It is very important to be able to distinguish between the five groups of accounts: Assets, Expenses, Equity, Revenue and Liabilities. An understanding of these groups leads into the essential learning tool, the ‘rules of double entry’.
These are discussed below
Assets
Assetsare items of value owned/controlled by a business; examples are cash, inventories, buildings and motor vehicles.
Liabilities
Liabilitiesare amounts owed to people or to organizations outside of the business; examples are amounts owed to Creditors control for purchases, or to a bank for a loan, overdraft or mortgage.
Equity
Equityis represented by the business’s assets less its liabilities (or the amount that the business owes to the owner). Equity is the amount originally invested in a business plus extra cash introduced, plus profits and less losses and drawings of cash or inventories from the business by the owner.
Revenue
Revenueitems are the earnings of a business; examples are income from sales of trading stock, interest, commission, rent and discount received.
Expenses
Expensesare outflows from a business; examples are payment for wages or salaries, purchases of trading stock, payments for advertising, freight, motor vehicles expenses and discount allowed.
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