Wednesday 5 February 2014

Major Types of Accounts


Assets: 
__________

·         Formal Definition: The properties used in the operation or investment activities of a business.
·         Informal Definition: All the good stuff a business has (anything with value) - The goodies.
Additional Explanation: The good stuff includes tangible and intangible stuff. Tangible stuff you can physical see and touch such as vehicles, equipment and buildings. Intangible stuff is like pieces of paper (sales invoices) representing loans to your customers where they promise to pay you later for 
At the end of a year (period), the revenue and expenses accounts (Ma's Kids) are set to zero and their balances are transferred to a permanent equity account in the Balance Sheet such as Owner's Capital (Mom) or Retained Earnings. This process is what is known as Closing The Books. Since the balances of these accounts are set to zero (closed out) at the end of a period, these accounts are sometimes referred to as temporary or nominal accounts. After closing the books for a year, the only accounts that have a balance are the Balance Sheet Accounts. That's why the Balance Sheet Accounts are also referred to as Permanent Accounts.

Of course the table is based on the Accounting Equation ( Assets = Liabilities + Owner's Equity ) which must be kept in balance and double-entry accounting, where for every debit to an account there must be an equal credit to another account. 
your services or product. Examples of assets that many individuals have are cars, houses, boats, furniture, TV's, and appliances. Some examples of business type assets are cash, accounts receivable, notes receivable, inventory, land, and equipment.
 Liabilities:
_____________

Formal Definition: Claims by creditors to the property (assets) of a business until they are paid.
Informal Definition: Other's claims to the business's good stuff. Amounts the business owes to others.


Additional Explanation: Usually one of a business's biggest liabilities (hopefully they are not past due) is to suppliers where a business has bought goods and services and charged them. This is similar to us going out and buying a TV and charging it on our credit card. Our credit card bill is a liability. Another good personal example is a home mortgage. Very few people actually own their own home. The bank has a claim against the home which is called a mortgage. This mortgage is another example of a personal liability. Some examples of business liabilities are accounts payable, notes payable, and mortgages payable.

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