There are 5 categories that I always emphasise that every entrepreneur must know and be clear about, for them to understand their businesses better.
These are valuable items with a long lifespan. Assets are extremely important in any business as we use them over and over again to generate income. We have 2 types of assets: Current assets and Non-current assets. Current assets are those that can change their position at any time, examples are cash, inventory, etc.
Non-current assets are a long-term investments for which the full value will not be realized within the accounting year. Examples are : property, plant and machinery, etc.
These are are the external parties that the company owes money to. Examples such as creditors i.e your suppliers
You might have obtained stock in credit and agreed to pay over a certain period. They become your liability as you are obligated to pay as per the agreement. A loan is also a liability as you are obligated to pay it back, with interest even. Just like assets, there are two types of Liabilities. Non-current Liabilities e.g long term loans such as mortgage, deferred taxes, etc. Current liabilities e.g accounts payable, short term borrowings, etc. Those that can be paid within a year.
The monies that come into a business as a results of exchange of goods or services rendered. They are often referred to as sales because of its transactional nature. It is important to understand that a loan, though it has a positive effect of the company bank account but cannot be classified as income. A business need to render a service or sell goods in order to gain an income,obviously depending on the nature of business.
The cost of operations that a company incurs to generate revenue. Examples of operational expenses are telephone, electricity, wages and salary. We often say “You must loose money to money”. It is in this notion.
5. Owner’s Equity
It is defined as the amount of money invested by the owner in the business minus any money taken out by the owner of the business. I often say the business and the owner can co-exist. Meaning one can borrow from the other should the need arise. However a clear discipline should be withheld. Accurate records should be maintained.
Understanding the above-mentioned categories will make you understand your business even more in terms of its positioning and the performance. They are not limited to accounting professionals.
Compiled by Dikeledi Seoloane on behalf of Matsobanemetja Business Consulting (Pty) Ltd
A registered Accountant and Tax Practitioner.