When coming up with a financial picture, everything falls into the following 4 basic account types:

  1. Assets: This is stuff that you own or have long-term possession of. An example: Cash in a bank account. You own that cash. Or, your house. You own that house. Or a truck. You own that truck.
    This breaks down to 2 sub-categories: (a) Assets-Realized - Stuff that you own and can exchange right away. Key example here is Cash. (b) Assets-Unrealized - Stuff that your own but requires you to sell it first. Examples are: your car, your house, your stocks. You need to sell these things for cash first (to make it become a realized asset). Before you can use the money from that sale.

  2. Liabilities: This is stuff that you borrowed, and now you owe it. An example would be the credit card. You owe (need to pay back) the money borrowed from the credit card account. Another example is a mortgage: You borrowed a bunch of money to purchase a house. Now you owe the mortgaged amount of money.

  3. Earns: This is stuff that gets you money. Examples include things like a pay-cheque, house appreciation, stock dividends, money made from a lemonade stand (sales).

  4. Burns: (Also known as expenses): This is stuff that takes your money that you will never get back (as if it was set on fire). Usually you exchange this money for something else of (temporary) value. A great example is heat in the winter-time. You pay for (give away money, never to see it returned), in exchange for natural gas or electricity, which in turns provides you heat (temporary value). Often I think of another example of this, such as when people actually burned money to provide heat for their house when they couldn’t find dry logs. Another example is food. You exchange money for food, eat the food and next day need to do it all over again. Some “burns” are unavoidable and needed (such as money for food, or electricity), other types are more avoidable (such as loan interest).

With the above account types, we can describe pretty much any financial picture. Next, let’s talk about how we can create a financial picture with the software.