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 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.
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:
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:
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:
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:
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 firstname.lastname@example.org or call us at 909-599-2111.
Thanks for reading.
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.