1 - What are Assets and its Types?
An asset is something business owns. Assets are defined as resources that help generate profit in the business. The business has the control over it.
Ex: cash , Inventories (i.e., stock), inventory, office equipment, machinery, real estate, land and building, machinery, account receivables etc.
Assets are classified into 3 types:
1. Asset classification based on convertibility
Here we have 2 types
a. Current Assets
current assets are assets that can be easily converted into cash and cash equivalents (typically within a year). Current assets are also termed liquid assets.
Ex: cash, cash equivalents, short-term deposits, accounts receivables, inventory(stock), marketable securities, office supplies.
b. Fixed Assets/ Non- Current Assets
Non-current assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non-current assets are also termed as fixed assets or long -term assets or hard assets.
Ex: land, building, machinery, equipment, patents, trademarks.
2. Asset classification based on Physical Existence
Here we have 2 types
a. Tangible Assets
Tangible assets are assets with physical existence (we can touch, feel and see them).
Ex: land, building, machinery, equipment, cash, office supplies, inventory, marketable securities.
b. Intangible Assets
Intangible assets are assets that lack physical existence
Ex: goodwill, patents, brand, copyrights, trademarks, trade secrets, license and permits, corporate intellectual property.
3. Asset classification based on usage or purpose
Here we have 2 types
a. Operating Assets
Operating Assets are assets that are required in the daily operation of a business. In other words, operating assets are used to generate revenue from a company’s core business activities.
Ex: cash, accounts receivable, inventory, building, machinery, equipment, patents, copyrights, goodwill.
b. Non-operating Assets
Non-Operating Assets are assets that are not required for daily business operations but can still generate revenue.
Ex: short-term investments, marketable securities, vacant land, interest income from a fixed deposit.
2 - What are Liabilities and its Types?
Liabilities are current debts your business owes to other businesses, organisations, employees, vendors or government agencies.
Liabilities are classified into 3 types:
1. Current liabilities (short-term liabilities)
Current liabilities also known as short-term liabilities , are debts or obligations that need to be paid within a year. Current liabilities should be closely watched by management to ensure that the company possesses enough liquidity from current assets to guarantee that the debts or obligations can be met.
Ex: account payable, interest payable, income tax payable, bills payable, bank accounts overdraft, accrued expenses, short-term loans etc.
2. Non-current liabilities (Long-term liabilities)
Non-current liabilities, also known as long- term liabilities, are debts or obligations due in over a year’s time. Long-term liabilities are an important part of a company’s long term financing. Companies take on long-term debt to acquire immediate capital to fund the purchase of capital assets or invest in new capital projects. Long-term liabilities are crucial in determining a company’s long-term solvency. If companies cannot repay their long-term liabilities as they become due, the company will face a solvency crisis.
Ex: bonds payable, long term notes payable, deferred tax liabilities, mortgage payable, capital leases.
3. Contingent liabilities
Contingent liabilities are liabilities that may occur , depending on the outcome of a future event. Therefore, contingent liabilities are potential liabilities.
For example: when a company is facing a lawsuit of Rs.100,000, the company would incur a liability if the lawsuit proves successful. However, if the lawsuit is not successful , then no liability would arise.
Ex: lawsuits, product warranties.
3 - What is Account Receivable
The amount of money owed by customers or clients to a business after goods or services have been delivered and or used.
4 - What is Accounts Payable
The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.
5 - Definition of Capital
Capital is the money or wealth needed to produce goods and services. In the most basic terms, it is money. All businesses must have capital in order to purchase assets and maintain their operations. Business capital comes in two main forms: debt and equity. Debt refers to loans and other types of credit that must be repaid in the future, usually with interest. Equity, on the other hand, generally does not involve a direct obligation to repay the funds.
6 - What is Drawing in Accounting?
These are withdrawals made for personal use rather than company use.
7 - What is Debit?
An accounting entry where there is either an increase in assets or a decrease in liabilities on a company’s balance sheet.
8 - What is Credit?
An accounting entry that may either decrease assets or increase liabilities and equity on the company’s balance sheet, depending on the transaction.
9 - Difference between Equity and Owner’s Equity
Equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.
10 - What is Sundry Debtor?
A person who receives goods or services from a business in credit or does not make the payment immediately and is liable to pay the business in the future is called a Sundry Debtor. Businesses use an account to track these transactions and they are called as Sundry Debtor account or Accounts Receivable.
11 - What is Sundry Creditor?
A person who gives goods or services to the business in credit or does not receive the payment immediately from the business and is liable to receive the payment from the business in future is called a Sundry Creditor.
12 - What is Discount?
Reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer.
13 - What is Premium?
A premium is any additional cost charged on top of an asset’s usual cost.
14 - What is Inventory?
Inventory refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit. Stock items are the goods you sell to customers. Inventory includes the products you sell, as well as the materials and equipment needed to make them. The four main types of inventory: raw materials, work in progress and finished goods.
15 - What is Carriage Inward?
Carriage inwards is the freight/transport cost incurred by the buyer on the purchase of raw materials or goods.
16 - What is Carriage Outward?
Carriage outwards is the freight/transport cost incurred by the seller in shipping or delivering goods sold by it.
17 - What are Outstanding Expenses?
These expenses are expenses incurred because of payments that have been made in advance. An example of prepaid expense is an insurance premium. These expenses are always recorded in the current asset of the balance sheet.
18 - What are Prepaid Expenses?
These expenses are expenses incurred because of payments that have been made in advance. An example of prepaid expense is an insurance premium. These expenses are always recorded in the current asset of the balance sheet.
19 - What is Accrued income?
Accrued Income is the income which is earned but not yet received.
20 - What is Income Received in Advance called?
‘Income received in advance’, as the name suggests, are the earned revenue which is to be earned in the future in an accounting period but is already received in the current accounting period.
21 - What is Surplus?
Excess of incomes over expenses is a surplus to a business.
22 - What is Deficit?
Excess of expenses over incomes is a deficit to a business.
23 - Depreciation Definition with Example
Depreciation is the decrease in the value of assets and the method used to reallocate, or “written down” the cost of the tangible assets (Machinery, Equipment) over its useful life span.
Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time.
Ex: If a delivery truck (Tangible Asset) is purchased a company with a cost of Rs. 2,50,000 and the expected usage of the truck are 5 years, the business might depreciate the asset under depreciation expense as Rs. 20,000 every year for a period of 5 years.
24 - Appreciation Definition with Example
Appreciation is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates.
Currency, land, stock are some examples of assets that are likely to appreciate over a specific period of time.
Ex: If a business has purchased a share of any company for Rs.500. If that share’s value increased to Rs.550, then the investment appreciated by Rs.50.
25 - What is an Accounting Period?
Appreciation is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates.
Currency, land, stock are some examples of assets that are likely to appreciate over a specific period of time.
Ex: If a business has purchased a share of any company for Rs.500. If that share’s value increased to Rs.550, then the investment appreciated by Rs.50.
26 - What are Accruals?
Accruals include expenses and revenues not yet recorded in companies’ accounts. Accruals affect businesses’ net income and must be documented before financial statements are issued.
27 - What do you mean by Acquisition?
One company taking over controlling interest in another company.
28 - What is Double Entry Bookkeeping?
Method of recording financial transactions in which each transaction is entered in two or more accounts and involves two-way, self-balancing posting. Total DEBITS must equal total CREDITS.
29 - What is Face Value?
Amount due at maturity from a BOND or note.
30 - What are Finished Goods?
The products that have been made and are ready for sale.
31 - What is a Goodwill?
Goodwill is an intangible asset that is associated with the purchase of one company by another. Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the fair market value of the assets and liabilities.
32 - Definition of Debt
Debt is what someone owes to someone else. Usually, debt is in the form of money, but it can also be items, or services.
33 - What is Owner's Equity?
Owner’s Equity is defined as the proportion of the total value of a company’s assets that can be claimed by its owners (if it is a sole partnership or partnership) and by its shareholders (if it is a corporation). It is calculated by deducting all liabilities from the total value of an asset (Equity= Assets – Liabilities).
34 - Secured Debt Definition
DEBT guaranteed by the pledge of assets or other COLLATERAL.
35 - What is a Salary?
Salary is a fixed amount paid or transferred to the employees at regular intervals for their performance and productivity, at the end of the month.
36 - What are Wages?
Wages are hourly or daily-based payment given to the labour for the amount of work finished in a day.
