The accounting elements are Assets, Liabilities, Owners Equity, Capital Introduced, Drawings, Revenue and Expenses. Each account we have is one of these elements. On early task you must master is to be able to allocate each account to its accounting element.
- Assets (Owned): Something that provides a future economic benefit.
- Physical Assets such as Land, buildings, vehicles, equipment, furniture etc.
- Things represented electronically. Typically lists:
- You make a sale on credit. Until that account has been paid to you it is an Account Receivable,
- Bills you may have paid in advance - these are referred to as prepayments.
- Work you have completed, but not yet sent the bill for. This is accrued Revenue. In most business it is referred as WIP (Work-in-Progress).
- Cash at Bank probably falls in here. You have a record on paper or in electronic form that indicates how much funds you have available.
- There are also assets we refer to as intangible assets. Typically these are much harder to put a value on. A patent is a good example of an intangible assets. Imagine if a company invented a new drug that halved the time that someone suffered from a cold and this drug is patented. This will generate a significant future cash stream. Typically these require a calculation to work out their value.
- Liabilities (Owed): Is a future economic sacrifice you are obliged to make. When you borrow money you have created a liability, similarly if you purchase an item on credit (Account Payable). Someone could have delivered a service to you and they have not yet sent you a bill. This would be an accrued expense.
- Owner's Equity: Defined as `the residual interest in the assets of the entity after deduction of its liabilities'. This difference between assets and liabilities represents the owners interest in the business. It is often referred to as Net Assets. For owners' equity we have one (type of) permanent account and is the capital account(s). It is impacted upon by the temporary accounts: Capital Introduced, Capital Withdrawn (drawings) and revenue and expenses.
- Revenues: Gross inflows of economic benefit during an accounting period in the course of the ordinary activities of an entity… other than increases resulting from contributions from equity participants AASB118. Examples include Sales, Income from provision of services, funds paid from others for use of an entities assets (e.g. Rental Income, hire fees), Interest Received. Remember for each of these items it is only revenue in a period to the extent it relates to that time period
- Expenses: Decreases in owners' equity because of the use of assets or increasing liabilities. But only to the extent that it is in the course of producing income for the current period (Matching Principle).
Accounting Elements that are initially difficult to categorise:
Prepayments. Assets. You have paid for something in advance. You have taken money out of your bank account (an asset) and paid for something now that you will use later. This is an asset until you use it. When you use it an expense is created.
Accrued Revenue. Asset. This is described above. You do work but have not sent the bill. When you send the bill it will become an Account Receivable (another form of asset) and when the Account is paid, it becomes Cash at Bank. So accrued revenue is just the first step to turning work into cash.
Accrued Expenses. Liabilities. Just like accrued revenue this is a service you have received, but not yet paid for, or even received the bill. It will often have an account name ending in Payable, e.g. Rent Payable, Salaries Payable. While all accounts ending in payable will be a liability, they will not all be items that have been accrued. For example, Accounts Payable are accounts for which you have received the bill.
