Classification of Assets, Liabilities, and Equity in Accounting

Posted on Aug 23, 2024 in Economy

CLASSIFICATION OF LIABILITIES

As with assets, in accounting, liabilities are grouped based on their nature and purpose. The primary basis for classifying liabilities is the degree of enforceability (higher or lower) determined by the term of the obligations or debts to be paid. Obligations with shorter terms are considered more enforceable, while those with longer terms are less so.

Current Liabilities

This category encompasses all short-term debts and obligations (maturing within one year) characterized by their constant movement or rotation. The major components of this group include:

  1. Suppliers: Debts owed to suppliers for purchasing goods on credit.
  2. Notes Payable Short-Term: Value of promissory notes and bills of exchange issued to secure short-term credit purchases or operations.
  3. Sundry Creditors: Debts arising from open credit purchases or loans from entities other than suppliers of business goods or raw materials.
  4. VAT Payable (VAT Removed): Amount of value-added tax collected on sales, which is payable to the tax authorities.

Non-Current Liabilities

This group consists of long-term debts and obligations (maturities exceeding one year) typically used for investments intended to strengthen the business. Key components include:

  1. Mortgagee: Debts secured by real estate (land or buildings) used as collateral for loans.
  2. Notes Payable Long-Term: Value of notes or bills of exchange issued to secure long-term credit purchases or operations (maturities over one year).

Deferred Liabilities

This category includes amounts received in advance for services to be provided in the future. These obligations, while currently liabilities, will convert into revenue as the services are delivered. The main components are:

  1. Revenue Received in Advance: Income received for services or products yet to be delivered.
  2. Interest Received in Advance: Interest income received in advance for loans or credit extended.

MAJOR EQUITY ACCOUNTS

Equity represents the residual interest in the assets of a business after deducting its liabilities. It reflects the financial strength and solvency of the business. The core equity accounts include:

  1. Capital: The initial and subsequent contributions made by owners (shareholders or partners) to the business, either in cash or in kind.
  2. Net Income: The profit or loss generated by the business from its operations over a specific period (e.g., a fiscal year).
  3. Retained Earnings (Loss): The accumulated profits or losses of the business over time, after deducting any dividends paid to owners.

CLASSIFICATION AND MOVEMENTS OF MAJOR INCOME STATEMENT ACCOUNTS

Income Statement – Debit Side

  1. Cost of Sales: Calculated as follows:
    • Beginning Inventory + Purchases + Expenses on Purchases = Total Goods Handled
    • Total Goods Handled – Ending Inventory = Cost of Sales
  2. Selling Expenses:
    • Salaries and wages of sales department
    • Benefits for sales staff
    • Commissions for agents and sales personnel
    • Advertising and marketing expenses

Balance: Represents the capital expenditures incurred to generate sales revenue (also known as direct costs). At the year-end, this balance is transferred to the income statement, reducing revenue.

Administration Expenses

  • Salaries and wages of administration department
  • Benefits for administration staff
  • Stationery and office supplies
  • Postage and telecommunication expenses

Government Accounting

Government accounting encompasses the accounting practices of government entities at various levels (state, local, municipal, etc.). It also often includes accounting for public sector organizations like colleges and universities.

Types of Users: External and Internal

External Users:

  1. Creditors: Use financial information to assess the company’s ability to repay loans.
  2. Shareholders: Individuals or corporations who have invested in the company and are entitled to a share of its profits.
  3. Analysts and Financial Intermediaries: Monitor the financial performance of publicly traded companies and provide ratings to guide investment decisions.
  4. Public Investors: Individuals or institutions seeking investment opportunities and rely on financial information to make informed decisions.
  5. Regulatory Agencies: Oversee and regulate publicly traded companies, requiring them to submit financial reports.
  6. Government Authorities: Use financial information to determine and collect taxes from businesses.

Internal Users:

  • Management (CEO, CFO, Department Heads): Use detailed financial information to monitor performance, make decisions, and plan for the future.

POSTULATES (PRINCIPLES) OF ACCOUNTING

Basic Economic Entity Assumption

  1. Entity: The business is separate and distinct from its owners, creditors, and other stakeholders. Its transactions are recorded independently.

Measurement Principles

  1. Historical Cost: Assets and liabilities are recorded at their original cost.
  2. Going Concern: The business is assumed to continue operating in the foreseeable future.

Dual Aspect Concept

  1. Duality: Every transaction has a dual effect, impacting both assets and liabilities/equity.

Presentation Principles

  1. Full Disclosure: Financial statements should provide all material information necessary for users to understand the financial position and performance of the business.
  2. Relevance: Financial information should be relevant to the decision-making needs of users.
  3. Consistency: Accounting methods and principles should be applied consistently over time to ensure comparability.

ACCOUNTING STRUCTURE

Accounting principles (now often referred to as accounting standards) are a set of rules and guidelines that govern the preparation of financial statements. They ensure reliability, comparability, and transparency in financial reporting.

Special Rules

Specific rules exist for valuing and presenting various items in financial statements. These rules are often established by accounting standard-setting bodies.

Prudence Concept

Accountants are advised to exercise caution and avoid overstating assets or revenues or understating liabilities or expenses.

Income

Represents resources earned by the business from selling goods or services, whether in cash or on credit.

Expenses

Costs incurred by the business to generate revenue. Lower expenses generally lead to higher profits.

Basic Accounting Elements

  1. Assets: Economic resources owned by the business, expected to provide future benefits.
  2. Liabilities: Obligations or debts owed by the business to others.
  3. Equity: The residual interest in the assets of the business after deducting liabilities. Represents the owners’ stake in the business.

CLASSIFICATION OF ASSETS

Current Assets

integration and classification.
This is the first group in the classification of assets and is composed of all property and rights of the business that are related or constant moving, because they work with the employer and earns profits through change, and they have a great facility to become in cash. The principal assets in this group taking high to low availability are:

1 .- Fixed Cash Fund: This is the game that the company develops, to make payments under $ 2000.00 dollars, are cash, after two thousand by check

2 .- Case: Is the account in which all sales are applied, all entries of money. It was later transferred to the bank. (The money available in the case of business)

3 .- Banks: The money is now deposited in the bank checking account to make payments over $ 2000.00 dollars, business policy.

4 .- Goods Store:It is the account that runs the company, to implement all purchases of goods, determining the value of these stocks and knowing your sales. (the value of the goods that the company has in its stock available for sale)

5 .- Customers: Are the clients have debts to the company by selling goods on credit, only credit sales for which the company is engaged.

6 .- Notes Receivable: T he value of the documents that third parties will have signed for the company on various transactions and bills of exchange promissory notes, can also be a sale of goods on credit while specifying that a document is signed.

7 .- Sundry debtors: T he amount of loans the company makes its employees or third parties and open credit sales, other than goods of the business.


8 .- Creditable VAT: T he amount of VAT (value added tax), the company has paid on purchases or miscellaneous performed.

9 .- Short-term Fixed investments: The company doing the banks to have funds available to meet any contingency.


Integration and asset classification.
This group comprises all those goods that have permanence or fixity in the business, that is purchased for use and not for sale, at least immediately, since in some cases over time can be sold to buy others. These goods are necessary as the foundation for business operations.
The main assets that are part of this group are:

1 .- Plots: The value of land owned by the company

2 .- Buildings: T value of the building or office of the company

3 .- Furniture and office equipment: T value of furniture and office equipment that uses

4 .- Electronic Computer equipment: The value of computer equipment that uses electronic

5 .- distribution equipment or transportation equipment: E s the cost of the vehicles that the company uses for the distribution of the products it sells, business object

6 .- Machinery: T he cost of the machinery the company uses to manufacture items sold

7 .- Deposits in guarantee: T he cost of deposits of money the company makes a pledge to ensure fulfillment of obligations by signing lease contracts generally.

8 .- Stocks, bonds and securities: T he cost of shares or bonds that the company buys from other companies and fixed income securities or capital investment made for dividends or profits


Deferred charges Deferred assets or their integration and classification
This group consists of all those amounts paid in advance and which are expected to receive a service during the current year or in subsequent years, ie they are investments which over time become expenses but for the moment have a value for a sale of business or cancellation of his contract investment or can be recovered. The main values that belong to this group are:

1 .- Installation charges: T he cost of facilities made by the company at its offices, machinery, etc.

2 .- Organization expenses: T he cost of business organization that is generally the start of operations

3 .-Insurance premiums paid in advance: T he value of insurance that the company hired to protect their property and personnel against risks in general in advance

4 .- Rents paid in advance: T he value of the income that the company usually pays in advance for the lease of Property for their offices).

5 .- Prepaid interest: T he value of the interest the company pays in advance for the use of credit or money speculation