There are two techniques to accounting for financial transactions; the Traditional Approach and the Modern Approach.
The British Approach is another name for the Traditional Approach. The American Approach is another name for the Modern Approach. Let’s find out more about it.
Modern Approach to account classification:
Using the modern approach, the accounts can be categorized as follows:
Accounts of Assets a company’s assets include its properties, belongings, or financial resources. They assist with business operations and income generation. They can be valued in monetary terms. There are two types of assets: tangible and intangible. Support may also be divided into fixed assets and current assets. Fixed assets retained for a lengthy period.
They assist with the day-to-day operations of the company. Land, buildings, furniture, machines, automobiles, and so on, Current assets retained for a limited period. In most cases, they can complete within a year. Debtors, bills receivable, bank balances, cash, shares, and so on.
Accounts of Liabilities
Liabilities are the amounts owed to third parties by an entity. These are the business’s responsibilities or debts that must pay. Long-term and current liabilities are two types of liabilities.
Long-term Liabilities are due after a one-year term–for instance, debentures, bank loans, and so on. Must pay current obligations within a year–for example, creditors, bills due, rent owed, bank overdraft, and so on.
Capital Accounts
The owner’s money into the firm is referred to as capital or owner’s equity. The owner might bring in Capital in the form of cash or assets. Capital is a commercial obligation that must pay back to the owner because a business exists independently of its owner.
As a result, the Capital reflected on the Balance Sheet’s liabilities side. After the owner deducts the Drawings, the capital account presented. Drawings are the sums of money, products, or assets taken from the firm by the owner for personal use.
Accounts of Revenue
The amount earned by the firm through the sale of goods or services referred to as revenue. It also covers other payment sources, such as rent, commissions, interest, dividends, etc. Under the Modern Approach, all revenue components also grouped.
Accounts of Expenses
Expenses refer to any costs incurred or money spent to generate revenue. It’s worth noting that a fee occurs when the advantages of the money spent depleted within a year. When a benefit lasts more than a year, it referred to as Expenditure.
As a result, the cost of things sold is an expense, whereas the price of items purchased is Expenditure. Rent, wages, energy, interest, and other costs are expenses. Purchases of assets, short-term investments, and other similar acquisitions fall under the category of spending.
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