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Assets refer to properties owned by an entity, liabilities to their economic obligations, and capital to the interest of the owners.

There are three major elements of accounting: Assets, Liabilities, and Capital. These terms are used widely so it is necessary that we take a look at each element. It is important to know what they are before we try to understand how they relate to each other in the accounting equation and in the accounting cycle.

The term "account" is used often in this tutorial. Thus, we need to define that term before we proceed.

In accounting, an account is a storage unit. It is used to collect and store information of similar nature. For example, "Cash". Cash is an account that stores all transactions involving cash receipts and cash payments. All cash receipts are recorded as increase in Cash and all cash disbursements are recorded as deductions to the same account.

Another example, "Building". Suppose a company acquires a building and pays for cash. That transaction would be recorded through the "Building" account for the acquisition of the building and the "Cash" account for the payment in cash.

Assets

Assets refer to resources owned and controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current.

A. Current assets – Assets are considered current if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts are:

1. Cash – bills, coins, funds for current purposes, checks, cash in bank
2. Receivables – Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and others
   
   • Allowance for Doubtful Accounts – This is a valuation account which represents the estimated uncollectible amount of accounts receivable. It is considered a contra-asset account and is presented as a deduction to the related asset, accounts receivable. Doubtful accounts are discussed in detail in another lesson.
3. Inventories – assets held for sale in the ordinary course of business
4. Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies

B. Non-current assets – Assets that do not meet the criteria to be classified as current. Hence, they are long-term in nature – useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include:

1. Long-term investments – investments for long-term purposes such as investment in stocks, bonds, and properties; and funds set up for long-term purposes
2. Land – land area owned for business operations (not for sale)
3. Building – such as office building, a factory, warehouse, or store
4. Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office Equipment, Computer Equipment, Delivery Equipment, and others
   
   • Accumulated Depreciation – This is a valuation account which represents the cumulative depreciation expense. It is considered a contra-asset account and is presented as a deduction to the related assets, building and equipment. Depreciation is discussed in detail in another lesson.
5. Intangibles – long-term assets with no physical substance, such as goodwill, trademark, copyright, etc.
6. Other non-current assets

So that is basically it for assets. Next, we will take a look at the second element – liabilities, on page 2.

Underlying Assumptions in Accounting: Accrual, Going Concern, and Others

The Accounting Equation and How It Stays in Balance
(with examples)