Five basic Elements of Accounting
Accounting involves five basic Elements. They are as follows.
- Assets
- Liabilities
- Owner's Equity
- Revenue
- Expenses
1. Assets – Asset may be defined as anything owned by the business entity. Assets are the resources that are used to conduct the business activities.
Examples: Cash, Cash at Bank, Debtors, Stock, Equipment, Prepayments, Land & Buildings etc. Assets are reported on the balance sheet.
Assets are classified into two types:1. Current assets are equivalent to cash or will get converted into cash within a time frame of one year. Examples: Cash and cash equivalents, short term investments, accounts receivables, inventories, and prepaid revenue
2. Non-current assets are those assets that will not get converted into cash within one year and are non current. Examples: long term investments, plant property and equipment, goodwill, accumulated depreciation and amortization, and long term deferred taxes assets
2. Liabilities – A liability is an obligation of a company that results in the company’s future sacrifices of economic benefits to other entities or businesses.
Examples: Creditors, Bank Loans, Accrued Expenses, Mortgage, Bank Overdraft etc. Liabilities are reported on the balance sheet.
Liabilities are classified into two types:
1. Current liabilities are the debts that a business expects to pay within 12 months. Examples: Short-term loans, Accounts payable, Accrued expenses, Interest payable, Bank account overdrafts, Bills payable, Income taxes payable.
2. Non Current liabilities are the debts that a business expects to pay beyond one year. Examples: Debentures, Bonds payable, Long-term loans, Deferred tax liabilities, Long-term lease, Pension benefit obligations.
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3. Owner’s Equity – Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between assets and liabilities recorded on the balance sheet of a company.
Equity Formula:
Equity= Assets – Liabilities
4. Revenues – Revenues is the money that comes into a business from the sale of goods or services. Revenues result from selling goods or providing services through the main operations of a business entity. They are economic benefits that cause a business to increase its assets or reduce its liabilities which finally leads to increase the Owner’s equity.
Examples: Cash Sales or credit sale, Discount received, interest received, stock gain or commission received etc.
5. Expenses – Expense is the amount of money spent in order to buy or do something. It’s the amount of money that’s spent for business purposes. They are the consumption or losses of future economic benefits that cause a business to reduce its assets and increase its liabilities which finally leads to decrease the Owner’s equity.
Examples: Salaries, Wages, Rent, Fright, discount allowed, insurance etc.
Affect of Debit and Credit on Assets, Liabilities, Revenue, Expenses and Equity
