Assets in accounting In the financial accounting sense of the term, it is not necessary to be able to legally enforce the asset’s benefit for qualifying a resource as being an asset, provided the entity can control its use by other means. The accounting equation relates assets, liabilities, and owner’s equity: Assets = Liabilities + Stockholder’s Equity (Owner’s Equity) Assets = liabilities + Capital liabilities = Assets – Capital Capital = Assets – liabilities That is, the total value of a firms Assets are always equal to the combined value of its “equity” and “liabilities.
The accounting equation is the mathematical structure of the balance sheet. Assets are listed on the balance sheet. In a company’s balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country. Assets can be divided into e. g. current assets and fixed assets, often with further subdivisions such as cash, receivables and inventory. Assets are formally controlled and managed within larger organizations via the use of asset tracking tools.
These monitor the purchasing, upgrading, servicing, licensing, disposal etc. , of both physical and non-physical assets. edit]Current assets Main article: Current asset Current assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets: 1. Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e. g. , money orders, cheque, bank drafts). 2.
Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). 3. Receivables — usually reported as net of allowance for noncollectable accounts. 4. Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the “lower of cost or market” rule. 5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance).
See also adjusting entries. Marketable securities Securities that can be converted into cash quickly at a reasonable price The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities. Long-term investments Often referred to simply as “investments”. Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of three types of investments: 1. Investments in securities such as bonds, common stock, or long-term notes. . Investments in fixed assets not used in operations (e. g. , land held for sale). 3. Investments in special funds (e. g. sinking funds or pension funds). Different forms of insurance may also be treated as long term investments. Fixed assets Main article: Fixed asset Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land, buildings,machinery, furniture, tools, IT equipment, e. g. , laptops, and certain wasting resources e. g. timberland and minerals. They are written off against profits over their anticipated life by chargingdepreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. Asset is important factor in balance sheet These are also called capital assets in management accounting. Intangible assets Main article: Intangible asset Intangible assets lack of physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc.
These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Websites are treated differently in different countries and may fall under either tangible or intangible assets. Tangible assets Tangible assets are those that have a physical substance, such as currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals Comparison : current assets , liquid assets and absolute liquid assets Current assets| Liquid assets| Absolute liquid assets| Stocks| | | Prepaid expenses| | | Debtors| Debtors| | Bills receivable| Bills receivable| |
Cash in hand| Cash in hand| Cash in hand| Cash at bank| Cash at bank| Cash at bank| Accrued incomes| Accrued incomes| Accrued incomes| Loans and advances (short term)| Loans and advances (short term)| Loans and advances (short term)| Trade investments (short term)| Trade investments (short term)| Trade investments (short term)| The assets are purchased to increase the value of a business firm or welfare the firm’s functioning’s. You will be able to think of an asset as something that can render cash flow (run), no matter of whether it is a company’s constructing equipment or a person lease flat.
Types of Assets Some item of efficient value possessed by a corporation or person, particularly that which could be exchanged to cash (currency). Good examples are cash, security system, bills owed, stock list, agency equipments, real property, an auto and other belongings. About a balance sheet, the assets are equal to the sum of liabilities (financial dues), ordinary shares, preference shares and retained profits. By an accounting position, the assets are divided into the under mentioned classes: 1. The current assets (other liquid items and cash) . The long-term assets (plant, equipment, real estate) 3. The deferred and prepaid assets (expenses (expenditures) for future prices such as insurance policy, interest, rent) 4. The intangible assets (copyrights, good will, trademarks, patents). The resources with economic value that a person, corporation or nation control or possesses with the expectation that it will furnish future welfare What is liabilities and types of liabilities and there examples? Answer: Liabilities are money or moneys owed to another individual or company by another.
There are two main liability categories, Current Liabilities and Long-Term Liabilities. Current Liabilities are liabilities that will be paid for in a short amount of time, 12 months or less. Long-Term Liabilities are liabilities that will take longer than 12 months to pay off. Two good examples of these are Equipment that a company purchases on account and will pay off in less than six months and large equipment or assets such as land, equipment, buildings, etc, that will take much longer than six months to pay off. Two further examples may be A POS (point of sale) computer that cost $3,000.
The company may choose to pay this equipment off in 6 months from purchase date, this is considered a Current Liability since the payment of this debt will be paid in less than 12 months. I purchase a building/land to open my business for say $500,000, this is a huge amount and it is unlikely (unless I’m really RICH) that I would pay this off in 6 months or less, therefore I will take a mortgage out on the building/land. The building/land is an asset for my company yes, however the mortgage payment, which will probably be 10 years or so, is a liability and is considered Long-Term. What are the different types of liabilities in accounting?
RANJIT RAINA ACCOUNTING The various types of liabilities are given below: Fixed liability: The liability which is to be paid of at the time of dissolution of firm is called fixed liability. Examples are Capital, Reserve and Surplus. Long-term liability: The liability which is not payable within the next accounting period is called long-term liability. Examples are Debentures of a company, Mortgage Loan etc. Current liability: The liability which is to be paid of in the next accounting period is current liability.. Examples: Sundry, creditors, Bills Payable and Bank overdraft etc. Trade liability:
Liability which is incurred for goods and services supplied or expenses incurred is called trade liability. Example; Bill payable and Sundry period. Financial liability: Liability which is incurred for financial purposes is called financial liability. Example: Bank overdraft, load taken for a short period. Contingent liability: A contingent liability is one which is not an actual liability but which will become an actual one on the happening of some event which is uncertain. Examples: Bills discounted before maturity, Liability of a case pending in the court. Assets, Liabilities, Equity, Revenue, and Expenses
Greetings! This Accounting Basics tutorial focuses on the five different account types that we find in our Chart of Accounts. They are: Assets, Liabilities, Equity, Revenue, and Expenses. We will define each account type and discuss its unique characteristics. Author: Keynote Support The Account Types: Assets, Liabilities, Equity, Revenue, and Expenses To fully understand how to post transactions and read financial reports, we must understand these five account types. Let’s define them briefly and then look at each one in detail: * Assets: tangible and intangible items that the company owns that have value (e. . cash, computer systems, patents) * Liabilities: money that the company owes to others (e. g. mortgages, vehicle loans) * Equity: that portion of the total assets that the owners or stockholders of the company fully own; have paid for outright * Revenue or Income: money the company earns from its sales of products or services, and interest and dividends earned from marketable securities * Expenses: money the company spends to produce the goods or services that it sells (e. g. office supplies, utilities, advertising) Assets Assets can be tangible or intangible.
Tangible assets are physical entities such as land, buildings, vehicles, equipment, and inventory. Intangible assets include Accounts Receivables, patents, and contracts. Assets are also grouped according to their liquidity, or the speed at which they can be converted into cash. Current assets can be converted into cash in 12 months or less. Fixed assets are tangible assets with a life span of at least one year and usually longer. High-cost fixed assets such as machinery and computer systems are not expensed, but their value is depreciated, or “written off,” over a number of years according to one of several depreciation schedules.
Liabilities Liabilities are debts, or financial obligations of a business, and are classified as current or long-term. Current liabilities are debts that are paid in 12 months or less, and consist mainly of monthly operating debts. Current liabilities are usually paid with current assets, i. e. Cash. A company’s working capital is the difference between its current assets and current liabilities. Managing short-term debt and having adequate working capital is vital to a company’s long-term success. Long-term liabilities are typically mortgages or loans used to purchase fixed assets, and are paid off in years instead of months.
Equity Equity is of utmost importance to the business owner because it is the owner’s financial share of the company. Worded another way, Equity is that portion of the total assets of the company that the owner fully owns. Equity may be in assets such as buildings and equipment, or cash. Equity is also referred to as Net Worth. For example, if you purchase a $30,000 vehicle with a $25,000 loan and $5,000 in cash, you have acquired an asset of $30,000, but have only $5,000 of equity. The Balance Sheet equation, discussed in Accounting Basics: the Income Statement and Balance Sheet, is: Assets = Liabilities + Owner’s Equity
We can see how this equation works with our example: $30,000 Asset = $25,000 Liability + $5,000 Owner Equity. Types of Equity Accounts and Their Various Names There are three types of Equity accounts that will meet the needs of most small businesses. These accounts have different names depending on the company structure, so we list the different account names in the chart below. Contribution (Money Invested): There are times when company owners must invest their own money into the company. It may be start-up capital or a later infusion of cash. When this occurs, a Capital or Investment account is credited.
See the first row in the table below. Distribution or Draw (Money Withdrawn): If a business is profitable, the owners often want some of the profit returned to them. To track this activity, a Draw or Distribution account is debited. This is the only Equity account (non-contra) that receives debits. See the second row in the table below. Accumulation from Prior Years: To tracks a company’s Net Income as it accumulates over the years, Retained Earnings or Owner’s Equity is credited. On the first day of the fiscal year, most accounting programs automatically credit this account with the previous year’s Net Income.
See the third row of the table below. NOTE: Most single-owner companies enter journal entries to “close out” the Contribution and Draw accounts to Retained Earnings on the last day of the fiscal year. Partnerships, however, may choose not to close out these accounts so that a permanent record of partner activity is maintained. | Sole Proprietorship| Partnership| Subchapter S Corporation| Money invested:| Owner’s Investment – or – Capital Contribution| Partner A Capital Contribution Partner B Capital Contribution, etc. | Paid in Capital – or – Capital Contribution| Money withdrawn:| Owner’s Draw| Partner A Draw
Partner B Draw, etc. | Distribution| Accumulation prior years:| Owner’s Equity – or – Owner’s Capital| Partner A Equity Partner B Equity, etc. | Retained Earnings| Income or Revenue Income is money the business earns from selling a product or service, or from interest and dividends on marketable securities. Other names for income are revenue, gross income, turnover, and the “top line. ” Net income is revenue less expenses. Other names for net income are profit, net profit, and the “bottom line. ” Income is “realized” differently depending on the accounting method used.
Accrual basis accounting counts the revenue as soon as an invoice is entered into the accounting system. Cash basis accounting does not count the revenue until the invoice is paid. Income accounts are temporary or nominal accounts because their balance is reset to zero at the beginner of each new accounting period, usually a fiscal year. Most accounting programs perform this task automatically. Expenses Expenses are expenditures, often monthly, that allow a company to operate. Examples of expenses are office supplies, utilities, rent, entertainment, and travel.
Like revenue accounts, expense accounts are temporary accounts that collect data for one accounting period and are reset to zero at the beginning of the next accounting period. Most accounting programs perform this task automatically. A unique type of Expense account, Depreciation Expense, is used when purchasing Fixed Assets. Costly items, such as vehicles, equipment, and computer systems, are not expensed, but are depreciated or written off over the life expectancy of the item. A contra-account, Accumulated Depreciation, is used to offset the Asset account for the item. Please see your Accountant for help with the depreciation of Assets.
Expenses In accounting, there are only revenue nature and capital nature expenses. Revenue nature expenses records in profit and loss account while capital nature expenses are recorded in balance sheet. Revenue expenses are again subpart of direct expenses and indirect expenses Direct expenses are the main type of expenses which are related to production and purchase of goods. These expenses are incurred during the purchase of goods and transfer to trading account. I am giving the examples of direct expenses:- ? Wages ? Freight ? Carriage ? Carriage inward ? Octrai ? Royalty on production Factory expenses ? Factory depreciation ? Fuel , oil and power ? All other expenses related to purchase of goods Indirect Expenses ? Office expenses ? Sales expenses ? Advertising ? Administrative expenses ? Bad debts ? Depreciation of office assets ? Interest on loan ? All other expenses relating to sale and marketing Income Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants (IASB Framework).
Income is therefore an increase in the net assets of the entity during an accounting period except for such increases caused by the contributions from owners. The first part of the definition is quite easy to understand as income must logically result in an increase in the net assets (equity) of the entity such as by the inflow of cash or other assets. However, net assets of an entity may increase simply by further capital investment by its owners even though such increase in net assets cannot be regarded as income. This is the significance of the latter part of the definition of income.
There are two types of income: * Sale Revenue: Income earned in the ordinary course of business activities of the entity; * Gains: Income that does not arise from the core operations of the entity. For instance, sale revenue of a business whose main aim is to sell biscuits is income generated from selling biscuits. If the business sells one of its factory machines, income from the transaction would be classified as a gain rather than sale revenue. Following are common sources of incomes recognized in the financial statements: * Sale revenue generated from the sale of a commodity. Interest received on a bank deposit. * Dividend earned on entity’s investments. * Rentals received on property leased by the entity. * Gain on re-valuation of company assets. Income is accounted for under the accruals principal whereby it is recognized for the whole accounting period in full, irrespective of whether payments have been received or not. As income is an element of the income statement, it is calculated over the entire accounting period (usually one year) unlike balance sheet items which are calculated specifically for the year end date.
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