Assets, liabilities and capital

Much of the work of financial accountants consists of summarising financial information in accordance with generally accepted accounting principles. This information is derived from the double-entry bookkeeping system. The system is based on the relationship between the three key components of assets, liabilities and capital.

Assets

An 'official' definition of assets, as contained in the IASB Framework, is 'a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity'. Typical business assets are divided between non-current assets, which are expected to be retained by the business for at least a year and are of significant value, and current assets, which are constantly changing during the course of the business's activities.

Typical examples of non-current assets are:

• Land

• Buildings

• Motor vehicles

• Machinery

• Computers.

Nearly all non-current assets will be subject to depreciation. Another term used to describe the acquisition of non-current assets is capital expenditure, i.e. expenditure on assets contributing to the long-term capital accumulation of the organisation.


Typical examples of current assets are:
• Inventory of unsold goods (also called 'stock')
• Trade receivables (the amounts owed to the business by customers, also called 'debtors')
• Prepayments (amounts paid in advance for items such as rent)
• Bank balances (cash in the bank - also called 'cash-equivalents')
• Cash balances (cash held by the business, but not in the bank).