assets in accounting

7/30/2019 Assets in Accounting

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Assets in accounting

In thefinancial accountingsense of the term, it is not necessary to be able tolegally enforce the asset's benefit for qualifying a resource as being an asset,

provided the entity can control its use by other means.

Theaccounting equationrelates assets, liabilities, andowner'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 thecombined value of its "equity" and "liabilities."

The accounting equation is the mathematical structure of thebalancesheet.

Assets are listed on thebalance sheet. In a company'sbalancesheetcertain divisions are required bygenerally accepted accounting

principles(GAAP), which vary from country to country.[8]Assets canbe divided into e.g. current assets and fixed assets, often with furthersubdivisions such as cash, receivables and inventory.

Assets are formally controlled and managed within largerorganizations via the use of asset tracking tools. These monitor the

purchasing, upgrading, servicing, licensing, disposal etc., of bothphysical and non-physical assets.

[edit]Current assets

Main article:Current asset

Current assets are cash and other assets expected to be converted tocash 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 abusiness during normal business activity. There are 5 major items

included into current assets:

1. Cash and cash equivalents it is the mostliquid asset,which includescurrency,deposit accounts, andnegotiableinstruments(e.g., money orders, cheque, bank drafts).
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2. Short-term investments include securities bought andheld for sale in the near future to generate income on short-term price differences (trading securities).

3. Receivables usually reported as net of allowance fornoncollectable accounts.4. Inventory trading these assets is a normal business of acompany. The inventory value reported on thebalance sheetisusually the historical cost or fair market value, whichever islower. This is known as the "lower of cost or market" rule.

5. Prepaid expenses these are expenses paid in cash andrecorded as assets before they are used or consumed (acommon example is insurance). See alsoadjusting entries.

Marketable securitiesSecurities that can be converted into cashquickly at a reasonable price

The phrase net current assets (also calledworking capital) is oftenused and refers to the total of current assets less the total ofcurrentliabilities.

[edit]Long-term investments

Often referred to simply as "investments". Long-term investments areto be held for many years and are not intended to be disposed of inthe near future. This group usually consists of three types ofinvestments:

1. Investments in securities such as bonds, common stock, orlong-term notes.

2. Investments in fixed assets not used in operations (e.g., landheld for sale).

3. Investments in special funds (e.g. sinking funds or pensionfunds).

Different forms ofinsurancemay also be treated as long terminvestments.

[edit]Fixed assets

Main article:Fixed asset

Also referred to as PPE (property, plant, and equipment), these arepurchased for continued and long-term use in earningprofitin abusiness. This group includes as anassetland,buildings,machinery,furniture,tools,ITequipment, e.g.,
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laptops, and certain wasting resources e.g., timberland andminerals.They are written off againstprofitsover their anticipated life bychargingdepreciationexpenses (with exception of land assets).Accumulated depreciation is shown in the face of the balance sheetor in the notes. Asset is important factor in balance sheet

These are also calledcapital assetsinmanagement accounting.

[edit]Intangible assets

Main article:Intangible asset

Intangible assets lack of physical substance and usually are very hardto evaluate. Theyincludepatents,copyrights,franchises,goodwill,trademarks,tradenames, etc. These assets are (according to US GAAP) amortized toexpense over 5 to 40 years with the exception of goodwill.

Websitesare treated differently in different countries and may fallunder either tangible or intangible assets.

[edit]Tangible assets

Tangible assets are those that have a physical substance, suchascurrencies,buildings,real estate,vehicles,inventories,equipment,andprecious metals

[edit]Comparison : current assets , liquid assets and absoluteliquid assets

Current assets Liquid assetsAbsolute liquid

assets

Stocks

Prepaid expenses

Debtors Debtors

Bills receivable Bills receivable
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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)



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 thefirm's functioning's. You will be able to think of an asset as something that canrender cash flow (run), no matter of whether it is a company's constructingequipment or a person lease flat.

Types of Assets

Some item of efficient value possessed by a corporation or person, particularly thatwhich could be exchanged to cash (currency). Good examples are cash, securitysystem, 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 anaccounting position, the assets are divided into the under mentioned classes:


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1. The current assets (other liquid items and cash)

2. The long-term assets (plant, equipment, real estate)

3. The deferred and prepaid assets (expenses (expenditures) for future prices suchas 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 orpossesses 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 payoff.

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 CurrentLiability 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


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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 currentliability.. 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 becomean actual one on the happening of some event which is uncertain. Examples: Billsdiscounted before maturity, Liability of a case pending in the court.

Assets, Liabilities, Equity, Revenue, and Expenses
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Greetings! This Accounting Basics tutorial focuses on the five different accounttypes 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 SupportThe Account Types: Assets, Liabilities, Equity, Revenue, and Expenses

To fully understand how topost transactions and read financial reports, wemust understand these five account types. Let's define them briefly and thenlook at each one in detail:

Assets: tangible and intangible items that the company owns that have value(e.g. cash, computer systems, patents)

Liabilities: money that the company owes to others (e.g. mortgages, vehicleloans)

Equity: that portion of the total assets that the owners or stockholders of thecompany fully own; have paid for outright

Revenue or Income: money the company earns from its sales of products orservices, and interest and dividends earned from marketable securities

Expenses: money the company spends to produce the goods or services thatit sells (e.g. office supplies, utilities, advertising)

Assets

Assets can be tangible or intangible. Tangible assets are physical entities suchas land, buildings, vehicles, equipment, and inventory. Intangible assets includeAccounts Receivables, patents, and contracts.

Assets are also grouped according to theirliquidity, or the speed at which theycan be converted into cash. Current assets can be converted into cash in 12months or less. Fixed assets are tangible assets with a life span of at least oneyear and usually longer. High-cost fixed assets such as machinery and computersystems are not expensed, but their value is depreciated, or "written off," over anumber of years according to one of several depreciation schedules.

Liabilities
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Liabilities are debts, or financial obligations of a business, and are classified ascurrent or long-term. Current liabilities are debts that are paid in 12 months orless, and consist mainly of monthly operating debts. Current liabilities areusually paid with current assets, i.e. Cash. A company's working capitalis thedifference between its current assets and current liabilities. Managing short-termdebt and having adequate working capital is vital to a company's long-termsuccess.

Long-term liabilities are typically mortgages or loans used to purchase fixedassets, and are paid off in years instead of months.

Equity

Equity is of utmost importance to the business owner because it is the owner'sfinancial share of the company. Worded another way, Equity is that portion ofthe total assets of the company that the owner fully owns. Equity may be inassets such as buildings and equipment, or cash. Equity is also referred to asNetWorth.

For example, if you purchase a $30,000 vehicle with a $25,000 loan and $5,000in cash, you have acquired an asset of $30,000, but have only $5,000 of equity.The Balance Sheet equation, discussed inAccounting Basics: the IncomeStatement 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 Equi ty Accounts and Their Var ious Names

There are three types of Equity accounts that will meet the needs of most smallbusinesses. These accounts have different names depending on the companystructure, so we list the different account names in the chart below.

Contribution (Money Invested): There are times when company owners mustinvest their own money into the company. It may be start-up capital or a laterinfusion of cash. When this occurs, a CapitalorInvestmentaccount is credited.

See the first row in the table below.

Distribution or Draw (Money Withdrawn): If a business is profitable, theowners often want some of the profit returned to them. To track this activity,aDraw orDistribution account is debited. This is the only Equity account (non-contra) that receives debits. See the second row in the table below.
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Accumulation from Prior Years: To tracks a company's Net Income as itaccumulates over the years,Retained Earnings orOwner's Equity is credited.On the first day of the fiscal year, most accounting programs automaticallycredit this account with the previous year's Net Income. See the third row of thetable below.

NOTE: Most single-owner companies enter journal entries to "close out" theContribution and Draw accounts to Retained Earnings on the last day of thefiscal year. Partnerships, however, may choose not to close out these accounts sothat a permanent record of partner activity is maintained.

Sole

ProprietorshipPartnership

Subchapter S

Corporation

Money invested:

Owner's

Investment - or -Capital

Contribution

Partner A Capital

ContributionPartner 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 frominterest and dividends on marketable securities. Other names for income arerevenue, gross income, turnover, and the "top line."

Net income is revenue less expenses. Other names for net income are profit, netprofit, 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 isentered into the accounting system. Cash basis accounting does not count therevenue until the invoice is paid.

Income accounts are temporary ornominalaccounts because their balance isreset to zero at the beginner of each new accounting period, usually a fiscal year.Most accounting programs perform this task automatically.


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Expenses

Expenses are expenditures, often monthly, that allow a company to operate.Examples of expenses are office supplies, utilities, rent, entertainment, andtravel.

Like revenue accounts, expense accounts are temporary accounts that collectdata for one accounting period and are reset to zero at the beginning of the nextaccounting period. Most accounting programs perform this task automatically.

A unique type of Expense account, Depreciation Expense, is used whenpurchasing Fixed Assets. Costly items, such as vehicles, equipment, andcomputer systems, are not expensed, but are depreciatedorwritten offover thelife expectancy of the item. A contra-account, Accumulated Depreciation, isused to offset the Asset account for the item. Please see your Accountant forhelp with the depreciation of Assets.

Expenses

In accounting, there are only revenue nature and capital nature expenses. Revenuenature expenses records in profit and loss account while capital nature expenses arerecorded in balance sheet.Revenue expenses are again subpart of direct expenses and indirect expensesDirect 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 andtransfer to trading account. I am giving the examples of direct expenses:-

WagesFreightCarriageCarriage inwardOctraiRoyalty on productionFactory expenses

Factory depreciationFuel , oil and powerAll other expenses related to purchase of goods

Indirect ExpensesOffice expensesSales expensesAdvertising


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Administrative expensesBad debtsDepreciation of office assetsInterest on loanAll other expenses relating to sale and marketing

Income

Income is increases in economic benefits during the accounting period in the formof inflows or enhancements of assets or decreases of liabilities that result inincreases 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 firstpart of the definition is quite easy to understand as income must logically result inan increase in the net assets (equity) of the entity such as by the inflow of cash orother assets. However, net assets of an entity may increase simply by furthercapital investment by its owners even though such increase in net assets cannot beregarded as income. This is the significance of the latter part of the definition ofincome.

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 isincome generated from selling biscuits. If the business sells one of its factorymachines, income from the transaction would be classified as a gain rather thansale 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.


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Income is accounted for under the accruals principal whereby it is recognized forthe whole accounting period in full, irrespective of whether payments have beenreceived 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 arecalculated specifically for the year end date.

assets in accounting

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