ASSETS, LIABILITIES, EQUITY,

REVENUE, AND EXPENSES

PREPARED
BY
FRANCIS MABEDI
 ASSETS, LIABILITIES, EQUITY, REVENUE,
AND EXPENSES
 Introduction
 This Accounting Basics discusses the five account
types in the Chart of Accounts. We define each account
type, discuss its unique characteristics, and provide
examples.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Account Type Overview

 Having a good understanding of the account types is
necessary for anyone creating accounts, posting transactions
and journal entries, or reading financial reports. We briefly
define each account type below.
 Assets: tangible and intangible items that the company owns
that have value (e.g. cash, computer systems, patents, land &
buildings).
 Liabilities:
money that the company owes to others (e.g.
mortgages, vehicle loans, suppliers).
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Account Type Overview

 Equity: that portion of the total assets that the owners or
stockholders of the company fully own; have paid for outright
 Revenue or Income: money the company earns from its sales
of products or services, and interest and dividends earned from
marketable securities
 Expenses: money the company spends to produce the goods or
services that it sells (e.g. office supplies, utilities, advertising)
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Assets
 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. While Intangible assets are
things that represent money or value, e.g. Accounts
Receivables, patents, contracts, and certificates of deposit
(CDs).
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Assets
 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. Examples of current assets include
accounts receivable and prepaid expenses.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Assets
 Fixed / or non-currents 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.
 Because of their higher costs and longevity, assets are not
expensed, but depreciated, or "written off" over a number
of years according to one of several depreciation
schedules.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Liabilities
 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. Examples of
current liabilities may include accounts payable and
customer deposits.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Liabilities
 Current liabilities are usually paid with current assets; i.e. the
money in the company's checking account. 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.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Equity
 Equity 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.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Equity
 For example, if you purchase a MK30,000 vehicle with a
MK25,000 loan and MK5,000 in cash, you have acquired
an asset of MK30,000, but have only MK5,000 of equity.
The Balance Sheet equation is:
Assets = Owner's Equity + Liabilities
 We can see how this equation works with our example:
MK30,000 Asset = MK5,000 Owner Equity + MK25,000
Liability.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Income or Revenue
 Income is money 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."
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES
 Income or Revenue
 Income is "realized" differently depending on the
accounting method used. When a business uses
the Accrual basis accounting method, the revenue is
counted as soon as an invoice is entered into the
accounting system.
 If the Cash basis accounting method is used, the revenue
is not realized until the invoice is paid.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Income or Revenue
 Income accounts are temporary or nominal accounts
because their balance is reset to zero at the beginning of
each new accounting period, usually a fiscal year. Most
accounting programs perform this task automatically.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Expenses
 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.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND EXPENSES

 Expenses
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.
 ASSETS, LIABILITIES, EQUITY, REVENUE, AND
EXPENSES

 Expenses
 Another unique account is Accumulated Depreciation - a
contra-account. Accumulated Depreciation is used to
offset the Asset account for the item. Depreciation can be
very complicated, so we shall discuss this later -
depreciation of Assets.