Types / Nature of Accounts

“Accounting is the language of Business”.

Let’s test our definition of Accounting; we all know that for running a business we need some resources.

(if you are new read this blog first)

Resources:

Resources of the business mean the items which is necessary to run a business. e.g Cash, Bank Account, Stock, Office Furniture, Machinery, Delivery Vehicle, Building, and Equipment.

In Accounting we give the name to all this resources is “Assets” and It is also give us a definition of Assets, anything which is qualify in this definition we called it “Assets”.

“An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”

Go back to our explanation of Resources / Assets, we can observe that there are many assets which have short term benefits, and the others have long term benefits. So, we can divide these Assets according to their future economic benefits time in two categories, Current Assets and Fixed Assets.

Before going to the definition of Current Assets, here are some points to cover first. Accounting Period is the time period when companies close his account and create Profit / Loss statement and Balance Sheet. Generally it is 12 month period, in some countries it is started from January and End at December 31. In Pakistan it is started from July and End at June 30. Future Economic Benefits means the inflow of Cash into the Business.

“Current Assets are that resources of Business which Economic benefit is not more than One Accounting Period.” Current Assets example includes Cash, Bank Account, Stock, Raw Material Inventory, Finished Goods Inventory, Receivables, Short Term Advances, Short Term Investments, and Prepayments.

“Fixed Assets are the resources other than Current Assets.” Or “The Assets which future economic benefit is more than one Accounting Period.” Fixed Assets Example includes Office Furniture, Equipment, Machinery, Land, Building, Plants, Goodwill, Copyrights, and Trademarks.

Fixed Assets are further more divided into Tangible and Intangible Fixed Assets.

“Tangible Fixed Assets are the Fixed Assets which have physical existence”. Example is Property, Plant and Equipment.

“Intangible Fixed Assets are the Fixed Assets which have not physical existence”. Examples are Copyright, Patents, and Goodwill.

Sources:

Sources are the means of business by business get the funds for resources. Sources are two type, Internal and External. Example of Internal Sources is Fund provided by the owner in term of Investment.  Example of External sources is loan from the suppliers, other peoples, and businesses.

Internal Sources Called by Capital / Owner Equity in Accounting and External Sources are called by Liabilities.

As Same in the case of Assets, Liabilities are also current and long terms.

Current Liabilities is the liabilities which will pay in one Accounting Period. Accounts Payable, Notes Payable, Bank Overdraft are the some examples of Current Liabilities. Other than Current Liabilities all the liabilities are Long Term Liabilities.

          For more explanation of Liabilities we can say that liabilities mean all that which we get economic benefit in present and will pay it in future.

Revenues:

If we look closer in businesses we observe that every business is selling something. Some are selling goods; some are selling services, and some are selling both. This is called revenues in Accounting.

Examples of Revenues are Sales Income, Consultancy Fee Income, Service Charges Income etc.

Expenses:

Expenses mean the outflow of money (Economic Benefit) to getting the revenues.

Examples of Expenses include Salaries Expense, Utility Bills Expense, Courier Postage & Telegram Expense, Repair & Maintenance Expense, etc.

Summary:

Types / Nature of Accounts	Explanation
1)    Assets	Future Economic Benefit
2)    Liabilities	Out Flow of Future Economic Benefit at the result of past events.
3)    Owner Equity / Capital	Investment by the owner
4)    Revenue	Selling of Goods and Services
5)    Expense	Out flow of economic benefit to get the revenues