Question

2.) Assets have a normal debit balance account. Petty cash, Prepaid rent, and Office supplies are classified as assets and are increased with a debit

Liabilities have a normal credit balance account. Accounts payable, Insurance payable, and Interest Payable are classified as liabilities and are increased with a credit.

Equity has a normal credit balance account. The owner's equity or Common stock is classified as equity and is increased with a credit.

Assets, Dividends, and Expenses are increased with a debit. Liabilities, Common stock, and Revenues are increased with a credit.

3.) "Account receivable" is an asset account and the amounts owed by clients when performing a service on the account.

"Prepaid rent" is an asset account and an advance payment when renting.

"Accounts payable" is a liability account and an amount the business owes and must pay in the future.

"Notes payable" is a liability account and a written promissory note to pay a specific sum of amount in the future.

"Rent expense" is an expenses account and the total cost of rental used in a period.

"Salaries expense" is an expense account and the amount employees have earned during the period of time.

"Commission earned" is a revenue account and a fee paid to a person for providing goods and services.

Respond your thoughts on the above sentences.

Answer 1

1. Asset are the resources owned and controlled by the entity, that has a value and will provide future economic benefits. Asset accounts usually have debit balance and balance in such account is increased by every amount debited to that account and decreased by every amount credited to such account. Assets are classified in to two types a) non current assets and b) current assets. Current assets are those which are expected to be realised with in 12 months from the date of reporting and Non current assets are those which the entity expects to have economic benefits for a longer period of time

Example: investment, inventory, accounts receivable, prepaid expenses etc.,

2. Liabilities are obligations on the part of the organisation as a result of past economic events which require future cash outflow from the entity. Normally liabilities have credit balance and the balance in such accounts is increased by amounts credited and reduced by the amounts debited. Liabilities are classified in to 2 types a) Long term Liabilities and b) current liabilities

Current liabilities are those which are expected to be settled with in 12 months and long term Liabilities are other than those of current liabilities

Example: Loans outstanding, accounts payables, bonds payables, outstanding expenses etc.,

3. Equity is owner's claim against the assets of the entity and are classified under liabilities group and normally contains of capital employed and retained earnings of the organisation. Equity portion increases with the profits and gains and are reduced with the losses and expenses like divided etc.,

4. Accounts receivable is defined to mean amounts receivable from the customers or clients of the business for the supply of goods or services rendered by the entity and are classified under current assets.

5. Prepaid Rent is the rent paid in advance. It is a current asset for the entity as it is expected to be adjusted with the rent payable with in 12 months.

6. Accounts payable on the other hand are amounts owed by the entity on account of services and goods procured for running the business by the entity on credit basis . Accounts payable are classified under current liabilities.

7. Notes Payable ( promissory note) are similar to accounts payable by nature. Promissory note is a financial instrument in which one promises in writing to pay certain predetermined amount of money to other, at fixed or determinable future time or on demand by the payee. The nature of promissory note is that of a liability and it's categorization is based on the term for which it is accepted.

8. Rent is paid by the business entity for using the rented property such as office buildings, factory building, godowns etc., Rent is a predetermined sum of money for a particular period (usually monthly) for the utilisation of property during the said period as per the agreement with the owner of the property.

9. Salaries are paid to human resources utilized for the running of business. Salary expense is a fixed payment usually monthly by the employer for the services rendered by the employee. In the case of service sector organisations, salary expenses account for majority of proportion of expenditure.

10. Commission earned is income earned for rendering services or sales made on account of third parties. Normally commission is paid as a percentage of the income generated by the person. for example a sales representative gets commission as a percentage of sales made by him.