ACCOUNTING EQUATION ELEMENTS

ACCOUNTING EQUATION ELEMENTS

1. Liability

   • Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction. Liabilities also include amounts received in advance for future services.
     • Examples of liability accounts reported on a company's balance sheet include: Notes Payable Accounts Payable Salaries Payable Wages Payable Interest Payable Other Accrued Expenses Payable Income Taxes Payable Customer Deposits Warranty Liability Unearned Revenues
       • liability accounts are usually classified
         • Current Liabilities
           • If a company has a loan payable that requires it to make monthly payments for several years, only the principal due in the next twelve months should be reported on the balance sheet as a current liability.
         • Long Term Liabilities
         • Commitments
           • A company's commitments (such as signing a contract to obtain future services or to purchase goods) may be legally binding, but they are not considered a liability on the balance sheet until some services or goods have been received.

2. Owner's Equity

   • Owner’s equity is essentially the owner’s rights to the assets of the business. It’s what’s left over for the owner after you’ve subtracted all the liabilities from the assets.
     • Owner’s equity includes: Money invested by the owner of the business Plus profits of the business since its inception Minus money taken out of the business by the owner Minus money owed to others
       • Capital Stock
       • Revenue
       • Expenses
       • Retained Earnigs
       • Dividends

3. Assets

   • Resource with economic value that a company owns or controls with the expectation that it will provide a future benefit.
     • Assets can be broadly categorized into
       • Short-Term (or current) assets
         • are short-term economic resources that are expected to be converted into cash within one year.
           • Examples: Cash, cash equivalents, accounts receivable, inventory, and various prepaid expenses.
       • Fixed Assets
         • Fixed assets are long-term resources, such as plants, equipment, and buildings. An adjustment for the aging of fixed assets is made based on periodic charges called depreciation, which may or may not reflect the loss of earning powers for a fixed asset.
       • Financial Assets
         • Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks
       • Intangible Assets
         • Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. They can be either amortized or tested for impairment each year.