of your business (share).

Now, here's the exciting stuff. Liabilities create leverage. Basically, when you borrow, you magnify the power of your business. But it's riskier then OE.


Finally, the central problem with your view seems to be the lack of an accrual concept. Do you know what the accrual concept entails?

Btw, have you ever done a cashflow statement? I'm guessing not. I'm not sure if should go there. So I will wait for your response...

"Accounts Payable" (Liability) as an increase AND under "Expense" (Owner's Equity) as a decrease.
Actually, expense increases. Then, later, OE decreases when you do the income statement.

I think you're talking about unearned revenue and ppd accounts. Unearned rev is a liability and is accrued when the service is performed. Opposite with ppd (asset) and is expensed with time.