Fundamentals of Accounting

4. Assets can be defined as objects or entities,
whether tangible or intangible, that the company owns
that have economic value.
Tangible assets are physical entities that the
business owns such as land, buildings, vehicles,
equipment, and inventory.
Intangible assets are things that represent money
or value; things such as Accounts Receivables, patents,
contracts, and certificates of deposit (CDs).

5. Assets are also grouped according to either their life
span or liquidity - the speed at which they can be
converted into cash. Current assets are items that are
completely consumed, sold, or converted into cash in 12
months or less.
Fixed assets are tangible assets with a life span of at
least one year and usually longer. Fixed assets might
include machinery, buildings, and vehicles. Fixed assets
are typically not very liquid. And because of their higher
costs, assets are not expensed, but depreciated, or
"written off" over a number of years according to one of
several depreciation schedules.

6. Liabilities are the debts, or financial obligations of a
business - the money the business owes to others.
Liabilities are classified as current or long-term.
Current liabilities are debts that are paid in 12 months
or less, and consist mainly of monthly operating debts.
Current liabilities are usually paid with current assets;
i.e. the money in the company's checking account.

7. A company's working capital is the difference between
its current assets and current liabilities. Managing
short-term debt and having adequate working capital
is vital to a company's long-term success.
Long-term liabilities are typically mortgages or loans
used to purchase or maintain fixed assets, and are
paid off in years instead of months.

8. Equity or Capital is of utmost importance to the
business owner because it is the owner's
financial share of the company - or that
portion of the total assets of the company
that the owner fully owns. Equity may be in
assets such as buildings and equipment, or
cash. Equity is also referred to as Net Worth.

9. For example, if you purchase a $30,000 vehicle with a
$25,000 loan and $5,000 in cash, you have acquired an
asset of $30,000, but have only $5,000 of equity.
The Balance Sheet equation 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.

10. Three Types of Equity Accounts and Their
Various Names
Contribution (Money Invested): There are
times when company owners must invest their
own money into the company. It may be start-up
capital or a later infusion of cash. When this
occurs, a Capital or Investment account is
credited.

11. Distribution or Draw (Money Withdrawn): If a
business is profitable, the owners often want
some of the profit returned to them. To track this
activity, a Draw or Distribution account is
debited. This is the only Equity account (non-
contra) that receives debits.

12. Accumulation from Prior Years: To tracks a
company's Net Income as it accumulates over the
years, Retained Earnings or Owner's Equity is
credited. On the first day of the fiscal year, most
accounting programs automatically credit this
account with the previous year's Net Income.

15. Income is money that the business earns from
selling a product or service, or from interest and
dividends on marketable securities. Other names
for income are revenue, gross income, turnover,
and the "top line.“
Net income is revenue less expenses. Other
names for net income are profit, net profit, and the
"bottom line."

16. Income is "realized" differently depending on the
accounting method used. Accrual basis accounting
counts the revenue as soon as an invoice is entered
into the accounting system. Cash basis
accounting does not count the revenue until the
invoice is paid.
Income accounts are temporary or nominal accounts
because their balance is reset to zero at the beginner
of each new accounting period, usually a fiscal year.
Most accounting programs perform this task
automatically.

17. Expenses are expenditures, often monthly, that allow a
company to operate. Examples of expenses are office
supplies, utilities, rent, entertainment, and travel.
Like revenue accounts, expense accounts are temporary
accounts that collect data for one accounting period and
are reset to zero at the beginning of the next accounting
period. Most accounting programs perform this task
automatically.

18. A unique type of Expense account,
Depreciation Expense, is used when
purchasing Fixed Assets. Costly items, such
as vehicles, equipment, and computer
systems, are not expensed, but are
depreciated or written off over the life
expectancy of the item. A contra-account,
Accumulated Depreciation, is used to offset
the Asset account for the item.

19. The End