1.
Assets
Assets are resources controlled by an organization as a result of past events and from which future
economic benefits are expected to flow.
Types of Assets:
Current Assets:
Expected to be converted into cash, sold, or consumed within a year.
Examples:
Cash and Cash Equivalents: Cash on hand, bank balances.
Accounts Receivable: Money owed by customers for goods or services already delivered.
Inventory: Goods available for sale or raw materials used in production.
Prepaid Expenses: Payments made in advance for goods or services to be received in the future, such as
insurance premiums.
Non-Current Assets:
Expected to provide economic benefits beyond one year.
Examples:
Property, Plant, and Equipment (PP&E): Land, buildings, machinery, vehicles.
Intangible Assets: Patents, trademarks, goodwill.
Long-term Investments: Investments in other companies’ stocks or bonds held for more than one year.
2. Liabilities
Liabilities are present obligations of an organization arising from past events, the settlement of which is
expected to result in an outflow of resources.
Types of Liabilities:
Current Liabilities:
Obligations due to be settled within a year.
Examples:
Accounts Payable: Money owed to suppliers for purchases made on credit.
Short-term Loans: Bank loans or overdrafts that need to be repaid within a year.
Accrued Expenses: Expenses incurred but not yet paid, such as wages or utilities.
Deferred Revenue: Payments received before delivering goods or services (e.g., advance payments).
Non-Current Liabilities:
Obligations not due for settlement within one year.
Examples:
Long-term Loans: Bank loans or bonds payable maturing in more than one year.
Lease Liabilities: Obligations under long-term lease agreements.
Pension Liabilities: Future obligations to pay employee pensions.
3. Capital (Equity)
Equity represents the residual interest in the assets of the organization after deducting liabilities. It is also
known as net assets or shareholders' equity in a corporation.
Components of Equity:
Share Capital: Funds raised by issuing shares to investors.
Examples:
Common Stock: Basic ownership interest in a corporation.
Preferred Stock: A class of ownership with preferential rights to dividends or assets.
Retained Earnings: Accumulated profits that have not been distributed to shareholders as dividends.
Other Reserves: Includes revaluation surplus, capital reserves, and other comprehensive income.
4. Expenses
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity.
Types of Expenses:
Operating Expenses:
Day-to-day expenses incurred in running a business.
Examples:
Salaries and Wages: Payments to employees for their services.
Rent Expense: Cost of renting office space or equipment.
Utilities: Payments for electricity, water, gas, and internet services.
Depreciation: Allocation of the cost of tangible assets over their useful lives.
Non-Operating Expenses:
Expenses not related to core business activities.
Examples:
Interest Expense: Cost of borrowing funds.
Loss on Sale of Assets: Losses incurred from selling assets below their book value.
5. Revenue
Revenue is the inflow of economic benefits during the accounting period in the form of increases in assets
or decreases in liabilities that result in increases in equity, other than those relating to contributions from
equity participants.
Types of Revenue:
Operating Revenue:
Income earned from the primary business activities.
Examples:
Sales Revenue: Income from selling goods or products.
Service Revenue: Income from providing services.
Commission Income: Fees earned for facilitating sales or services.
Non-Operating Revenue:
Income earned from secondary activities.
Examples:
Interest Income: Earnings from interest on savings or investments.
Dividend Income: Earnings from dividends on shares held in other companies.
Gain on Sale of Assets: Profits from selling assets above their book value.
Integration in Financial Statements
Statement of Financial Position (Balance Sheet):
Presents the organization’s financial position at a specific point in time.
Formula: Assets = Liabilities + Equity
Example:
Cash: $10,000
Accounts Receivable: $5,000
Inventory: $8,000
Property, Plant, and Equipment: $50,000
Total Assets: $73,000
Liabilities
Accounts Payable: $7,000
Short-term Loans: $3,000
Long-term Loans: $15,000
Total Liabilities: $25,000
Equity
Share Capital: $30,000
Retained Earnings: $18,000
Total Equity: $48,000
Total Liabilities and Equity: $73,000
Statement of Profit or Loss (Income Statement):
Shows the organization’s financial performance over a period.
Formula: Revenue - Expenses = Net Profit or Loss
Example:
Revenue
Sales Revenue: $100,000
Service Revenue: $20,000
Total Revenue: $120,000
Expenses
Cost of Goods Sold: $60,000
Salaries and Wages: $20,000
Rent Expense: $10,000
Utilities: $2,000
Depreciation: $5,000
Interest Expense: $1,000
Total Expenses: $98,000
Net Profit: $22,000
