Identifying Accounts

One of the core skills in accounting is identifying whether an account is an asset, liability, shareholders' equity, revenue, expense, or dividend. Additionally, for assets and liabilities, you need to determine if they are current (expected to be converted to cash or paid within 1 year) or long-term.

Assets
Assets are things of value that a company/individual owns or controls.

• Current Assets:
  - Cash (most liquid asset)
  - Accounts Receivable (amounts owed to you by customers, expected within 1 year)
  - Temporary Investments (stocks/securities you plan to sell within 1 year)
  - Inventory (products you've purchased to resell, expected to turn over within 1 year)
  - Supplies (office supplies, production supplies expected to be used within 1 year)
• Long-Term Assets:
  - Long-term Investments (stocks, bonds you plan to hold over 1 year)
  - Property, Plant & Equipment (land, buildings, machinery expected to last over 1 year)
  - Vehicles

For a freelance web developer, examples of assets include: cash in bank, computer/equipment (long-term).

Liabilities
Liabilities are amounts a company/individual owes and must repay.

• Current Liabilities:
  - Accounts Payable (amounts you owe to suppliers due within 1 year, like utility bills)
  - Salaries/Wages Payable (unpaid salaries to employees due within 1 year)
• Long-Term Liabilities:
  - Notes/Loans Payable (like a mortgage, loan from bank to be paid over multiple years)
  - Mortgage Payable

For a small marketing agency, an example of a liability is accounts payable for unpaid vendor invoices.

Shareholders' Equity
These accounts represent the owners' stake in the company. For a sole proprietor, it is simply their equity.
- Common Shares
- Retained Earnings (profits reinvested back into the company)

Revenues
Revenues are amounts earned by a company from performing services or selling products. For a freelancer, consulting revenue or rent revenue are examples.

Expenses
Expenses are costs incurred to generate revenues.
- Salaries Expense
- Supplies Expense (cost of supplies used up within a period)
- Utilities Expense
- Interest Expense (on loans)
- Income Tax Expense

Assets = Liabilities + Shareholders' Equity

Account Classification

Each of the following accounts is either an Asset (A), Liability (L), Shareholders' Equity (SE), Revenue (Rev), Expense (Exp) or Dividend (Div) account. Mark the first blank with the appropriate classification – A, L, SE, Rev, Exp or Div. If you have identified an item as either an Asset or Liability, mark the second blank as "C" if the item is current, or "LT" for Long-Term.

Long-term investments = A, LT
Accounts receivable = A,C
Consulting revenue= Rev
Rent revenue = Rev
Computer = A, LT
Mortgage payable = L, LT
Salaries payable = L, C
Cash = A, C
Supplies expense = Exp
Retained earnings = SE
Temporary investments = A, C
Accounts payable = L, C
Income tax expense = Exp
Car = A, LT
Salaries expense = Exp
Utilities expense = Exp
Land = A, LT
Inventory = A, C
Building = A, LT
Interest expense = Exp
Bank loan payable = L, LT
Common shares = SE
Supplies = A, C

Car loan = L, LT
Software expense = Exp
Wages expense = Exp
Office furniture = A, LT
Long-term investments = A, LT
Inventory = A, C
Small tools = A, LT
Accounts payable = L, C
Retained earnings = SE
Accounts receivable = A, C
Property = A, LT
Repair revenue = Rev
Maintenance expense = Exp
Interest expense = Exp
Salaries payable = L, C
Subscription revenue = Rev
Common shares = SE
Telephone equipment = A, LT
Sales revenue = Rev
Income tax expense = Exp
Mortgage payable = L, LT
Cash = A, C
Telephone expense = Exp

The key points to take away from classifying accounts are:

• Assets:
  - Cash and cash equivalents like temporary investments are current assets
  - Receivables from customers are current assets
  - Inventory and supplies expected to be sold/used within 1 year are current
  - Long-term investments you plan to hold over 1 year
  - Property, plant, equipment, vehicles, furniture are long-term/fixed assets
• Liabilities:
  - Amounts owed to suppliers, employees, taxes within 1 year are current
  - Loans, mortgages, long-term debt are long-term liabilities
• Equity:
  - Common shares represent owners' investment
  - Retained earnings track reinvested profits
• Revenues are amounts earned from services/product sales.
• Expenses are costs incurred to generate revenues.

Classifying accounts properly into these categories is fundamental to accounting for any business. The asset/liability/equity equation (Assets = Liabilities + Equity) must always hold true on the balance sheet. Tracking all accounts in the correct categories is critical.

Account classification source: Accounting Workbook