Types of Accounts

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Introduction to Accounting Explained Lecture 3

WHAT IS AN ACCOUNT?

In Lecture one of this this tutorial , we have seen that , the economic data mostly financial information are recorded , summarized and classified. Then do you think that all that information will be stored from where?
The Accountant will record such transaction in corresponding account and make the total amount of transaction’s value from General Ledger (GL)!

ASSETS
1.What is an Asset ?
The business needs physical tools/items that will be used to operate and rendering services , those items are called Assets.
Assets are controlled and owned by the business and help them in running the business activities and benefit from the service.


2. Asset Accounts
Asset Accounts are divided into 2 main Parts as detailed from next slide
1. Fixed Asset Accounts / Non current Assets
Non current assets accounts are divided into 2 classes:
a) Intangible Assets
Intangible assets are those which do not have physical existence , they are mainly :
 Patent
 Good will
 Trade mark
 License
b) Tangible Asset Accounts
Those are the assets which have physical existence and used by the business for period of one year and above, there are mainly :
 Building
 Land
 Furniture and Fitting
 Motor Vehicle
 Long term Securities
 Equipment
 Plant & Machinery


2. Current Assets
Current assets are the assets acquired by the business and stay in
running for a short period of time , usually less than one year. we have classified the current asset accounts into 3 classes :
a) Stock account :
 Stock of good
 Stock of row material
 Stock of Work in progress (W.I.P)
 Stock of Finished product and Semi – finished product
b) Customers and sundry debtors accounts
 Debtors accounts (Account receivables)
 Bills receivables
 Prepaid Expenses
 Income receivable ( Accrued income)
c) Financial Accounts
 Cash and Cash equivalents
 Bank
 Short term securities (marketable Securities)

 LIABILITY
1.what is Liability?
The business needs funds/money from other third party like Banks or suppliers that will be used to operates and rendering services ,those funds are called Liability.
Liability are owed by the business and have an obligation to pay it.

Those liability help them in running the business activities and benefit from the service.
2. Liabilities Accounts
Liabilities Accounts are divided into 2 main Parts as detailed below:
a) Long and Medium term liability
They are obligations of payment maturing in more than one
financial year (FY), the long and medium term liability accounts are
mainly:
 Long term bank loan
 Bonds debenture loans
b) Current liability
This are obligations of payment maturing in less than one
financial year (FY), the current liabilities accounts are mainly :
 Creditors (Account payables)
 Bank overdraft
 Accrued Expenses
 Income received in advance or Prepaid income
 Tax payable
 Outstanding salaries
 Dividend payables 


OWNER’S EQUITY
What is an Owner’s Equity ?
When the business sells all the assets and pays the all liabilities , the Financial value that would be remained is name as Owner’s Equity, mostly those funds are the resources invested by the business owners. Simply Owner’s Equity is the Value of the Assets minus all liability.

Owners Equity of the Company comprise of :
o Ordinary shares / Capital
Less : Drawings
o Reserves
o Retained earnings
Assets , Liability and Equity accounts are also named as Real Accounts
Owner’s Equity = Capital + Net Profit – Drawing

ACCOUNTING EQUATION
As we have explained in previous slides, business owns properties which are called Assets , these assets are the business resources that enable them to run the business operations and serving the customers.
The owners of the business provides funds to finance the Business, these
funds including assets that the owners may put is called Capital.
Other persons who are not owners of the business may also finance assets.
Funds from these sources are called Liabilities.
The total assets must equal to the total funding i.e. both from owners and
non owners , this is expressed in form of accounting equation which is expressed as shown here
ASSETS = LIABILITY + EQUITY

INCOME AND EXPENSES
1. Income/ Revenue
The Income /Revenue of the business is the sum of all items that increase
the value of assets and hence increase the owner’s equity without any
corresponding increase in the liability or any new investment by the owners of the business.

Most examples of Income Accounts are:
• Sales
• Rent received
• Interested received
• Discount received
• Dividend received


2. Expenses
The Expenses of the business are those items that reduce the value of assets and hence reduce value of owners equity without any corresponding reduction in liabilities or any capital drawing by the owner.
Most examples of Expense Accounts are:
• Office supply
• Rent paid
• Electricity
• Advertisement
• Telephone and posting All Expense accounts, Income Accounts or Losses accounts
• Dividends paid are also named as Nominal Accounts
• Stationary
• Wages and salaries
• Depreciation and Etc.

End of Lecture


 40 All the time,  1 To day

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