No one can run a business without an Accounting Department. The duty of an Accounting Department is to present a financial picture of the business. Accounting shows two basic aspects of a company: what it owns and what is owes. Assets are resources a company owns or controls. The claims on a company’s assets - what it owes - are separated into owner (equity) and nonowner (liability) claims. Together, liability and equity are the source of funds to acquire assets.

The three major elements of accounting are: Assets, Liabilities, and Owner’s equity.  

Assets

Assets are the resources a company owns or controls. These resources are expected to yield future benefits. Examples include web servers for an online services company, musical instruments for a rock band, and land for a vegetable grower. Assets include cash, supplies, equipment, land, and accounts receivable. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current.

1. Current assets

Assets are considered "current" if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts include:

1. Cash and Cash Equivalents – bills, coins, funds for current purposes, checks, cash in bank, etc.
2. Receivables – Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and other claims
3. Allowance for Doubtful Accounts – This is a valuation account which shows the estimated uncollectible amount of accounts receivable. It is a contra-asset account and is presented as a deduction to the related asset – accounts receivable.
4. Inventories – assets held for sale in the ordinary course of business
5. Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies.

2. Non-current assets

Assets that do not meet the criteria to be classified as "current." Hence, they are long-term in nature – useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include:

1. Long-term investments – investments for long-term purposes, such as investment in stocks, bonds, and properties; and funds set up for long-term purposes
2. Land – land area owned for business operations (not for sale)
3. Building – such as office building, factory, warehouse, or store
4. Equipment – Machinery, furniture and fixtures (shelves, tables, chairs, etc.), office equipment, computer equipment, delivery equipment, and others
   Accumulated Depreciation – This is a valuation account which represents the decrease in value of a fixed asset due to continued use, wear & tear, passage of time, and obsolescence. It is a contra-asset account and is presented as a deduction to the related fixed asset.
5. Intangibles – long-term assets with no physical substance, such as goodwill, patent, copyright, trademark, etc.

Liabilities

Liabilities are creditors’ claims on assets. Liabilities are obligations to other parties, such as payable to suppliers, loans from banks, bonds issued, etc. They are also classified into current (short-term) and non-current (long-term) liabilities.  

A. Current liabilities  

A liability is considered current if it is due within 12 months after the end of the balance sheet date. In other words, they are expected to be paid in the next year.  

If the company's normal operating cycle is longer than 12 months, a liability is considered current if it is due within the operating cycle. Current liabilities include:

1. Trade and other payables – such as Account Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc.
2. Current provisions – estimated short-term liabilities that are probable and can be measured reliably
3. Short-term borrowings – financing arrangements, credit arrangements or loans that are short-term in nature
4. Current-portion of a long-term liability – the portion of a long-term borrowing that is currently due.
   Example: For long-term loans that are to be paid in annual installments, the portion to be paid next year is considered current liability; the rest, non-current.
5. Current tax liabilities – taxes for the period and are currently payable.

B.    Non-current liabilities

Liabilities are considered non-current if they are not currently payable, i.e. they are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter.

In other words, non-current liabilities are those that do not meet the criteria to be considered current. Hah! Make sense? Non-current liabilities include:

1. Long-term notes, bonds, and mortgage payables;
2. Deferred tax liabilities; and
3. Other long-term obligations

Capital or Owner’s Equity

Equity is the owner’s claim on assets and is equal to assets minus liabilities. Equity is also called net assets or residual equity. Equity consists of four parts:  

1.     Owner Investments: inflows of cash and other net assets from owner contribution, which increase equity.

2.     Owner withdrawals: outflows of cash and other assets to owners for personal use, which reduce equity.

3.     Revenue: increase equity from sales of products and services to customers; examples include sales of products, consulting services provided, facilities rented to others, and commissions from services.

4.     Expenses: decrease equity from costs of providing products and services to customers; examples include costs of employee’s time, use of supplies, advertising, utilities, and insurance fees.

These are the basic elements of accounting principles which are universally prevailing. They form the basis of financial accounting in any business.

HTH & Associates help organizations and business owners with accounting and/or financial consulting services.

If you have questions about bookkeeping, contact us at accounting@thaddeus.org  or call us at 909-599-2111.  

Thanks for reading.

References:

https://bizfluent.com/about-6129312-basic-bookkeeping-principles.html

https://bizfluent.com/about-6129312-basic-bookkeeping-principles.html

Sapna Agnihotri

Sapna Agnihotri, an Accounting and Human Resources Intern at Thaddeus Resource Center. Prior to Joining Thaddeus Resource Center, she worked as a teacher. A graduate in Family Finance and Consumer Science, she studied Accounting from Waukesha Technical College, and lives in Wisconsin.

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