Asset And Liability Basics

by: E.SAUNDERS

Knowledge of accounts can make life much easy. If you are to invest in a new
business or joining your forefather’s business, planning to take some loan,
looking for job in any marketing company, desire to be the manager of a
multinational company or have the onus to manage your own assets and
liabilities, knowing some basics of accounts becomes mandatory.

Broadly, accounting is bifurcated into two categories-

Cash Based Accounting

Accrual Accounting

The Cash Based accounting pertains to the management of an individual’s personal
monetary transactions. In this case, he keeps a track of the money he withdrew,
deposited, gave or received from someone etc. This accounting comes to life when
actual cash transactions take place.

The Accrual Accounting requires an accountant who notes the transactions even if
no money has been actually exchanged. This method works on the principle of
comparing or seeing the ratio of the expenses to expenditure. If the expenditure
is more, you need to cut down your luxuries, if not then it’s always good to
have some savings for future. This type of accounting tells you the amount that
you owed; this might not match with the figure of your bank balance.

In the language of accounting there are several key terms that one needs to be
familiar with. Some of the crucial ones are discussed below-

The Assets-

The assets are generally those possessions of an individual that
have a good market value or are quite valuable. Assets are mainly classified
into three types-

Current Asset-

The cash is the most basic asset of any individual. The money
that is being held in accounts like the checking and savings accounts is also
included in the cash. Also inclusive are the marketable securities in the form
of bonds, stocks, shares etc. The money lent or payments due from clients, even
form a part of it.

Fixed Asset-

Comprises of all the tangible valuable things like property,
machines, equipments, land and the like that are not meant to be sold.

Intangible Asset-

Incorporates all the untouchable things like copyrights,
patents, trademarks etc. that have tremendous monetary significance.

The law of opposites governs the nature; where there are assets, there will be
liabilities. These are the debts that you have to pay back to your creditors.
This can be done through giving cash or any other asset like jewelry, some other
goods etc. Liabilities again are of two kinds-

1. The Current Liabilities- the liabilities that are to be paid back within a
certain time limit and most often through your current assets. These include the
accounts payable i.e. type of bill that you have to monthly, the Notes
Payable-loans taken from banks meant to be repaid within 30 days and the Accrued
Expenses- the compulsory expenses like taxes, wages, interests etc. where the
bills are not received but the balances of each must be repaid.

2. Long Term Liabilities- those debts that can be repaid at ease for the tenure
is more then a month.

The Financial Capital- is the economic capital. It is any liquid medium or
merchandise that stands for wealth or other styles or capital. There are four
ways to manage and display the financial capital. First, this capital is needed
when a contract is made with any sort of capital asset. The financial
instruments work in the form of currency in case of sale, purchase or trade of
goods i.e. the medium exchanges. Second, it works as a settled medium or mode
like gold for the

Standard of Deferred Payment. Third, The Unit of Account has a market value
attached to it which in turn varies with the economy of the country. Fourth, The
Source of Value is concerned with financial capital that needs to be saved and
recovered. It is a collection of things like gold, real estate, collectibles
etc.

Petty Cash is an important factor in business. It is the smallest account within
a business setting or the cash in bills and coinage required to pay little
expenses.

Types of Business- there are several kinds of business one should be aware of
like

Sole proprietorship- where a single individual who starts the business owns it
too.

Partnerships- the companies or businesses started by two or more persons where
they conjointly own it.

Corporations- involve lot many shareholders or investors who are responsible in
taking decisions for the company.

Limited Liability Companies- can be said to be sisters of corporations. Here the
business members are not under a legal obligation to pay the debts if the
business fails.

Payrolls- the term payroll designates the manner in which you will be paying the
employees of your company and even yourself. Many multinational companies cater
to payroll service provider companies that do the work quite efficiently.

These are some of the broad guidelines that will help you grasp the basics of
accounting. It is essential to have some such wisdom for accounts as it is
fruitful in all walks of life