What's in A Chart of Accounts - Assets, Liabilities, Equity, Revenue, Expenses & What they Mean

Continuing the discussion from How does the Chart of Accounts Work & Why is it Important?:

What’s in a Chart of Accounts - here are a list of accounts commonly found in a chart of accounts and what they mean:

Assets are things that you own. These include things like:

  • Bank Account - your bank account should ideally hold all your cash. It’s something you own.
  • Prepayment - the money that people pay upfront for something. For example, if you’ve paid your rent in advance, that money that is ‘in advance’ is actually something you own because if you depart from the rental premises (and have not outstanding fees) that money would be returned to you - ie. it’s money you own.
  • Fixed assets - things that you own between 1 - 5 years and are quite expensive like a computer. Fixed assets are things that can be depreciated.
  • Non Current Assets - anything owned for more than 12 months, so things like equipment, fitouts e.g. adjustable desk for sitting and standing (how cool are they! I have a standing desk and they’re the best). Fixed assets are non current assets.
  • Current Assets - stuff that the business owns for less than 12 months. Things like accounts receivable, stock for example, if you sell computers, a computer that you buy and sell would be stock and for that small timeframe when it’s in your care, that’s an asset.

Liabilities are things you owe to other people. These include things like:

  • Current Liabilities - things you owe to other and needs to be paid within 12 months. For example, accounts payable. You buy a desk on lay-by and then pay it within 12 months.
  • Non-current Liabilities - things you own to others and needs to be paid back after 12 months. Things like bank loans on the building etc…

Equity aka Net Assets is the net worth of the business. It’s your asset $ figure less the $ figure of the liabilities amount. For example, if Babbit owns $500 worth of things and owes $50, Babbit’s net worth is $450. That’s Babbit’s Equity.

Revenue / Income is the money that comes into your business (in credit form/cash form). It includes:

  • Sales - Money that comes in from what you do in business, e.g. selling something, selling services etc…
  • Other Income - Money that comes in but not from the normal course of business like the interest you earn from a bank account.

Expenses is the money that goes out of the business (in credit form/cash form). It includes:

  • Expenses - is money that goes out of the business for normal operation e.g. postage.
  • Direct costs - is money that is spent to get stuff needed directly to make a sale e.g. stock.
  • Depreciation - is when the value of your fixed asset decreases. So for a car owned by the business, every year, you might wipe of $500 off its value. Depreciation represents the decline in value because you can’t sell a car you bought a year ago for the same price.

Next: Part 2A - Setting up from Scratch

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