After the financial transaction occurs and is proven by direct and indirect documents, as previously explained, then it is analyzed in order to identify the accounts that have been affected by the financial transaction that occured.
In this lesson, we are going to explain the first and second points, while the third and fourth points will be explained in the next lesson.
The account can be defined as the record or the container that contains all the financial movements that have affected it after analyzing the financial transaction, For example, if the company makes a transaction for the sale of goods amounting to USD 1,000 and that value is received in cash , then when we analyze the financial transaction, we will find out that it contains two accounts, an account for sales, which increased by USD 1,000, and the cash account, which also increased by USD 1,000, and from that we conclude the following:
Classification of Accounts
There are several classifications of accounts, the most widely-accepted classification of which is that accounts are categorized into five groups as follows:
The assets account for all economic resources and properties which the company owns, and are divided into several sections as follows:
Current Assets (Short-Term)
Current assets represent the assets owned by the company in the form of cash or which are expected to be converted into cash within the upcoming fiscal period, such as cash on hand and at bank, accounts receivable [receivables], goods, notes receivable (Bills of exchange)… etc.
Fixed Assets (Long-Term)
Fixed assets are the assets owned by the company for the purpose of helping it to practice its activity and to be used them for several years or for several subsequent fiscal periods. They are not purchased with the intent of immediate resale, such as buildings, machinery, equipment, furniture, etc.
Intangible Assets (Long-Term)
Intangible assets are assets owned by the company and are lacking the tangible physical substance, such as the Goodwill, Trademark, Patents…etc.
Other Assets
Other Assets represent the other accounts of a debit nature (Normal Debit Balance), which appear on the assets side of the balance sheet, because they represent assets of the company, such as the prepaid expenses account and the accrued revenue account.
Liabilities represent all the debts and amounts owed by the company, and are categorized as follows:
Current liabilities(Short-Term)
Short-term liabilities are debts which the company is required to pay off within the upcoming fiscal period (less than a year), such as accounts payable, short-term loans, notes payable (Bill of Exchange) etc.
Non-current liabilities(Long-Term)
Long-term liabilities are debts which the company is required to pay off within the upcoming fiscal periods (more than a year).
Other Liabilities
Other Liabilities represent the other accounts of a credit nature (Normal Credit Balance), which appear on the liabilities side of the balance sheets, because they represent debts on the company, such as the accrued expenses account, the deferred revenue account.
Owner's equity is the accounts that represent the liabilities of the company towards the owners of the enterprise (company), such as the capital account, Owner Withdrawals account, retained earnings account, etc.
Revenue is the accounts that arise at the time of selling goods or providing a particular service to others, such as computer hardware sales or revenue from providing consulting services.
Expenses are the accounts which arise when the company gets services from others, to help it practice its business activity and achieve its objectives, such as electricity, telephone, internet, advertising expenses and other expenses.
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The following balances appeared in the Trial Balance of Al-Amal Trading Company at 31/12/2015 as follows:
Required:Match each account with the group to which it belongs, based on what has been explained above. Answer |