Asset Accounts

Assets are the resources owned by a business which benefit its future operations and are convertible to cash (cash itself is also an asset). Examples are cash, land, building, vehicles, receivables, etc.

List of Asset Accounts

Following are the common asset accounts:

• Cash: In accounting, cash includes physical money such as bank notes and coins as well as amount deposited in bank for current use.
• Accounts Receivable: It includes the money owed to the business by outsiders such as customers and other businesses. In most cases accounts receivable arise from sales or services provided on credit. There is no interest on accounts receivable.
• Notes Receivable: Notes receivable includes the money owed to business by outsiders for which there is a formal document for proof of debt. In most cases Notes receivable also involve interest.
• Prepaid Insurance: The cost of insurance premium paid in advance.
• Inventory: These are goods and materials held by a business for the purpose of sale or for the production process.
• Supplies: Supplies include items held for use in miscellaneous activities by the business. It may include items used by business staff (for example: stationary products) and items used in production process (for example nails used in production of furniture).
• Equipment: Equipment having life more than a year. Examples are Vehicles, Production Machinery, Computers etc.
• Buildings: Buildings owned by the business. Examples are Office Building, Factory Building, Godown, Garage etc.
• Land: Includes cost of all the land owned by the business. Also includes cost of the land with building on it.
• Patents, Trade Mark, License: These are assets have no physical existence but have properties of assets.

The assets cash, accounts receivable, notes receivable, prepaid insurance, inventory and supplies are categorized as Current Assets.

Equipment, buildings, land and patents are categorized as Non-Current Assets.

Those assets which have no physical existence are called intangible assets.

Special Journals

Special Journals (also known as subsidiary journals) are chronological records of frequently occurring transactions such as sales, purchases and cash receipts/payments.

Repetitive transactions such as sales and purchases are recorded in special journals and the totals of these journals are transferred to general ledger on a regular basis such as daily, weekly or monthly as if a single transaction has occurred in this interval.

Special journals mostly deal with subsidiary accounts but this is not a rule. For example, sales journal is typically used to record credit sales and the accounts involved are individual debtors’ accounts (these are subsidiary accounts) and sales account which a general ledger account.

Businesses may need to record countless sales transactions per day. Recording all such transaction directly in general journal would be extremely time consuming and error prone. It is much easier and simple to summarize all sales transactions during a week, for example, and transfer the total amount to general records.

Format

Special journals are in the form of a table of numerous rows and multiple columns. Each transaction takes a single row. The names of columns vary based on the type of transaction in a special journal.

Examples

Examples of special journals which are commonly used are:

1. sales journal
2. sales returns journal
3. purchases journal
4. purchase returns journal
5. cash receipts journal
6. cash payments journal

Journal

In financial accounting, journal is a record of all the transactions of a business which occur with in a specific time period. The business transactions are recorded chronologically in a journal each one with a short description. A record of a single transaction in a journal is called journal entry.

There are two types of accounting journals:

General Journal

General Journal can be used to record any type of financial transaction. If a business is involved in relatively small number of transactions each day, it can cover all of them in just a single accounting journal with out any complexity.

Specialized Journal

Specialized Journals are used by larger businesses which are involved in numerous transactions each day. Recording all those transactions in just a single journal will make things too complex. Therefore all the transactions of sales are recorded in sales journal, those of purchases are recorded in purchases journal and receipts and payments of cash are recorded in cash journal etc.

Thus there are following important specialized journals:

• Cash Journal
• Sales Journal
• Purchases Journal

Business Transaction

Business transaction is an event which affects a business financially or in other words it causes a change in its assets, liabilities and/or equity. Any event which does not affect the business financially is not recorded in accounting system.

Business transactions are recorded in a special type of register called journal.

Journal Entry Format

Each individual record in a journal is called journal entry. Journal entries are passed according to the principle of the accounting equation and it obeys the debit credit rule. Entries made

A typical journal entry displays the following information:

• Date of transaction
• Names of accounts involved in the transaction
• Debit and credit columns for entering dollar amounts

The format of a typical journal entry is shown below:

Date	Account	Debit	Credit
Jan 1	Cash	4,400
	Capital		4,400

Expanded Accounting Equation

Expanded accounting equation, as the name implies, is an expanded form of the standard accounting equation and it shows components of owner's equity such as paid-in capital, dividends, incomes, expenses etc. Expanded accounting equation does not expand assets and liabilities further. It helps to understand the relationship between balance sheet and income statement because it combines figures from both of the financial statements.

It is important to note that the components of equity differ between sole proprietorships, partnerships and companies. Therefore the expanded accounting equation is also different for different forms of business. For example, a corporation will use:

Assets = Liabilities + Paid-in Capital - Treasury Stock + Incomes - Expenses - Dividends

For sole proprietorship, it will be:

Assets = Liabilities + Owner Capital + Incomes - Expenses - Withdrawals

Expanded accounting equation can be used in the form of a table to record transactions of a business as shown in the example below:

Example

Note: We have used the transactions from the journal entries page here.

Date	Assets	=	Liabilities	+	Paid-in Capital	+	Income	−	Expenses	−	Dividends
Jan 1	+100,000	=		+	+100,000	+		−		−
Jan 2	+36,000 −36,000	=		+		+		−		−
Jan 3	+80,000 −60,000	=	+20,000	+		+		−		−
Jan 4	−17,600	=	−17,600	+		+		−		−
Jan 13	+28,500	=		+		+	+28,500	−		−
Jan 13	−17,600	=		+		+		−		−
Jan 14	−19,100	=		+		+		−	+19,100	−
Jan 18	+32,900 +21,200	=		+		+	+54,100	−		−
Jan 23	+15,300 −15,300	=		+		+		−		−
Jan 25	+4,000	=	+4,000	+		+		−		−
Jan 26	+5,200	=	+5,200	+		+		−		−
Jan 28	−19,100	=		+		+		−	+19,100	−
Jan 31	−5,000	=		+		+		−		−	+5,000
Jan 31		=	+2,470	+		+		−	+2,470	−
Jan 31		=	+1,494	+		+		−	+1,494	−
Jan 31	−3,470	=		+		+		−	+3,470	−

Summing the each of the column in the above table, we get:

147,530 = 15,564 + 100,000 + 82,600 − 45,634 − 5,000

147,530 = 147,530

Accounting Equation

When an entrepreneurs start a business, their business assets (such as office equipment, inventories, office buildings, cash, etc.) come from two sources: either they purchase them using cash they invest in the business, or they raise loans and purchase the assets on credit terms in which they promise some third party to pay the price in future. This simple fact is expressed by the accounting equation as follows:

Assets = Liabilities + Shareholders' Equity

Accounting equation is the most basic principle of financial accounting. It states that at a point of time, the value of assets of a business is equal to sum of the value of its liabilities and its shareholders' equity.

An ASSET is a resource controlled by a business which is of economic use to the business. Examples of assets include land, buildings, vehicles, inventory, accounts receivable, cash and cash equivalents, etc.

A LIABILITY is the obligation of a business towards its creditors i.e. those who provided loaned cash or loaned assets. Settlement of liabilities result in an outflow of assets. Common liabilties are accounts payable, salaries payable, taxes payable, etc.

The EQUITY is the claim of the owners of the business on the business' assets. It represents the assets leftover after all liabilities have been paid off. Owner's equity contains accounts such as common stock, retained earnings, etc. The accounting equation can be modified to define shareholders' equity as follows:

Shareholders' Equity = Assets - Liabilities

Concept and Example

The following example further explains the concept behind the accounting equation:

In June 2013, Kumar Sangakara started a tourism business with LKR 15 million in personal savings. Out of the money he invested, he purchased office building worth LKR 10 million and office equipment worth LKR 3 million. He kept LKR 2 million in cash to pay routine expenditures and obtained 10 vehicles from Marwan Atapatu Bank (MAB) for total value of LKR 20 million.

Let's see how these transactions fit into the accounting equation as at the end of first month of operations:

The business assets are: vehicles worth LKR 20 million, office buildings worth LKR 10 million, office equipment worth LKR 3 million, and cash worth LKR 2 million. This sums up to LKR 35 million.

The only liability is the amount payable to MAB on account of leased vehicles amounting to LKR 20.

His shareholders equity which represents his interested in the business is equal to his initial investment plus any profits earned. Since there are no operations and no profit and loss earned in first month, his initial investment assets at LKR 15 million.

This fits well into the accounting equation:

Assets (LKR 35 million) = Liabilities (LKR 20 million) + Equity (LKR 15 million).

There is no transaction that can imbalance this fundamental accounting identity. The concept of expanded accounting equation further helps with how further business transactions are reflected by the accounting equation.

Financial Accounting Introduction

Financial Accounting

Financial accounting is a system that accumulates, processes and reports information about an entity's performance (i.e. profit or loss), its financial position (i.e. assets, liabilities and shareholders' equity) and changes in financial position.

Every entity, whether for-profit or not-for-profit, aims at creating maximum value for its stakeholders. The goal of maximum value addition is best achieved when there is a mechanism to monitor the management and the board of directors. Financial accounting helps in such monitoring by providing relevant, reliable and timely information to the stakeholders.

Inputs to a financial accounting system include business transactions which are supported by source documents, such as invoices, board resolutions, management memos, etc. These inputs are processed using generally accepted accounting principles (GAAP). The processed information is reported through standardized financial statements.

Users of the Financial Statements

The most basic objective of financial accounting is preparation of general purpose financial statements, which are financial statements meant for use by stakeholders external to the entity, who do not have any other means of getting such information, i.e. people other than the management. These stakeholders include:

• Investors and Financial Analysts: Investors need the information to estimate the instrinsic value of the entity and to decide whether to buy, hold or sell the entity's shares. Equity research analysts use financial statements to conduct their research on earnings expectations and price targets.
• Employee groups: Employees and their representative groups are interested in information about the solvency and profitability of their employers to decide about their careers, assess their bargaining power and set a target wage for themselves.
• Lenders: Lenders are interested in information that enables them to determine whether their loans and the interest earned on them will be paid when due.
• Suppliers and other trade creditors: Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due and whether the demand from the company is going to increase, decrease or stay constant.
• Customers: Customers want to know whether their supplier is going to continue as an entity, especially when they have a long-term involvement with that supplier. For example, Apple is interested in long-term viability of Intel because Apple uses Intel processors in its computers and if Intel ceases operations at once, Apple will suffer difficulties in meeting its own demand and will loose revenue.
• Governments and their agencies: Governments and their agencies are interested in financial accounting information for a range of purposes. For example, the tax collecting authorities, such as IRS in USA, are interested in calculating taxable income of the tax-paying entities and finding their tax payable. Antitrust authorities, such as Federal Trade Commission, are interested in finding out whether an entity is engaged in monopolization. The governments themselves are interested in efficient allocation of resources and they need financial accounting information of different sectors and industries to decide on federal and state budget allocation, etc. The bureaus of statistics are interested in calculating national income, employment and other measures.
• Public: the public is interested in an entity's contribution towards the communities in which it operates, its corporate social responsibility updates, its environmental track record, etc.