The five categories of accounting, often referred to as the five major elements of financial statements, are the foundation of the entire Outsourced Bookkeeping Services Knoxville. Every financial transaction a business undertakes must fit into one of these five accounts.
These categories are: Assets, Liabilities, Equity, Revenue, and Expenses.
1. Assets (What the Business Owns)
Assets are resources controlled by a business from which future economic benefits are expected to flow to the entity. They represent things the company owns.
Examples: Cash, Accounts Receivable (money owed by customers), Inventory, Equipment, Buildings, and Land.
2. Liabilities (What the Business Owes)
Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. They represent the debts of the company.
Examples: Accounts Payable (money owed to suppliers), Salaries Payable, Unearned Revenue (money received for services not yet delivered), and Loans/Notes Payable.
3. Equity (The Owner’s Claim)
Equity (also known as Owner’s Equity or Shareholders’ Equity) represents the residual interest in the assets of the entity after deducting all its liabilities. Essentially, it is the portion of the business the owners truly own.
Components: Equity is primarily composed of Owner’s Capital (initial investment) and Retained Earnings (accumulated profits kept in the business).
4. Revenue (What the Business Earns)
Revenue represents the increase in assets or decrease in liabilities resulting from the ordinary activities of the business. It is the income earned from core operations.
Examples: Sales Revenue (from selling goods), Service Revenue (from providing services), and Interest Revenue.
5. Expenses (The Costs of Earning Revenue)
Expenses are the costs incurred in the process of generating revenue. They represent the outflow of resources or incurrence of liabilities to operate the business.
Examples: Rent Expense, Salaries Expense, Utilities Expense, Cost of Goods Sold, and Depreciation Expense.
The first three categories (Assets, Liabilities, and Equity) make up the Balance Sheet and are often called Permanent Outsourced Accounting Services Knoxville. The last two categories (Revenue and Expenses) make up the Income Statement and are often called Temporary Accounts because their balances are zeroed out at the end of each accounting period.