1.
Assets
Assets are divided into two main categories: current assets and non-current assets.
Current Assets (expected to be converted to cash or used within one year)
o Cash: Currency or equivalents that are readily available.
Example: $10,000 in the company's checking account.
o Accounts Receivable: Amounts owed by customers for goods or services sold on credit.
Example: $5,000 owed by a customer for goods delivered.
o Inventory: Goods available for sale or raw materials used in production.
Example: $20,000 in finished products held for sale.
o Prepaid Expenses: Payments made for goods or services to be received in the future.
Example: $1,500 prepaid insurance for the next 6 months.
Non-current (Fixed) Assets (expected to provide economic benefits beyond one year)
o Property, Plant, and Equipment (PP&E): Tangible assets used in business operations.
Example: $100,000 for a factory building owned by the company.
o Long-term Investments: Investments held for more than a year.
Example: $25,000 invested in stocks and bonds.
o Intangible Assets: Non-physical assets like patents and trademarks.
Example: $15,000 in patents held by the company.
2. Liabilities
Liabilities are classified as current liabilities and non-current liabilities.
Current Liabilities (due within one year)
o Accounts Payable: Amounts owed to suppliers for goods or services received.
Example: $8,000 owed to suppliers for raw materials.
o Accrued Expenses: Expenses that have been incurred but not yet paid.
Example: $2,000 in accrued wages for employees.
o Short-term Debt: Loans and other obligations due within one year.
Example: $10,000 short-term bank loan.
o Current Portion of Long-term Debt: The portion of long-term debt that is due within the
next year.
Example: $5,000 payment due on a $50,000 loan next year.
Non-current Liabilities (due beyond one year)
o Long-term Debt: Loans and other obligations not due within the current year.
Example: A $200,000 mortgage on a company-owned building.
o Bonds Payable: Debt issued by the company that will mature in more than a year.
Example: $150,000 in bonds issued to investors.
o Deferred Tax Liabilities: Taxes owed in future periods due to temporary differences
between accounting income and taxable income.
Example: $5,000 in deferred tax liabilities.
3. Equity
Equity is categorized into contributed capital and earned capital.
Contributed Capital (amounts invested by owners)
o Common Stock: Capital raised from issuing shares to shareholders.
Example: $50,000 raised from issuing shares.
o Preferred Stock: Shares that have a higher claim on dividends but typically don’t have
voting rights.
Example: $30,000 raised from issuing preferred shares.
o Additional Paid-in Capital: The amount shareholders pay above the par value of the
stock.
Example: $10,000 raised from selling stock above par value.
Earned Capital (profits retained in the company)
o Retained Earnings: Cumulative net income that has not been distributed as dividends.
Example: $100,000 in retained earnings reinvested in the business.
o Dividends: Distributions of a portion of a company’s earnings to shareholders.
Example: $10,000 in dividends paid to shareholders.
Financial Accounts:
1. Inventory
o Classification: Asset (Current)
o Explanation: Inventory represents goods available for sale, which are expected to be
sold within a year.
2. Accounts Payable
o Classification: Liability (Current)
o Explanation: Money owed to suppliers for goods or services, expected to be paid within
one year.
3. Sales Revenue
o Classification: Revenue
o Explanation: Income earned from selling goods or services.
4. Equipment
o Classification: Asset (Non-current)
o Explanation: Equipment is a long-term resource used in business operations, providing
economic benefits for more than one year.
5. Retained Earnings
o Classification: Equity (Earned Capital)
o Explanation: Cumulative net income retained by the company and not paid out as
dividends.
6. Prepaid Rent
o Classification: Asset (Current)
o Explanation: A payment made for rent in advance, covering future periods within one
year.
7. Accrued Wages
o Classification: Liability (Current)
o Explanation: Wages that have been earned by employees but not yet paid, expected to
be paid within one year.
8. Common Stock
o Classification: Equity (Contributed Capital)
o Explanation: Represents the ownership interest in the company contributed by
shareholders in exchange for stock.
9. Cost of Goods Sold (COGS)
o Classification: Expense
o Explanation: The direct cost of producing or purchasing goods sold by the company
during a period.
10. Interest Payable
o Classification: Liability (Current)
o Explanation: Interest expense that has accrued but not yet been paid, due within one
year.
11. Dividends
o Classification: Equity (Earned Capital)
o Explanation: Payments made to shareholders from retained earnings, representing a
portion of the company's profits.
12. Cash
o Classification: Asset (Current)
o Explanation: Cash is the most liquid asset, available for immediate use.
13. Mortgage Payable
o Classification: Liability (Non-current)
o Explanation: A long-term debt related to the purchase of property or equipment, with
payments due beyond one year.
14. Utilities Expense
o Classification: Expense
o Explanation: The cost incurred by the company for utilities like electricity, water, and gas
during the period.
15. Accounts Receivable
o Classification: Asset (Current)
o Explanation: Money owed to the company by customers for sales made on credit,
expected to be collected within one year.
Here’s a short quiz to test your understanding of financial accounts
Note: add explanation on each answer that you selected. Write your answer to your notebook.
Quiz: Understanding Financial Accounts
Multiple Choice Questions
1. Which of the following is a current asset?
o A) Accounts Receivable
o B) Buildings
o C) Long-term Investments
o D) Mortgage Payable
Answer:
Explanation:
2. Which account would appear in the Equity section of the balance sheet?
o A) Retained Earnings
o B) Cost of Goods Sold
o C) Accounts Payable
o D) Inventory
Answer:
Explanation:
3. Cost of Goods Sold (COGS) is classified as:
o A) Revenue
o B) Asset
o C) Expense
o D) Liability
Answer:
Explanation:
4. Which of the following is a non-current liability?
o A) Accounts Payable
o B) Accrued Wages
o C) Mortgage Payable
o D) Utilities Expense
Explanation:
5. What type of account is "Prepaid Insurance"?
o A) Expense
o B) Revenue
o C) Liability
o D) Asset
Explanation:
6. Interest Payable is classified as:
o A) Asset
o B) Liability
o C) Revenue
o D) Expense
Explanation:
7. Which account would appear on the Income Statement?
o A) Common Stock
o B) Sales Revenue
o C) Property, Plant, and Equipment
o D) Dividends
Explanation:
True/False Questions
8. Accounts Payable is an asset.
9. Dividends decrease retained earnings.
10. Depreciation is classified as an expense.
