What Role do Accounting Principles Play in the Preparation of a Statement of Financial Position?

Certain accounting principles are followed in the preparation of the Statement of Comprehensive Income and the Statement of Financial Position.

Following principles must be followed in order to determine accurate profit or loss and the value of assets and liabilities.

1) Business Entity Concept

According to this concept, the business is distinct from its owners. Only for this reason are all accounts kept in the name of the business and not in the names of the proprietors.

As a result, capital supplied by the proprietor is the liability of the business, and drawings by the proprietor are his own expense, reducing the value of capital.

2) Going Concern Concept

According to this concept, it is assumed that the business will continue indefinitely and is not organized for a specific time period.

That is, the business will continue indefinitely and there are no plans to shut it down.

According to this concept, income and expenses are classified as capital or revenue nature.

The Statement of Financial Position is prepared using capital nature items. Depreciation is calculated over the life of fixed assets, according to this concept.

If this concept does not exist, it is impossible to prepare financial statements and there is no need to charge depreciation.

3) Periodicity Concept

According to the going concern concept, the business will continue indefinitely with no end date.

However, we cannot wait indefinitely to know and understand the financial position of the company.

As a result, in order to know the financial condition of each year, we must prepare a comprehensive income statement and a statement of financial position.

An infinite amount of time can be divided into equal small parts. This small portion is referred to as periodicity. In general, periodicity denotes a year.

4) Accrual Concept

This concept is the opposite of the cash concept. Under the cash concept, only cash transactions are accounted for, on the other hand, in the case of the accrual concept, cash, and all other transactions will be accounted for.

According to this concept, when preparing the Statement of Comprehensive Income, outstanding references are added to related expenses that have already been paid, and outstanding incomes are added to related incomes that have already been received during the accounting year in question.

Under this concept, unearned income and prepaid expenses are shown as a deduction from the respective account head.

5) Conservatism Principle

According to this principle, in order to calculate profit, you must be conservative, i.e., anticipate no profit while accounting for all potential losses.

It means that if there is a possibility of loss in the future, a provision should be made, but anticipated profit should not be considered until it is realized.

If a profit or dividend is distributed in anticipation, it is effectively a breakdown of the business’s capital, which is not only against the company act but also detrimental to the company.

For example, provision for bad and doubtful debt is shown in the financial statement as probable losses. Closing stock is valued at a lower cost or market price.

6) Cost Price Principle

According to this principle, fixed assets are shown in the financial statement based on their historical cost, which is the price at which they were purchased.

Fixed assets are not shown at their current market value because they are purchased for long-term use in business rather than for trading.

The cost price denotes the amount sacrificed for acquiring the respective asset as well as any other necessary expenses incurred to make the asset usable for the business.

7) Consistency Principle

According to this principle, books of accounts are prepared and maintained using the same methodology each year.

It is because of the comparison and analysis of the years and inter-organization.

Otherwise, it is impossible to obtain a complete financial picture.

8) Materiality Convention

The accountant’s knowledge, experience, and intelligence are utilized in the recording of transactions under this convention.

When recording the transaction, the accountant considers the transaction’s materiality or immateriality.

For example, stationery items such as calculators, staple machines, and punch machines are purchased for long-term use in business, but because they are inexpensive, they are not classified as assets, and the cost is not amortized over the useful life; rather, they are classified as expenses for the fiscal year in question and are reported in the comprehensive income statement.

You can also read:

• 35 Important Accounting Principles Short Questions and Answers [With PDF]
• 6 Important Accounting Principles [Notes with PDF]
• Accounting Concepts or Assumption [Notes with PDF]

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Users of Financial Statements

A business entity involves a large number of stakeholders. All of them use financial statements. Parties in today’s business world use a variety of financial statements to meet their specific needs.

Users of financial statements are as follows:

1.Internal Users:

Internal users are internal parties of the organization. E.g., owners, management authority, internal auditor, and account department officials.

Owners:

The owners are the first to be mentioned among the internal users of financial statements.

To make a profit, the owner invests the necessary capital in the business. As a result, they are naturally interested in information about their areas of interest, such as how profitable the business is, whether capital is being used properly, whether to take out a loan, what the status of property liabilities is, and so on.

For small businesses or sole proprietorships, this is normal. They have the right to receive and use the financial statements of the business first.

When it comes to a joint venture company, the situation is a little different. According to the Entity Concept, the owners or shareholders of the company have been identified as separate entities from the business entity.

So, in this case, many business owners or shareholders consider external users of financial statements.

The question remains – the business entity and the owner or shareholder may be separate entities.

However, there may be no restrictions on the use of their financial statements by internal users because their rights in the business’s internal affairs are free and priority. Their location is distinct from that of external users.

Management Authority:

The business is run by the board of directors, which the company’s shareholders elect. They are given broad rights, responsibilities, and authority in order to conduct business. As a result, managers require different types of information in order to run their businesses effectively.

When planning, making decisions, implementing plans, formulating policies, and performing other functions, they use various accounting information from financial statements.

Accounting Department:

From the recording of financial transactions to the finalization of financial statements, the Accounting Department is responsible for all functions related to preparing and finalizing financial statements.

In this regard, the middle and senior officers of this department regularly use the accounts and financial statements of the past different years.

As a result, the Internal Accounts Department can be considered the first category user of financial statements in internal accounting work.

This department assists management in making business decisions in a variety of ways by providing interim accounting information.

Internal Auditor:

Large corporations set up internal audit departments outside of the accounting department to ensure financial transparency and accountability.

All other departments’ financial transactions are audited by this department’s honest and dedicated staff and officers.

This ensures that the financial transactions of officers and employees at all levels are transparent and accountable.

Internal audit work frequently involves using various types of financial statements, accounts, and books by the auditor.

2. External Users:

External users of financial statements are considered as a third party to the business. Creditors, lenders, investors, potential investors, government, Tax authorities, external auditors, officials-employees, trade unions of industrial and commercial associations, researchers, and consultants are considered external accounting information users.

Creditors:

Almost every company now sells products on a credit basis. In this case, before selling goods on credit, a seller must consider the buyer’s financial situation and ability to pay the debt.

They make decisions based on the data in financial statements.

Lender:

Borrowing is required to resolve a business’s financial crisis. Different individuals or organizations provide these loans in exchange for interest.

Before making the loan, the lender will analyze the various details of the borrowing institution’s financial statements to ensure that the borrower will repay the interest and the loan amount on time.

Investors:

Banking Institutions, insurance companies, and other financial institutions or investors scrutinize an institution’s financial statements before investing.

They invest in a company if they see in the review that the lending is safe, the dividend rate is relatively high, and the return on investment is available at the end of the term.

Future or Potential Investors:

Future or potential investors are those who decide to invest in a company in the hopes of making a profit or receiving a dividend in the future but have not yet done so.

If they want to invest in a company, they will first look at the investment’s security and profitability.

They will do so by reviewing the company’s financial statements and making an investment decision.

Government:

The government must formulate the country’s industrial policy, trade policy, import-export policy, and other policies to run the state efficiently.

Various government departments and ministries can obtain the necessary information by reviewing various business financial statements and reports to formulate these policies. They can then announce and implement the appropriate government policies.

Tax Authorities:

The government imposes a value-added tax, sales tax, income tax, import duty, export duty, and other taxes on traders and industrialists and resolving tax disputes.

As a result, the government is interested in learning about the traders’ income-expenditure, import-export, production, distribution, and other financial data.

The government’s tax authorities examine traders’ financial statements, regulate their appropriate functions, and resolve tax and tax-related issues.

External Auditors:

Certified accountants and their audit firms are external auditors appointed by statutory provisions in joint venture companies, co-operative businesses, private companies, partnership businesses, banks, and insurance companies.

External auditors use financial statements to advise owners and management authorities on the accuracy, error, fraud, and forgery of the accounts prepared by the companies and submit audit reports in the interest of the owners, shareholders, and all parties involved.

Employees:

Employees and officers constantly work to increase the organization’s work activity, improve its reputation, and make money.

Their livelihood is one of the primary drivers of increased sales revenue and profit.

They must rely on various accounting information in the organization’s financial statements to receive fair credit for their improved performance.

The income statement shows increased production and sales revenue and increased profit figures, which aids them in their partnership or fair payments.

Chamber of Commerce and Industry:

The Chamber of Commerce and Industry uses various accounting information from their subordinate institutions’ financial statements to determine its overall commercial situation.

They also use financial statements to protect the association’s interests and formulate necessary policies.

Trade Unions:

Workers are the lifeblood of any business. Workers in third-world countries are routinely denied their fair piece of the profits.

Their hard-won profits help them gain a larger share of ownership and prosperity. Owners never pay their fair dues under factory and labor laws.

As a result, the information gathered from the organization’s financial statements, i.e., the increased profit serves as a reliable vehicle for negotiating the workers’ minimum wage, fair payment of human living dues, and claim collection.

Researchers:

Researchers conduct research and evaluation work on the management and accounting system of the organization.

Financial statements give a complete picture of a company’s financial situation, which aids researchers in realizing the truth and conducting product research.

Consulting firm:

Consulting firms or advisers are hired in the hopes of receiving practical advice on identifying and overcoming business and management weaknesses in order to survive in the face of competition.

This consulting firm examines the firm’s financial statements, identifies weaknesses, and proposes solutions so that the firm emerges and survives in its glory.

In the light of the above discussion, it can be said that financial statements are not only for accountants but also for people from all walks of life.

You can also read:

• The Purpose of Financial Statements
• Top 9 Limitations of Financial Statements
• Short Questions & Answers-Financial Statements
• Everything about Income Statement

The post Top Users of Financial Statements [Notes with PDF] appeared first on Everything about Accounting.

Limitations of Financial Statements

Financial statements reveal a variety of information about the business. The demand for and application of this information is growing all the time.

On the other hand, financial statements have some limitations, and it is necessary to be aware of these limitations.

Financial statements have the following limitations:

1.Unable to disclose exact financial position:

The common misconception about financial statements is that they accurately reflect a company’s financial situation. However, this theory isn’t always correct.

According to the historical price principle, the business entity records its assets in the accounts book. After the purchase of any asset, the exact purchase price is shown in the book of accounts year after year.

If an asset was purchased for $1 million ten years ago, it is still listed in the financial statements at that price. However, its current value could be $5 million or more, or it could lose value if it becomes obsolete.

The current market value of fixed assets does not reflect the financial statements, which does not reveal its exact financial condition.

However, there are problems with the revaluation of fixed assets every year. As a result, the problem of valuing fixed assets is a significant flaw in financial statements.

2. Maintaining accounts based on historical cost:

The transactions in an accounting year are recorded in the books of accounts based on historical expenses, i.e., actual expenses.

A big assumption of accounting is that the value of money remains unchanged in an accounting year. As a result, the net profit or net loss determined at the end of the accounting year is considered accurate and reliable.

However, the reality is not that. The value of money fluctuates in almost all countries of the world.

The net profit or net loss calculated by accountants for economic instability is not accepted as accurate, reliable, and realistic.

3. Absence of qualitative information:

The financial results and financial condition of any business organization depend on two types of factors. These two factors are:

• Quantitative factor and
• Qualitative factor

Quantitative factors can be expressed in numbers, but qualitative factors cannot be expressed in numbers.

Financial statements express the financial results and financial condition of a business organization. However, it does not realize the actual state of the business.

The role of qualitative factors in determining the net profit, net loss, and financial condition of a business organization is not minor.

For example- the reputation of business organization, product quality, the use of advanced and skilled human resources, dynamic management, excellent and professional behavior of sales staff, improved worker-owner relationships, application of advanced technology, the solidarity of officers and employees towards organization all play an essential role in increasing the income of the organization and improving the financial condition.

However, since these critical issues do not reflect in the financial statements, the accounting information users cannot know about the business organization’s overall condition.

4. Lack of future information:

Many account information users, especially current and potential investors and creditors, are interested in knowing about the business organization’s future business situation.

The financial statements provide no information about the future state of the business.

The main reason for this is that financial statements are prepared using information from previous transactions and expenses. As a result, the financial statements do not include any guidance on the company’s prospects.

5. Cannot serve data quickly:

Interim accounting data is required to make business policy decisions such as borrowing, expanding, or contracting a business.

In these cases, financial statements fail to provide the necessary interim information. Because preparing the financial statements at the end of the accounting year takes a long time.

It’s a good idea to use it after preparing the financial statements and receiving the audit report.

The process of preparing interim financial statements has been introduced in many industrialized countries around the world to overcome this limitation.

6. Influenced by personal opinions:

Personal opinions of accountants or professional accountants have an impact on financial statements at the time of preparation. Despite universally accepted accounting principles, this effect is observed.

For example, accounting differs in determining depreciation, valuing inventories, determining the amount of distributable profits, dividing capital and profit into revenue income and expenditure, and determining the amount of different types of reserves.

As a result, different organizations’ financial statements differ in information, and various questions arise about the acceptability of the financial statements.

7. Creation of private reserve:

In many cases, business organizations increase or decrease the amount of assets and liabilities and do not correctly divide capital and revenue transactions to hide the business’s actual financial condition from competitors, resulting in financial statements that show less than the correct amount of net profit.

Again, financial results are skewed by creating a large number of private reserves, which makes financial statements unreliable for business decisions in many cases.

8. Possibility of window decoration:

Many business organizations use deceptive tactics to hide the business’s actual financial condition. It presents a favorable financial situation to improve its reputation and ensure the reasonable market value of its shares in the stock market.

The financial statements prepared as a result of purposefully windowed beds do not reveal the business organization’s exact financial position. Financial statements like these aren’t acceptable.

9. Relative comparisons are not possible:

Users of accounting information use financial statement information for a variety of purposes. Investors often decide to invest in companies with relatively good financial conditions by analyzing different business organizations’ financial conditions.

When businesses are different, and their accounting methods are different. It is complex and confusing for investors to make the right investment decision by analyzing their financial statements.

Nothing in today’s commercial world is innocent or blameless. Despite the many limitations of financial statements, their practical importance is far greater.

Its acceptability will increase hundreds of times if its limitations in terms of reality and practical importance can be mainly overcome.

You can also read:

• What are financial statements? and What are the elements of Financial Statements?
• Everything about Income Statement.
• Short questions and answers- Financial Statements
• Assets and their classification

The post Top 9 Limitations of Financial Statements [Notes with PDF] appeared first on Everything about Accounting.

What is Income Statement?

A business organization carries out all its activities with the aim of making profits and maximizing profits. At a fixed time interval, usually at the end of the accounting year, the statement that the business organization prepares for its annual results is called the income statement.  

Generally, the statement prepared by the business organization to determine the amount of profit or loss made at the end of the period is called the income statement.  

If the amount of income is greater than the expense, that extra income is considered to be the profit or profit of the business. On the other hand, if the expenditure is greater than the revenue, this additional expense is considered to be a loss or loss of business.  

Thus, it can be argued that the statement by which the profit or loss of a business organization is calculated by calculating the difference between revenue and revenue expenditure is referred to as the income statement.

Purpose of preparation of the income statement

Generally, the income statement is prepared to meet the various objectives of the organization. At present, the main objective of every business organization is to increase the profitability and wealth of the company.  

The income statement is prepared for the following purposes:  

1. In general, it is prepared to calculate the net profit or loss of the business organization.
2. The efficiency of the purchase and sale of the business is verified by the calculation of gross profit or loss.
3. Management of the organization shall be assessed by assessing the profitability of the business.
4. It provides the necessary information to analyze the financial results of the business in order to make decisions on business operations.
5. It provides the necessary information on profit or loss to determine the equity of the owners of the organization.
6. It provides the users of accounting information with the necessary profitability information.
7. It provides information on the reasonable amount of the dividend paid out of the net income earned.
8. It provides the necessary information to analyze the financial status of the organization.
9. It provides accurate information on profit to attract investors.
10. Provides the management authority with accurate and necessary information on the revenue and expenditure of the organization to manage business activities efficiently and smoothly.

Classification of the income statement

  The income statement can be divided into two categories.  

1. Single Step Income Statement
2. Multi-Step or Comprehensive Income Statement.

1. Single Step Income Statement  

In the single-step income statement, all kinds of revenues and expenses are shown in one step. The net profit or loss of a business is calculated by subtracting the sum of the expenses from the sum of the income.

The single-step income statement can be used very easily and in a short time to calculate the net profit or loss of the business. However, one of the main drawbacks of the single-step income statement is that the gross profit or loss and the operating profit or loss are not known in this statement.

In Single-Step Income Statement:

Net Profit or Loss= Total Revenues-Total Expenses  

Example of Single-Step Income Statement

2. Multi-Step or Comprehensive Income Statement  

The income statement, which is used to calculate the net profit or loss of a business in several steps is called the multi-step or comprehensive income statement. The gross profit or loss is calculated by subtracting the cost of goods sold from the sale of the multi-step income statement.  

The operating profit or loss is then calculated on the basis of the gross profit minus the operating cost. The net profit or loss is then calculated by adding the non-operating income to the operating profit and subtracting the non-operating expenses.  

Here again, the operating expenses are divided into two parts:  

• Administration expenses.
• Marketing expenses.

In order to calculate the net profit or loss of the business, this income statement is divided into several steps, which is why it is called a multi-step or comprehensive income statement.  At the same time, gross profit or loss, operating profit or loss, and net profit or loss are known through the preparation of a multi-step income statement.   

The preparation of a multi-step income statement may inform the business organization of its sales performance and management skills and inefficiency.

In Multi-Step or Comprehensive Income Statement:

Gross Profit or Loss= Total Sales-Cost of goods Sold

Operating Profit or Loss= Gross Profit-Operating Expenses

Net Income or Loss= Operating Profit+ Non-operating and other Income- Non-operating and Other Expenses  

Example of Multi-Step Income Statement

You can also read:

• Everything about Financial Statement.
• Liabilities and their Classification
• Assets and their classification

The post Income Statement: Definition, Purpose, Classification, and Example [Notes with PDF] appeared first on Everything about Accounting.

The financial statement is prepared by taking into consideration all the persons belonging to the organization so that they can get all the information they need from the financial statements.

 Today we are going to learn :

• What is the financial statement? 
• The purpose or objective of the financial statement and 
• The statements included in the financial statement.

So let’s get started.

What is Financial Statement?

Financial statements are a bunch of accounting information that gives a picture of the organization’s performance and financial situation to its owners and interested parties.

Financial Statements reports issued by companies with a view to providing information on their financial health and recent results. 

The purpose of this statement is to provide investors, prospective investors, analysts, and all other interested parties with financial information as clearly and accurately as possible.

Purpose or Objective of Financial Statements

Financial statements are one of the most important sources of business information. The financial statements provide the necessary information to the various parties involved in the business. As a result, financial statements have a much greater particular importance.

The financial statements have the following purposes or objectives:

1.Business budgeting and planning:

Businesses prepare different types of budgets, such as purchase budgets, sales budgets, production budgets, marketing budgets, administrative expenditure budgets, cash budgets, and, most importantly, master budgets and various types of plans, to run the business smoothly.

Businesses require various financial data to prepare these budgets and plans. For example, The financial statements provide all information related to last year’s income-expenditure, purchase-sale, assets, liabilities, and ownership.

Budget makers and plan makers use this type of financial data for making budgeting and planning.

2. Determining the current and long term liabilities of the organization:

It is frequently necessary to determine the organization’s current and long-term liability.

The ratio of current assets, current liabilities, long-term liabilities, and ownership elements in financial statements helps to verify the financial well-being and debt repayment capacity of the organization.

Once the institution is satisfied with its financial well-being, creditors, bankers, and potential investors can decide on their lending activities.

3. Lender decision making:

Lenders consider various factors before granting a loan to an institution, including the institution’s financial viability, ability to repay the loan on time, and the business’s reputation.

Lenders decide whether or not to approve a loan after reviewing the business organization’s financial statements at various times.

4. Dividend declaration decision:

When the financial statements are ready at the end of the fiscal year, shareholders are eager to receive dividends.

The business organization’s managing authority must determine how much dividend can be paid, whether dividends can be paid at all, what the dividend rate will be, how much of the profit will be paid as dividends, and how much will be left for the business.

Financial statements help to make necessary decisions in these situations.

5. Assist in tax assessment:

The business entity regularly submits the audited financial statement to the tax authority.

It is routine work of the business organization. The tax authority determines the tax by examining the financial statements in the light of its point of view.

The use of financial statements is essential for tax assessment. The tax authorities review and use the financial statements to determine income tax, value-added tax, sales tax, and other multiple taxes.

6. Formulation of industry and trade policy of the government:

The government earns income from various sources and spends that income in various sectors of state administration.

Thus, the government analyzes various government and non-government organizations’ financial statements in formulating import policy, export policy, industrial policy, trade policy, tax, and revenue policy.

We can say that the business owners, shareholders, managing authorities, lenders, creditors, bankers, and the government benefit in many ways from using financial statements for multiple purposes.

Therefore, in the age of modern globalization, the importance of financial statements is immense, and their use is increasing.

Components of Financial Statements

A financial statement is referred to as a statement that provides financial information for internal and external users.

Companies prepare four financial statements based on the summarized accounting data.

Explanatory notes, supporting schedules, and supporting notes are included in every financial statement.

The components of financial statements are as follows:

1. Income statement
2. Owner’s equity statement
3. Balance sheet
4. Statement of cash flow

These statements provide financial information relevant to internal and external users.

1. Income Statement

An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time.

The income statement records revenue and expenses for a specific period of time.

The income statement first lists the revenues and then the expenditures. The statement then shows net revenues (or net losses).

Net income results when revenues exceed expenditure. When expenditure exceeds revenue, there is a net loss.

Note that in calculating net income the income statement does not include investment or withdrawal between the owner and the company.

Sample of Income Statement:

2. Owner’s Equity Statement

The equity statement of an owner summarizes the changes to the equity of an owner over a certain period.

The owner’s equity statement reports for a specific period of time changes in the owner’s equity. The time period shall be the same as that covered by the statement of income.

The Owners Equity Statement is generated with the data from the Income Statement.

The first line of the statement shows the initial equity amount of the owner. The investments of the owner, net income (or loss), and drawings of the owner then come.

This statement shows why the equity of the owner has increased or fallen during the period.

If the owner makes more investments, the business shall report them as investments in the equity statement of the owner.

Sample of Owners Equity Statement:

3. Balance Sheet

At a certain date, a balance sheet reports the assets, liabilities, and equities of the owner.

The company prepares the balance sheet from the column headings of the tabular summary and the month-end data displayed in its final row.

Note that the balance sheet lists assets at the top, followed by liabilities and equity of the owner. Total assets must be equal to the total liabilities and equity of the owner.

The balance sheet is an overview of the financial condition of the company at a certain time (usually at the end of the month or year).

Sample of Balance Sheet

4. Statement of Cash Flow

A cash flow statement contains information about cash inflows (receipts) and outflows (payments) for a given period of time.

The cash flow statement provides information about cash receipts and payments over a given period of time. 

The Cash Flow Statement reports

1. Cash effects of a company’s operations over a period of time.
2. Investment transactions.
3. Financing transactions.
4. Net increase or decrease in cash over a period of time, and
5. Cash at the end of the period.

It is useful to report sources, uses, and money changes because investors, creditors, and others want to know what happens to the liquid resources of a company.

The cash flow statement provides answers to the following simple, but significant questions.

1. During this period, where did the cash come from?
2. What was the amount of cash used in that period?
3. What has changed the cash balance over the period?

Sample of Cash Flow Statement

You can also check:

• Short Questions and Answers-Financial Statement
• Top 50 Accounting job interview questions and answers
• Difference between Financial Accounting and Management Accounting
• Accounting Quizzes

The post Everything About Financial Statement [Notes with PDF] appeared first on Everything about Accounting.

What is the Liability?

The sacrifice against the acquisition of property and services is usually a liability.

The amount that has not yet been paid will have to be paid in the future against the acquisition of property and services from another person or institution is called a liability.

The amount payable will be the liability of the businessman or business entity.

Any legitimate claim against a business’s property is called a liability. Liability generally refers to the outside.

Examples of Liabilities are Capital, Provident fund, Accounts payable, Notes Payable, Bank overdraft, Bank Loan, Expenses Payable, etc.

Classification of Liabilities

The different types of liabilities are as follows

1. Internal Liabilities

The liability of the owner or owner of the organization or the liability of the company to the shareholders is referred to as internal liability.

Internal liability is the sum of the debts of the owner of the business. Accepted by the owners or shareholders, on payment or refund.

This type of liability is usually the result of the concept of a business entity.

Examples of Internal Liabilities:

• Capital
• Share Capital
• Reserve Fund
• Share Premium
• Pension Fund
• Bonus Fund
• Welfare fund
• Retained Earnings

2. External Liabilities

The aggregate of the debts owed by the organization to any party other than the owner of the business is referred to as external liability.

The sum of current liabilities and long-term liabilities is referred to as external liabilities.

Examples of External liabilities:

• Accounts Payable
• Bank Loan
• Bank Overdraft
• Liability for Guarantee

2.1. Current Liability

A liability that is limited to a short term, two or three months, a maximum of one year and a fixed period is referred to as the current liability.

Current liabilities or short-term liabilities are all liabilities that need to be repaid in an account or in a short period of time.

Examples of Current Liabilities:

• Accounts Payable
• Notes Payable
• Unearned Revenue
• Bank Overdraft
• Expenses Payable
• Short Term Loan

2.2. Long-term Liability

Long-term liabilities are generally referred to as long-term liabilities created for two or three years or more.

Liabilities that generally do not require payment within one year or are accepted for multiple accounting periods are defined as permanent or long-term liabilities.

These liabilities are commonly used for capital expenditure.

Examples of Long Term Liabilities

• Bank Loan
• Mortgage Loan
• Debenture
• Other Long-term Liabilities

 2.3. Contingent Liability

A contingent or uncertain liability is one that is subject to an event, that is, an event that may or may not be regarded as a liability to a business.

Contingent liabilities are claims that may be considered future business liabilities.

According to the principle of conservatism, a contingent liability is considered a liability.

According to the principles of full disclosure, a contingent liability is to be shown as a footnote in the Balance sheet.

Examples of Contingent Liabilities:

• Liability for Guarantee
• Liability for awaiting the court’s Judgment
• Liability for Discounting Bills/Notes

I think you’re clear about the liabilities and their classification after reading this article.

You can also read:

• Assets and Their Classification
• Everything about Income Statement
• Everything about Financial Statement

The post Liabilities and Their Classification [Notes with PDF] appeared first on Everything about Accounting.

What is Asset?

An asset is something owned or operated by a business entity that will provide future benefits to the organization. The asset is the main driving force of a business.

In other words, the asset is the unexpired portion of cost i.e. the unused part of the cost is an asset.

Therefore, the portion of the cost which is left unused for future income is considered as the asset of the business.

Examples of assets are Land, Building, Inventory, Goodwill, Cash, Bank, Preliminary expenses, etc.

Classification of Assets

The classification of assets is given below.

Current Assets

Assets that are short-lived, usually limited to a particular financial year or period, are known as current assets.

The duration of such a property is from 2 or 3 weeks to two or three months and the maximum is one year or 12 months. Such property can be converted into cash for a short period of time if necessary.

Features of Current Assets:

1. It provides benefits within a period of time.
2. Current assets can quickly be converted into cash.
3. The principle of conservatism is applied for the evaluation of current assets. 

Examples of Current Assets:

• Cash in Band
• Cash at Bank
• Accounts Receivable
• Notes Receivable
• Supplies in Hand
• Merchandise Inventory
• Prepaid Expenses
• Advance to Employees
• Short Term Investment

Liquid Assets

Liquid assets are called cash assets and convertible assets in cash. This type of property business can be used to pay the immediate debt.

 Examples of Liquid Assets:

• Cash in Hand
• Cash at Bank
• Notes Receivable
• Marketable Securities

Fixed Assets

Assets that are collected for long-term use and those used to carry out business operations are called fixed assets. Such assets can be used for business from one or two years to one or two hundred years.

 Features of Fixed assets:

1. Fixed asset provides benefits for multiple accounting periods.
2. Depreciation is imposed on them.
3. Fixed asset has a long life and the product is not sold.
4. Fixed assets are recorded at the purchase price according to historical pricing or purchase price policy.

Examples of Fixed Assets:

• Furniture and fittings
• Office Equipment
• Motor Vehicle
• Delivery Van
• Plan and Machinery
• Leasehold Property
• Land and Building
• Freehold Premises
• Goodwill

Amortizable Assets

Continued use of a property that is constantly reduced or decayed and at one time completely wiped out is called an amortizable asset.

Examples of Amortizable Assets:

• Leasehold Property
• Patent
• Trademark
• Coal Mine
• Gas Fields
• Forest

Real Assets

An asset that has real existence or is unseen to the eye, but can be bought in real terms, i.e. one that has a market value is called real property.

 Example of Real Assets:

• Land
• Building
• Machinery
• Goodwill
• Patent
• Trademark.

Fictitious Assets

 An asset that has no real existence, which has no market value or cannot be bought, is called a fictitious asset.

Examples of Fictitious Assets:

• Preliminary Expenses
• Share Discount
• Underwriter Commission

Tangible Assets

 An asset that has a real existence and which is visible is called a tangible asset. These assets have an external appearance and can be touched.

Examples of Tangible Assets:

• Furniture
• Building
• Equipment
• Vehicle
• Vessel
• Land

Intangible Assets

Assets that do not have a real existence and which can’t be touched are considered intangible assets.

Examples of Intangible Assets:

• Copyright
• Patent
• Goodwill

You can also read:

• Liabilities and Their Classification
• Everything about Income Statement
• Everything about Financial Statement

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