Basic Elements of Accounting That Any Business Needs
No business can run without an accounts department and hence the duty of the accounting department is to present a financial picture to the business. There are proficient accountants who are eligible to do this job and for this, they need to be perfect with the five basic elements of accounting. The team members of the accounting department vary from business to another depending on the size and the type of the business it is.
5 Fundamental Elements of Accounting
There are 5 basic elements of accounting which are always present in every accounting service. The five basic elements of accounting are as follows:
Assets are the resources which the businesses use to conduct their activities. An item becomes an asset when you own it or have the right to use it. Asset provides economical support to your business. For example, if you run a factory, then the types of machinery of that factory become your asset. Asset always serves some economic benefit to the business either in terms of cash or credit.
Liabilities are a group of items which are obligations to the business. They arise when you make a purchase or take a loan for the business. To settle these liabilities, you will need to settle the assets. For example, salary due to the employees while hiring is a liability to the company and this obligation cannot be avoided if the employee provides his services to your business.
Expenses are unavoidable events in the business to conduct business operations. For a period of time, expenses reduce the assets and increase the liabilities. For example, if you own a truck, then the fuel filled every time in the truck for business operation is an expense to the company. Expenses are usually repeating events which are unavoidable but can be cut down as per the business requirements. All the expenses for business operations must accordingly be present in financial statements.
Revenue is what comes when the company sells their products or deliver their services. Revenue is the income of the business, thus resulting in increasing of assets and decreasing of liabilities. Cash revenues lead to an increase in the revenue and credit sales lead to a decrease in the liabilities as your customer commits to pay you after a specific period of time.
Owners equity is the capital by the owner of the business to conduct his business activities. Owner’s equity includes all the ways through which the resources make the business function properly. Basic accounting formula is:
Owner’s equity = Assets – Liabilities
Owner’s equity increases when revenue upscales, or when the business makes an investment. Meanwhile, it decreases when expenses can reduce the same.
These are five basic elements of accounting principles which are universally prevailing. They form the basis of financial accounting in any business.