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The five main parts of accounting, also known as the five components of the Bookkeeping Services in Jersey City Equation or the Elements of Financial Statements, are the fundamental building blocks used to classify every financial transaction a business undertakes.
These five elements are: Assets, Liabilities, Equity, Revenues, and Expenses.
1. Assets (A)
Assets represent the economic resources owned or controlled by a company that are expected to provide a future benefit. They are things the business owns.
Definition: Resources that generate value, used to operate the business, or convertible into cash.
Examples: Cash, Accounts Receivable (money owed to the company by customers), Inventory, Equipment, and Buildings.
2. Liabilities (L)
Liabilities represent a company’s obligations or debts to external parties that result from past transactions and will require a future sacrifice of economic resources (usually cash). They are things the business owes.
Definition: Claims against the company's assets by outside parties (creditors).
Examples: Accounts Payable (money the company owes to suppliers), Salaries Payable, Notes Payable (loans), and Unearned Revenue (cash received for a service not yet delivered).
3. Equity (E)
Equity, often called Owner's Equity or Shareholders' Equity, represents the owners' residual claim on the assets of the business after all liabilities have been paid. It reflects the investment made by the owners plus the cumulative profits kept in the business.
Definition: The owners' stake in the company.
Components: Typically includes Owner/Shareholder Investments (Common Stock) and Retained Earnings (accumulated net income minus dividends).
The Accounting Equation: The relationship between the first three parts is fundamental:
4. Revenues ®
Revenues represent the inflows of assets or enhancements of equity resulting from a company's major or central operations during a specific period. Revenue is recorded when it is earned, not necessarily when cash is received.
Definition: Money earned from selling goods or providing services.
Examples: Sales Revenue (from selling products), Service Revenue (from providing services), and Interest Revenue (from bank deposits).
5. Expenses (X)
Expenses represent the outflows of assets or increases in liabilities incurred in the process of generating revenue during a Accounting Services Jersey City . Expenses are recorded when they are incurred (matching principle).
Definition: Costs incurred to produce revenue.
Examples: Cost of Goods Sold (COGS), Rent Expense, Salary Expense, Utilities Expense, and Depreciation Expense.
Note: The final two elements, Revenues and Expenses, directly impact Equity via the Income Statement (Revenues - Expenses = Net Income), which is then added to Retained Earnings (part of Equity).
These five elements are: Assets, Liabilities, Equity, Revenues, and Expenses.
1. Assets (A)
Assets represent the economic resources owned or controlled by a company that are expected to provide a future benefit. They are things the business owns.
Definition: Resources that generate value, used to operate the business, or convertible into cash.
Examples: Cash, Accounts Receivable (money owed to the company by customers), Inventory, Equipment, and Buildings.
2. Liabilities (L)
Liabilities represent a company’s obligations or debts to external parties that result from past transactions and will require a future sacrifice of economic resources (usually cash). They are things the business owes.
Definition: Claims against the company's assets by outside parties (creditors).
Examples: Accounts Payable (money the company owes to suppliers), Salaries Payable, Notes Payable (loans), and Unearned Revenue (cash received for a service not yet delivered).
3. Equity (E)
Equity, often called Owner's Equity or Shareholders' Equity, represents the owners' residual claim on the assets of the business after all liabilities have been paid. It reflects the investment made by the owners plus the cumulative profits kept in the business.
Definition: The owners' stake in the company.
Components: Typically includes Owner/Shareholder Investments (Common Stock) and Retained Earnings (accumulated net income minus dividends).
The Accounting Equation: The relationship between the first three parts is fundamental:
4. Revenues ®
Revenues represent the inflows of assets or enhancements of equity resulting from a company's major or central operations during a specific period. Revenue is recorded when it is earned, not necessarily when cash is received.
Definition: Money earned from selling goods or providing services.
Examples: Sales Revenue (from selling products), Service Revenue (from providing services), and Interest Revenue (from bank deposits).
5. Expenses (X)
Expenses represent the outflows of assets or increases in liabilities incurred in the process of generating revenue during a Accounting Services Jersey City . Expenses are recorded when they are incurred (matching principle).
Definition: Costs incurred to produce revenue.
Examples: Cost of Goods Sold (COGS), Rent Expense, Salary Expense, Utilities Expense, and Depreciation Expense.
Note: The final two elements, Revenues and Expenses, directly impact Equity via the Income Statement (Revenues - Expenses = Net Income), which is then added to Retained Earnings (part of Equity).