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Classification of Accounts According to the Accounting Equation Approach

Prior to understanding the rules for accounting equation, it is important to understand the various terms which will help in understanding the concepts better

  • Assets account: Assets are resources held by an enterprise to derive future economic benefits. There are 2 types of assets: Fixed Asset & Current Asset
    • Fixed assets: Fixed assets are for the purpose of producing goods and services and not for resale. They are of 2 types: Tangible and Intangible
      » Tangible assets are those which can be seen and touched. Example: land, building, machinery etc.
      » Intangible assets are those which can neither be seen nor touched. Example: goodwill, patents, trademarks etc.
    • Current Assets: Current assets are those assets which are held
      » In the form of cash. Example: cash in hand, cash at bank etc.
      » For conversion into cash. Example: stock, debtors, bills receivable etc.
      » For consumption or in production of goods or rendering of services. Example: raw materials, work in progress
  • Liabilities Account: Liabilities are financial obligation of the enterprise. There are 2 kinds of liabilities: Long term Liabilities and Current Liabilities.
    • Long term liabilities are those which do not fall due for payment in a relatively short period i.e., it is for more than one year. Example: term loans, debentures etc.
    • Current liabilities are those which are due for payment in a relatively short period, say, within 12 months. For Example - creditors, bills payable, outstanding expenses etc.
  • Capital Account: Capital account relates to the accounts of the owners of the enterprises. Example: Owner’s capital Account, Drawings Account etc.
  • Revenue Account: Revenue account relates to the amount charged for the goods sold or services rendered. For example, Sales account, Discount received account, Interest received account etc.

Note: Under this approach, Revenue includes all the earnings from core and non-core business activities. 

  • Expense account: Expense accounts relate to the amount incurred in the process of earning revenue. For example, Discount allowed account, Interest paid account, Loss on sale of furniture etc.

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