Basic Concepts Of Accounting

Basic Concepts Of Accounting..!!

Assets:-

                    Any item of economic value owned by an individual or organization, especially that which could be converted to cash.

Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. 

According to accounting equation

                                     Assets = Liabilities + Capital 

(where Capital for a corporation equals Owner's Equity)

*From an accounting perspective, assets are divided into the following categories: 

1.       Current assets (cash and other liquid items).

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

3.      Prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest).

4.      Intangible assets (trademarks, patents, copyrights, goodwill).

2) Liability:-

              An obligation that legally binds a person or an organization  to pay a debt. When one is liable for a debt, they are responsible for paying the debt or settling a wrongful act they may have committed. 

For example, If Tanveer borrow a loan from bank to fulfilment of any requirements or expense, Then he is liable to pay Debt back to bank.

In the case of a company, accounts payable, taxes, wages, accrued expenses, and deferred revenues.

According to accounting equation

                                  Liabilities = Assets - Capital

(where Capital for a corporation equals Owner's Equity)

*Liabilities are reported on a balance sheet and are usually divided into two categories:

1.       Current liabilities: debts payable within one year(such as wages, accounts, taxes, accounts payable)

2.      Long-term liabilities: debts payable over a longer period.

3) Capital:-

                       . The net worth of a business; that is, the amount by which its assets exceed its liabilities. It may also define as Cash or goods used to generate income either by investing in a business or a different income property.

For example: Money, property, and other valuables which collectively represent the wealth of an individual or business.

8According to accounting equation

                                  Capital = Assets - Liabilities

(where Capital for a corporation equals Owner's Equity)

4) Revenue:-

                The total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner's equity and is calculated before any expenses are subtracted.

Net income can be calculated by subtracting expenses from revenue. 

For the government, the increase in assets of governmental funds that do not increase liability or recovery of expenditure. This revenue is obtained from taxes, licenses and fees.

5) Expense:-

                 An outflow of cash or other valuable assets from a person or company to another person or company. An expense decreases assets or increases liabilities

For Example: Buying food, clothing, furniture or an automobile, salaries, utilities etc

*In a cash flow statement, expenditures are divided into operating, investing, and financing expenditures.

1.       Operational expense – salary for employees

2.      Capital expenditure – buying equipment

3.      Financing expense – interest expense for loans and bonds