Assets are resources a company owns that have an economic value. Assets are represented on the balance sheet financial statement.
Some common examples of assets are cash, accounts receivable, inventory, supplies, prepaid expenses, notes receivable, equipment, buildings, machinery, and land. Cash includes paper currency as well as coins, checks, bank accounts, and money orders. Anything that can be quickly liquidated into cash is considered cash. Cash activities are a large part of any business, and the flow of cash in and out of the company is reported on the statement of cash flows.
Accounts receivable is money that is owed to the company, usually from a customer. The customer has not yet paid with cash for the provided good or service but will do so in the future. Inventory refers to the goods available for sale. Service companies do not have goods for sale and would thus not have inventory.
Merchandising and manufacturing businesses do have inventory. You learn more about this topic in Inventory. Examples of supplies office supplies include pens, paper, and pencils. Supplies are considered assets until an employee uses them. At the point they are used, they no longer have an economic value to the organization, and their cost is now an expense to the business. Prepaid expenses are items paid for in advance of their use. They are considered assets until used. Some examples can include insurance and rent.
Insurance, for example, is usually purchased for more than one month at a time six months typically. The company does not use all six months of the insurance at once, it uses it one month at a time. However, the company prepays for all of it up front. As each month passes, the company will adjust its records to reflect the cost of one month of insurance usage. Notes receivable is similar to accounts receivable in that it is money owed to the company by a customer or other entity.
The difference here is that a note typically includes interest and specific contract terms, and the amount may be due in more than one accounting period. Equipment examples include desks, chairs, and computers; anything that has a long-term value to the company that is used in the office. Equipment is considered a long-term asset, meaning you can use it for more than one accounting period a year for example. Equipment will lose value over time, in a process called depreciation.
You will learn more about this topic in The Adjustment Process. Buildings, machinery, and land are all considered long-term assets.
Machinery is usually specific to a manufacturing company that has a factory producing goods. Machinery and buildings also depreciate. Unlike other long-term assets such as machinery, buildings, and equipment, land is not depreciated. The process to calculate the loss on land value could be very cumbersome, speculative, and unreliable; therefore, the treatment in accounting is for land to not be depreciated over time.
Liabilities and the Expanded Accounting Equation The accounting equation emphasizes a basic idea in business; that is, businesses need assets in order to operate. The stock will be down by one camera, and so that must be reflected in the accounts. If you remember, we established that the main objective of the business was to generate profit for the owners. The accounting equation thus balances, but the business has other expenses that need to be taken into account.
The balance sheet, however, does not give a breakdown of profit into income and expenses and for that we need the profit and loss account that will be discussed in more detail in the next section.
The net figure of income less expenses is calculated at the end of the financial period in the profit and loss account. This net figure, either a profit or a loss, is then transferred to the capital account.
If a business has made a loss in a financial period i. Making the decision to study can be a big step, which is why you'll want a trusted University. Take a look at all Open University courses. If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module , or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.
The income statement calculates the net income for the period by subtracting all the expenses from the gross income. The net income, or earnings, is then added to the retained earnings balance.
A loss for the period would reduce the retained earnings balance. If retained earnings fall, so do share value and stock price. You want unnecessary expenses to be avoided so that your stock price is not driven lower by poor management. Another determinant of stock price is earnings per share. A vigilant shareholder keeps an eye on corporate expenses and questions unexplained increases. Because dividends can come only from retained earnings, high expenses can hurt your dividend income.
Eric Bank is a senior business, finance and real estate writer, freelancing since Profit only increases equity if the company doesn't distribute it directly to the owners.
Undistributed profits that go to equity are called retained earnings. For most businesses, and especially small businesses, the vast majority of expenses will be operating expenses -- costs incurred in the day-to-day running of the business. These include workers' wages, rent, utilities, advertising, supplies and taxes. And although an item in inventory counts as an asset, its cost eventually shows up as an operating expense when the item gets sold.
Many operating expenses are simply unavoidable -- you can't run a store, for example, without inventory and someone to ring up sales.
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