In other words in a
bookkeeping system, a record of all the transactions relating to a particular
person or item is called an account.
The classification of accounts according to the accounting
equation approach or modern approach is given below:
1. Assets
2. Expense
3. Owner’s equity
4. Liabilities
5. revenue
Assets:
The asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are expected to flow to the
entity(IASB). There are two types of assets. Assets refer to tangible objects
or intangible rights owned by an enterprise and carrying probable future
benefits. Usually, the following items are included in the assets:
1. Current Assets.
2. Fixed assets/ Non-current
Assets
Current Assets:
Current assets are ones that an entity expects to use within one
year from the reporting date. Current assets are those assets which are held:
1. In the form of cash e.g.
cash in hand and cash in the bank.
2. For their conversation
into cash e.g. stock of finished goods, bills receivables, accrued income.
3. For their consumption in
the production of goods or rendering of services in the normal course of
business e.g. stock of raw material, work in process.
Fixed Non-Current Assets:
The assets whose benefits are expected to last more than 1 year
from a date of reporting are called as fixed or non current assets. Fixed
assets refer to those held to provide or produce goods or services and those
not held for resale in the normal course of business. The fixed assets are of
two types.
·
Tangible assets
·
Intangible assets
Tangible Assets:
Tangible assets refer to those fixed assets that can be seen and
touched e.g. land and building, plant and machinery, furniture and fixtures,
motor vehicles.
Intangible Assets:
Intangible assets refer to those fixed assets that cannot be seen
or touched e.g. goodwill, patents, trademarks, copyright, software, logo, etc.
Difference between current assets and fixed assets:
Also called long-term assets, fixed assets are held by a business
to continue use and not to be resold in a short time. On the contrary, current
assets are kept for resale and can be converted into cash or an equivalent in a
short time.
The assets which would
last more than a 1 complete year of accounting business cycle.On the contrary,
current assets are likely to be realized within a year or 1 complete accounting
cycle of a business.
Fixed assets are bought
from long-term funds deployed within a business. On the contrary, they are
bought out of short-term funds deployed within a business.
Fixed assets are used to
keep a business running and earn profits out of operations, on the contrary,
current assets are converted to cash or exhausted during the regular accounting
cycle of a business.
Fixed assets are not easy
to convert into cash. On the contrary, current assets are easy to liquidate as
compared to fixed assets.
Examples of fixed assets
include machinery, buildings, furniture, etc. On the contrary, examples of
current assets include cash in hand, cash at the bank, stock, debtors, etc.
Liabilities:
A liability may be defined as the obligation payable to the other
entity. Liabilities are incurred to fund the ongoing activities of a business.
There are two types of liabilities.
1. Current Liability
2. Non-current liability
Current Liability:
A current liability is one that the entity expects to pay off
within one year from the reporting date. the current liability may be defined as
that liability which decreases or falls for the reasons of payment in a short
period of time.(Normally a period not more than 12 months from the date of a
balance sheet) e.g. bills payables, trade creditors, outstanding expenditures,
overdraft, installment of loan.
Fixed Non-Current Liabilities:
Non current liability may be referred to as to settle 1 year from
the date of reporting. The long term of liability may be defined as the
liability which does not decrease or falls in order for payment in a short
period of time. Normally we can state that it can be from 1 or more than 1 year
from a balance sheet date. loan from a financial institution, debentures.
Owner’s Equity:
Sources of owner’s equity are the introduction of capital by the
owner into the business and profits generated by the entity after
distributions(drawing) to the owner for personal use. In other words it is the
account of the proprietor/partner who invested money in the business.
Revenue:
The amount earned or received by providing services to the
customers or by selling goods is called revenue.
Expense:
These are the costs that expire during the reporting period of the
entity. These must match with the current year's revenue. It includes
purchases, wages paid, depreciation, rent, rates, and taxes.
Difference between tangible and intangible Assets:
1. Tangible assets have a
physical existence on the contrary, intangible assets do not have a physical
existence.
2. Tangible assets are
depreciated on the other hand intangible assets are amortized.
3. Tangible assets are
generally much easier to liquidate due to their physical presence. On the other
hand, intangible assets are not easy to liquidate and sell in the market.
4. In Tangible assets, the
cost can be easily determined or evaluated. On the other hand, the cost of
intangible assets is much harder to determine.
5. Tangible assets might have
a trade-in value (i.e. salvage value). On the other hand, intangible assets
have no trade value.
Rules of Debit and Credit:
|
Main heads |
Increase |
Decrease |
Nature |
|
Assets |
Debit |
Credit |
Debit |
|
Expenses |
Debit |
Credit |
Debit |
|
Owner’s equity |
Credit |
Debit |
Credit |
|
Liabilities |
Credit |
Debit |
Credit |
|
Revenue |
Credit |
Debit |
Credit |
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