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Classification of Accounts
into Assets, Liabilities, Expenses,
Incomes, and Owners’ Equity

Introduction
• Every transaction has two fold effect.
• For every effect/ item there is an account
• Accounts can be classified into Assets, Liabilities, Expenses, Incomes, and
Owners’ Equity

• Assets, Liabilities, and Owners’ equity – part of Balance sheet

• Incomes and Expenses – Part of statement of profit and loss / Income
Statement

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General Ledger – made up of many Ledger

Accounts (T-Accounts) – Snapshot of T-Account
Account Name

Every single item would have a T Account

Understanding T-Accounts

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Accounting period concept

• All the transactions are recorded in the books of accounts on the assumption
that profits on these transactions are to be ascertained for a specified
period.
• Thus, this concept requires that a balance sheet and profit and loss account should be
prepared at regular intervals. This is necessary for different purposes like, calculation
of profit, ascertaining financial position, tax computation etc.
• Further, this concept assumes that, indefinite life of business is divided into
parts. These parts are known as Accounting Period.
• It may be of - one year, six months, three months, one month, etc. But usually one
year is taken as one accounting period which may be a calendar year or a financial
year.

Dual aspect/ Duality Concept

• Dual aspect is the foundation or basic principle of accounting. It provides the very
basis of recording business transactions in the books of accounts.
• This concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides.
• Therefore, the transaction should be recorded at two places. It means, both the aspects of the
transaction must be recorded in the books of accounts.
• For example, goods purchased for cash has two aspects which are (i) Giving of cash(ii)
Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is
commonly expressed in terms of fundamental accounting equation :
• Assets = Liabilities + Capital
• The above accounting equation states that the assets of a business are always equal to the claims of
owner/owners and the outsiders. This claim is also termed as capital or owners equity and that of
outsiders, as liabilities or creditors’ equity.
• Significance
• This concept helps accountant in detecting error.
• It encourages the accountant to post each entry in opposite sides of two affected accounts.

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Assets = + Equity
Liabilities
= + Capital + Retained Earnings
Cash Debtors Furniture Office Supplies = Bank Loan Creditors for office supplies + Capital + Revenue (Expenses)

R,E,N
1
2
3
4
5
6
7
8

It is not an exps., part of Equity (reduces RE)

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A,L,E
A
B
C
D
E
F

Assets = + Equity
Liabilities
= + Capital + Retained Earnings
Cash Debtors Furniture Office Supplies = Bank Loan Creditors for office supplies + Capital + Revenue (Expenses)

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3. Required: Match financial statement items to financial statement categories. Mark

each item in the list below as an asset (A), liability (L), or shareholders’ equity (E)
appearing in Balance Sheet or a revenue (R) or expense (E) appearing on the income
statement.

Asset, Liability, Equity,

Sr. No. Particulars
Revenue or Expense
1 Retained earnings
2 Accounts receivable
3 Sales revenue
4 Property, Plant and Equipment
5 Cost of goods sold expense
6 Inventories
7 Interest expense
8 Accounts payable
9 Furniture and fixtures

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3 (Ans). Required: Match financial statement items to financial statement categories. Mark
each item in the list below as an asset (A), liability (L), or shareholders’ equity (E) appearing
in Balance Sheet or a revenue (R) or expense (E) appearing on the income statement.

Asset, Liability, Equity,

Sr. No. Particulars
Revenue or Expense
1 Retained earnings Equity
2 Accounts receivable Asset
3 Sales revenue Revenue
4 Property, Plant and Equipment Asset
5 Cost of goods sold expense Expense
6 Inventories Asset
7 Interest expense Expense
8 Accounts payable Liability
9 Furniture and fixtures Asset

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4. Classify each of the item below according to (i) whether it appears on the income statement
or balance sheet and (ii) whether it is classified as revenue, expense, asset, liability or equity.

Income Statement, Balance Revenue, Expense, Asset,

Sr. No. Particulars
Sheet & Retained Earnings Liability or Equity
1 Salaries expense
2 Equipment
3 Cash
4 Accounts payable
5 Buildings
6 Contributed capital
7 Retained earnings
8 Interest revenue
9 Advertising expense

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4 (Ans). Classify each of the item below according to (i) whether it appears on the income
statement or balance sheet and (ii) whether it is classified as revenue, expense, asset, liability or
equity.

Income Statement, Balance Revenue, Expense, Asset,

Sr. No. Particulars
Sheet & Retained Earnings Liability or Equity
1 Salaries expense IS Expense
2 Equipment BS Asset
3 Cash BS Asset
4 Accounts payable BS Liability
5 Buildings BS Asset
6 Contributed capital BS Equity
7 Retained earnings BS Equity
8 Interest revenue IS Revenue
9 Advertising expense IS Expense

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Appear on Classified as
1
2
3
4
5
6
7
8
9

15

Appear on Classified as
1 Expenses
2 Asset
3 Asset
4 Liabilities
5 Asset
6 Equity
7 Equity
8 Revenue
9 Expense

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Assets = + Equity
Liabilities
= + Capital + Retained Earnings
Cash Debtors Furniture Office Supplies = Bank Loan Creditors for office supplies + Capital + Revenue (Expenses)

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Basis of Accounting for recognition of revenue and expenses

• Cash basis – recorded when cash is received or paid
• Incomes are recorded only when the cash is received.
• Expenses are recorded only when the cash is paid.
• Accrual basis – Accrual accounting means revenue and expenses are recognized
and recorded when they occur.
• Incomes and expenses are recorded when they accrue irrespective of cash has been received
or paid.
• E.g. Goods sold at Rs. 10,00,000 during the year (incl. credit sales - Rs. 960,000).
• Cash received in respect of credit sales – 950,000.
• As per Cash basis of accounting = 950,000 + 40,000 = 990,000
• As per Accrual basis of accounting = 10,00,000.
• Section 128 (1) – every company shall record financial transactions as
per accrual basis of accounting and double entry book keeping system.

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Basis of Accounting
• In accrual basis of accounting, revenues and expenses are recognized when
the transaction that causes them occurs, not necessarily when cash is
received or paid.
• That is, revenues are recognized when they are earned and expenses when
they are incurred.
• The two basic accounting principles that determine when revenues and
expenses are recorded under accrual basis accounting are the revenue
principle and the matching principle.
• Revenues are recognized when they are earned and received/ receivable.
• Expenses incurred during the period matched with the revenue of the period.

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IS, BS,SRE
A
B
C
D
E
F
g

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5. Required: Indicate whether each of the above items is an asset

(A), a liability (L), or part of equity (E).
Sr. No. Particulars Asset, Liability or Equity
1 Bonds Payable
2 Goodwill
3 Note Payable (60 days)
4 Accounts Receivables
5 Patents
6 Mortgage Payable
7 Cost of Goods Sold
8 Unearned Rent Revenue
9 Interest Receivable (30 days)
10 Salaries Payable
11 Retained Earnings
12 Inventory
13 Tax Payable
14 Accumulated Depreciation

Investment in Manson Company’s capital stock (to be held

15
five years)

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5 (Ans). Required: Indicate whether each of the above items is an

asset (A), a liability (L), or part of equity (E).
Sr. No. Particulars Asset, Liability or Equity
1 Bonds Payable Liability
2 Goodwill Asset
3 Note Payable (60 days) Liability
4 Accounts Receivables Asset
5 Patents Asset
6 Mortgage Payable Liability
7 Cost of Goods Sold Expenses affecting Equity ultimately.
8 Unearned Rent Revenue Liability
9 Interest Receivable (30 days) Asset
10 Salaries Payable Liability
11 Retained Earnings Equity
12 Inventory Asset
13 Tax Payable Liability
14 Accumulated Depreciation Asset (Contra to Asset)

Investment in Manson Company’s capital stock (to be held

15 Asset
five years)

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6. Required: Indicate whether each of the above items is an asset

(A), a liability (L), or part of equity (E).
Sr. No. Particulars Asset, Liability or Equity
1 Accounts payable
2 Accounts receivable
3 Accumulated depreciation
4 Additional paid-in capital
5 Building
6 Cash
7 Common stock
8 Income tax payable
9 Inventory
10 Investment in Endrun
11 Land
12 Mortgage payable
13 Prepaid insurance
14 Registered trademark
15 Retained earnings
16 Store fixture
17 Unearned revenue

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6 (Ans). Required: Indicate whether each of the above items is an

asset (A), a liability (L), or part of equity (E).
Sr. No. Particulars Asset, Liability or Equity
1 Accounts payable Liability
2 Accounts receivable Asset
3 Accumulated depreciation ---
4 Additional paid-in capital Equity
5 Building Asset
6 Cash Asset
7 Common stock Equity
8 Income tax payable Liability
9 Inventory Asset
10 Investment in Endrun Asset
11 Land Asset
12 Mortgage payable Liability
13 Prepaid insurance Asset
14 Registered trademark Asset
15 Retained earnings Equity
16 Store fixture Asset
17 Unearned revenue Liability

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7. Required: Indicate whether each of the above items is an asset (A), a liability (L),
or part of equity (E). (Revenue and Expenses are part of Equity)

Sr. No. Particulars Asset, Liability or Equity

1 Interest Expense
2 Commission income
3 Prepaid rent
4 Office supplies
5 Proprietor's drawings
6 Fines paid
7 Advances to suppliers
8 Unearned insurance premium
9 Income tax expense
10 Income tax payable
11 Dividend paid
12 Dividend income
13 Advances from customers

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7 (Ans). Required: Indicate whether each of the above items is an asset (A), a liability
(L), or part of equity (E).

Sr. No. Particulars Asset, Liability or Equity

1 Interest Expense Equity (Retained Earnings)

2 Commission income Equity (Retained Earnings)
3 Prepaid rent Asset
4 Office supplies Asset
5 Proprietor's drawings Equity
6 Fines paid Equity (Retained Earnings)
7 Advances to suppliers Asset
8 Unearned insurance premium Liability
9 Income tax expense Equity (Retained Earnings)
10 Income tax payable Liability
Equity (Retained Earnings)
11 Dividend paid
Equity (Retained Earnings)
12 Dividend income
13 Advances from customers Liability

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A,B,C,D
1
2
3
4
5
6
7
8

A,L,R,E A,L,R,E
1 6
2 7
3 8
4 9
5

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Woodcraft Company

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