If you are keen to train as an accountant, or perhaps you are already in the process of training, you’ll find the following three terms invaluable to your success in the accounting industry; Assets, Liabilities and Capital. These are the 3 major elements of accounting, without understanding these terms, you’ll find it pretty much impossible to work effectively as an accountant.
To explain the three terms listed above to their fullest, firstly it’s important to understand what an account is. Most of will already know this, but to define such a thing is somewhat tricky, so here goes… The best way to describe a financial account is as a place of storage, used to collect and store money. Such an account stores all transactions that involve cash receipts and cash payments.
So, now that we’ve defined an account, it’s only right that we go on to discuss the 3 major elements of accounting;
When considering the assets of a business, you are in fact referring to the resources in which that company own. To put it into the simplest terms, assets are properties or rights owned by a company. They can be referred to as both current or non-current, here we will explain further…
In order for assets to be considered current they must be in place for the purpose of being traded or consumed. In relation to cash assets, examples of which include;
- Cash (coins, notes, cheques, cash in bank etc.)
- Receivables, including accounts receivable (from customers), notes receivable, rent receivable, interest receivable etc.
- Inventories (assets held for sale)
- Prepaid expenses (expenses paid in advance)
These are assets that don’t meet the criteria in order to be classified as current. Examples include;
- Long-term investments (such as investments in stocks, bonds etc.)
- Land; land owned for business operations
- Building; office building
- Equipment; furniture, facilities, machinery etc. (consider that the valuation which represents the decrease in value with continued use, wear and tear etc. will be deducted
- Intangibles (long-term assets of no physical substance, such as copyright)
Liabilities are precisely that, but they are liabilities that a company is economically obligated to pay.
The assets of a business usually come from 2 major sources; the first being borrowings from lenders and the second being; contributions from the owners. The first refers to liabilities and the second to capital.
A liability is considered current if it is expected to be paid within the next 12 months. Current liabilities include things such as; trade and other payables, current provisions, short-term borrowings, current tax liabilities and others.
Liabilities are considered non-current if they are not currently payable, in other words, they are not due to be paid within the next 12 months. They include things such as long-term bonds and mortgage payables, deferred tax liabilities as well as other long-term obligations.
Capital, also recognised as net assets and equity, refers to what is left to the owners after all liabilities are settled. Put simply, capital is equal to total assets minus total liabilities. Capital can be affected by the following factors; income, expenses, withdrawals made by owners and contributions of o