It
is very important to be able to distinguish between the five groups of
accounts: Assets, Expenses, Equity, Revenue and Liabilities. An
understanding of these groups leads into the essential learning tool,
the ‘rules of double entry’.
These are discussed below-
Assets
Assetsare items of value owned/controlled by a business; examples are cash, inventories, buildings and motor vehicles.
Liabilities
Liabilitiesare
amounts owed to people or to organizations outside of the business;
examples are amounts owed to Creditors control for purchases, or to a
bank for a loan, overdraft or mortgage.
Equity
Equityis
represented by the business’s assets less its liabilities (or the
amount that the business owes to the owner). Equity is the amount
originally invested in a business plus extra cash introduced, plus
profits and less losses and drawings of cash or inventories from the
business by the owner.
Revenue
Revenueitems
are the earnings of a business; examples are income from sales of
trading stock, interest, commission, rent and discount received.
Expenses
Expensesare
outflows from a business; examples are payment for wages or salaries,
purchases of trading stock, payments for advertising, freight, motor
vehicles expenses and discount allowed.
