by CE Wynn

Created on: October 01, 2010

Double entry bookkeeping and accounting has been around for centuries, and so have the fundamental terms associated with the profession. Assets, liabilities and capital are the classifications used in one of the key financial statements, the balance sheet. To successfully, prepare, read or analysis a balance sheet, it is vital that you have a firm understanding of the three terms assets, liabilities and capital.

* Double Entry Bookkeeping

Before explaining assets, liabilities and capital, lets first look at the significance that these terms have on the concept of modern day accounting. Accounting today, is based on a system developed centuries ago, called double entry bookkeeping/accounting. Essentially, this means that two entries are always required, so for any debit there is always a corresponding credit.

This concept is further supported by the three terms being discussed now, with the following accounting equation:

Assets – Liabilities = Capital

A simply example, of both the accounting equation and double entry bookkeeping, would be purchasing an asset. Lets say a computer, this would be an increase to assets, however it would also result in either a decrease in another asset, such as a bank account, or the increase of a liability, such as a credit card.

* Assets

An asset is something that is either owned, is owed to you, or may provide a future benefit. Both assets and liabilities can be either current (the benefit is received in less then 12 months) or non current (more then 12 months).

  - Cash and its equivalents: the most common asset, cash may be held by the bank, but is available to you at call. Term deposits are another vehicle in which cash can be invested but may not be available to withdrawal until a certain period has passed.

   - Receivables/debtors: although not cash, debtors and receivables are still money owed to you or the business. It may include short term loans provided to others, or trade debtors such as outstanding invoices that customer are yet to pay.

   - Prepayments: in many circumstances it may be necessary or more beneficial to purchase something in advance, before the benefit may be received. An example would be car insurance paid annually. Although purchased at the beginning of the year, the full benefit is not received until the policy has expired.

   - Property, plant & equipment: unlike the previous three examples, property, plant and equipment is an asset because the item

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