LAHORE GARRISON UNIVERSITY

(DHA, Phase 6 sector C)

Name: MUHAMMAD HUZAIFA

Roll No: Fa-19/BSSE-D/219

Submitted To: MAM SARA MUNIR

Course Title: Principle of Accounting

Assignment # 2

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Q: What do you understand by pillars of accounting? Explain it by giving 2 examples of each
pillar.

Ans:
My understanding for pillars of accounting is simple, just like a building can’t stand without a
pillar, accountings can’t stand without its pillars. It is clearly noticeable how important are pillars
in accounting.

There are five pillars of accounting, named as:

• Assets
• Capital
• Liability
• Revenue
• Expenses
Now in order to explain these pillars, let’s discuss each one by one.

1. ASSETS:
Assets are the property of an organization like buildings, stock of goods, motor vehicles, amount
of money in bank’s account, etc.

Assets can be classified as

• Fixed assets
• Current assets
• Tangible assets
• Intangible assets
• Wasting assets
Tangible Assets are physical entities that the business owns such as land, buildings, vehicles,
equipment, and inventory.

Intangible Assets are nonphysical assets, such as copyright, trademark, goodwill and brand
recognition.

Current Assets are items that are completely consumed, sold, or converted into cash in 12 months
or less. Examples of current assets include accounts receivable and prepaid expenses.

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.

Wasting Assets are those assets which have limited life of usually in months and have to be
thrown after that, i.e. they are unusable after that period. These includes natural gas, oil. Etc.
2. CAPITAL:

It is the amount of resources which are invested by owner of organization in order to buy
assets, which can be used for growth of an organization. It is also termed as Networth or owners’
equity.

Examples:

a. If an owner of company supplies a sum of Rs 10,000 for purchasing goods or anything

else, the sum of amount given by owner is capital.
b. If an owner of company supplies Rs 35,000 (takes loan of Rs 30,000 and supplies Rs 5,000
from budget of organization) for purchasing goods, then capital is only Rs 5,000 which
were supplied by owner, and remaining 30,000 we will discuss it later on.

3. LIABILITY:

Those are the amount of resources which are invested by outsiders/any stakeholder other
than owner in order to buy assets, which can be used for growth of organization. Liabilities can be
classified as current and long term.

Current Liabilities are debts which have to be paid to creditor within 12 months. Current
liabilities are usually paid with current assets, that is current money in organization’s checking
account.

Long term Liabilities are typically loans used to purchase fixed assets, and those are to
be paid to creditors within years instead of months.

4. Revenue/Income:

Revenue or income is the money earned by selling a product or service.

E.g. if we sold a product to our customer or an organization in Rs 10,000 that money is our
income.

Types of revenue include following

Sales:

It is the income generated by selling the goods.

Fee Earned:
 It is the income generated in any institution by charging the students for services

(Education).

Rent Earned:

It is the income generated by charging the customer by giving your owned

building on rent.

Commission Earned:

It is the income generated by an agent for closing a deal between two parties.

5. Expense:

Expense are the cost of goods or services used up in the process of obtaining revenue.

• Expense is the amount spent on building a product which in return will produce revenue
Types of Expenses

Expenses affect all financial accounting statements but exert the most impact on the income
statement. They appear on the income statement under five major headings, as listed below:

➢ Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the cost of acquiring raw materials and turning them into finished
products. It does not include selling and administrative costs incurred by the whole company, nor
interest expense or losses on extraordinary items.

For manufacturing firms, COGS includes direct labour, direct materials, and manufacturing
overhead.

For a service company, it is called a cost of services rather than COGS.

For a company that sells both goods and services, it is called cost of sales.

Examples of COGS include direct material, direct costs, depreciation expense, and production
overhead.

➢ Operating Expenses
Operating expenses are related to selling goods and services and include sales salaries,
advertising, and shop rent.

General expenses include expenses incurred while running the core line of the business and
include executive salaries, R&D, travel and training, and IT expenses.

➢ Financial Expenses

These are costs incurred from borrowing or earning income from financial investments. They are
expenses outside the company’s core business. Examples include loan origination fees and
interest on money borrowed.

➢ Extraordinary Expenses

Extraordinary expenses are costs incurred for large one-time events or transactions outside the
firm’s regular business activity. They include laying off employees, selling land, or disposal of a
significant asset.

➢ Non-Operating Expenses

These are costs that cannot be linked back to operating revenues. Interest expense is the most
common non-operating expense. Interest is the cost of borrowing money. Loans from banks
usually require interest payments, but such payments don’t generate any operating income.
Hence, they are classified as non-operating expenses.

➢ Non-Cash Expenses

The sole purpose of a non-cash expense is to reduce net profit and eventually, taxes. It is not an
income statement category. Depreciation is the most common type of non-cash expense because
it conforms to the definition that an expense decreases owner’s equity by using up the asset.
Depreciation also results in other non-cash effects such as:

A debit to a depreciation account increases the account balance

A credit to a contra asset account like accumulated depreciation increases the balance of the
depreciation account

On the income statement, the book value of the asset decreases by the same amount as the
accumulated depreciation.
Expenses are income statement accounts that increase the debit side of a contra account. When
the expense is recorded, a corresponding credit is recorded to an asset or liability.