FA3 – Classifying Accounts: Asset, Liability, Equity, Revenue, or Expense?

Let's examine problem 1-2-A. You can download this problem and all my problems from TonyBell.com. It's a free PDF link. There's no sign-in, no sign-up. You just click a link and you'll have a PDF yourself. This problem has us examining assets, liabilities, shareholders' equity, revenue, expenses, and dividends. And the idea here is we're getting ready to prepare financial statements, but we have to understand the accounts first. So... Just quickly, high level, remembering what we learned in the very first video. Assets are the stuff the company owns or controls that has value. Things that give them a benefit, right? The owners have a benefit to own. That is an asset. Things of value. Liabilities, that's what the company owes. That's what they have to pay back. Shareholder's equity is a scoreboard number. It's a theoretical number. If I sold my assets, if I paid my debts, how much money would the shareholders have left over for them? That is their equity in the company. Revenues are the company doing whatever the company does to earn money. Expenses are costs of doing business. And dividends are if the company is profitable, the shareholders can pull money out of the company. And if they want to pull their money out of the company, they might take a dividend. It's a way of taking money out of the company and just using it for the shareholders' own purposes. OK, so those are our big categories. It also notes. If you have identified an item as an asset or liability, so we're going to be identifying each item as an asset, liability, shareholders, equity, revenue, expense, or dividend. If we know it's an asset or liability, further, we want to say if it's current or long-term. The distinguishing feature between current and long-term is typically one year. So... Think of, I'll think of a couple of liabilities. One is a phone bill. Okay, phone bill is definitely a liability. Is it going to be with me for more than a year? No, I pay my phone bill every month. That's less than a year. It would be a current liability. Well, what about my mortgage? I've got a 30-year mortgage. It's going to be with me for 30 years. Oh no, that mortgage. is a long-term liability. So you can see the distinguishing line is current or long-term, and it should be pretty clear. And if it's not clear, I will make it clear in our conversation whether something's current or long-term. But let's go into it. The first one, long-term investment. So is it asset, liability, shareholders' equity, revenue, expense, or dividend? Which of One of those is it. It's an asset. A long-term investment is something you can own or control that has value for you. So it's an asset. Is it current or long-term? It's long-term, right? That says it in the name. Accounts receivable. Now, the word receivable is a dead giveaway. This is an asset. An account receivable is when you do work for somebody, they don't pay you right away. They're going to pay you typically 30 days. This is current. We're going to get our money in less than a year in almost all circumstances. Consulting revenue. It's got the word revenue. Let's call it what it is. It's a revenue. Now, for assets and liability, we want to denote if it's current or long-term. Everything else, we don't denote current or long-term. So computers, computers are assets and yeah, they don't last forever, but they last more than a year. You would think if you bought a computer, it would be long-term mortgage payable. There's that word payable. It's a liability. And I just talked about my mortgage. These are 10 years, 20 years, 30 years. These are long-term. Cash is an asset and cash is thought of as the most current of current assets. Occasionally I'll have a student that says, well, I had cash last year. I have cash this year. Isn't it long-term? You know, I'm going to have cash next year too. And the answer is no, because that cash is cycling through, right? It's always moving. It's always changing. Retained earnings is one of our two key shareholders equity accounts that I just, at this point, I think students just need to remember retained earnings. And do we have common shares here? Yeah. Common shares. Those are equity accounts and it's just worth remembering them as such, right? We, in my class, you're only going to have two. There might be some other classes that have paid in capital. That's another common or a capital stock or something like this common stock instead of shares, but it's the same idea. These are all equity accounts. Okay. Next, temporary investments. Well, investments are assets. They're things we own and control. They're things of value. Think of just buying Microsoft shares. You're planning to sell them in a few weeks. It's an asset. Now, it's current. Then the word temporary is what leads you to think it's current. Accounts payable, this is your phone bill. This is a unpaid liability. Again, the word payable is the giveaway there. Thank And is it current or long-term? Well, my phone bill, my utilities bill, these types of unpaid bills, I'm gonna pay them off in a month, not a year. This is current. Income tax expense is an expense. I'm gonna put a little star beside it just because it's a special expense. When we get to our financial statements, we're gonna separate out the income tax expense. you. A car is an asset, and it's long-term, right? You will own a car for many years, and it's a long-term asset. Utilities expense, that's an expense. Got the word expense in it. Land is an asset, and it is a very long-term asset. We think of land as the longest of long-term assets. When you buy an asset, you have to estimate the life. A car, maybe 10 years. A computer, maybe 5 years. Land is deemed to have an infinite life. It lasts forever, according to accounting standard setters. Dividends are, well, they're their own category. These are dividends. That inventory, it's an asset, and it's a current asset. And what denotes that it's current is the company thinks they're going to sell it in less than a year. So it doesn't matter, like, let's say you're a Toyota dealership, you sell Toyota cars. Well, all the cars you're selling are long-term assets, right? Your inventory is long-term assets, but for you, it's current. Your customer will have it for five, 10 years. You're hoping to only have it for a few months sitting on the lot unsold. So it's a current asset, even though. The actual object will be long-term when the customer buys it. Buildings, that's a long-term asset. Buildings last 20 to 40 years, typically. Interest expense, this is another expense that I want to put a little star beside. And when we get to our financial statements, we separate out income tax and interest. They are, they're called non-operating expenses. So this is just setting the table for later in the course, but there's no interest and income tax. We're going to kind of treat them a little differently from the rest of our expenses. Bank loan payable. This is a liability. Now, it could be current. Usually, though, these are long term. Unclear here, but usually a bank loan is going to be more than a year. Usually. Common shares, we said, is shareholder's equity, again, called common stock, capital stock, and it's related to something called paid-in capital. If you see that, that is a shareholder's equity account as well. Rent revenue, it's got the word revenue in it. It's a revenue. Salaries payable, it's a liability. Unpaid salaries, you better be paying them in the next week or two, right? You can't go months and months or years without paying them. It's current. Uh, salaries, expense, that's an expense. It's a cost of doing business. Supplies expense is an expense. And you can see the last one supplies. Well, supplies are assets. Now let's talk about this and supplies are current assets. They last less than a year. This, I, I, I do this intentionally. I put supplies, expense and supplies at the bottom because like. Wait a second. Are we not talking about the same thing? Supplies and supplies expense. It can be confusing when you're a beginning student. You'll see things like this and you'll be like, are we talking about the same thing here? And the answer is no, this is actually quite different. These accounts, even though they're totally related to each other, they are capturing different information. So I've got a little example here to explain supplies expense December 15th, our company's supply closet was empty. So we have $0 of supplies, right? Our supplies are all gone. We buy $2,000 worth of supplies. These are assets. We buy, let's just pretend it's office supplies, pens and paper and pencils, things like this. So now I have $2,000 of office supplies. I have a $2,000 asset. And two weeks go by, so I'm imagining a college campus, and we call the professors, we go, professors, there's more supplies, and the professors circle like vultures, and they pick away at all the supplies, post-it notes, and whiteboard markers, and these types of things. And on December 31st, we count the supplies, we had 2,000, we only have $500 worth of supplies left. And now we're getting ready to do our financial report on December 31st. So I'm going to tell my shareholders, I list my assets, and I'm going to say, oh, shareholders, my supplies, I have $500 worth of supplies. I'm telling them my assets, I have $500 worth of supplies. Well, what do you suppose related to this situation, my supplies expenses? The supplies expenses, how many supplies I've used up during a period. And here, Here, between December 15th and December 31st, we used up... $1,500 worth of supplies. So these are absolutely related concepts, but it's important to know supplies expense is the amount of supplies you've used up during a given period. Supplies is the amount of physical assets you have on hand at a given time. They're related to each other, but they're not the same thing. And you'll see this with expenses and assets and expenses and liabilities. You'll see some, there's a relationship there, but they're not the same thing. So I wanted to introduce that one in this video. As always, I make these videos hoping that they're helpful to you. If they're helpful to you, I hope you'll hit me with a thumbs up and I hope you'll watch the next one. See you later. Thanks for watching. Goodbye. The next video in our series is right up here, and if you want a supercut of all of the videos in this series, that's the one down below.