Explanation of Accounts

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Mrs.ET Sopheak
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Explanation of  Account

Assets, Liabilities and Net Assets

There are various categories within assets and liabilities and also certain financial figures derived from them that are of interest:

• Current assets are those assets that are in the form of cash, or expected to become cash (or be used in operations) within the coming year. Examples are bank balances, short-term guaranteed investments, accounts receivable and prepaid expenses.

• Long-term assets (perhaps described as “capital assets” or “other assets”) are not expected to be converted to cash within a year. Examples are buildings, furniture, equipment and vehicles, all of which are expected to serve the needs of the organization over a number of years. Also included in this category are long-term financial assets that are being held to generate a return on investment over time.

• Current liabilities are those that have to be paid within the coming year. The items cited above — payable due to suppliers and mandated amounts withheld from employees’ salaries — are current liabilities as they are typically due to be paid within a year.

• Long-term liabilities are obligations to make payments in the future, beyond one year. Examples are loans outstanding and mortgage balances. However, mortgage or loan obligations that are to be paid within the coming year are shown as a current liability.

• Working capital is the difference between current assets and current liabilities. In equation form: Working Capital = Current Assets – Current Liabilities. Working capital is usually a positive number. On that basis, it can be thought of as a short-term “cushion” available to the organization in the coming year, reflecting the excess of current assets over what is required to meet current liabilities. Put another way, a positive working capital balance is evidence of the organization’s ability to pay its bills as they come due.

• The working capital ratio is another way of assessing the organization’s ability to pay its bills as they come due. Rather than calculating the dollar value of working capital, the ratio describes how many dollars of current assets are on hand for each dollar of current liabilities. In equation form: Working Capital Ratio = Current Assets / Current Liabilities. A ratio value greater than 1 signals the capacity in the short run to pay all current liabilities from current asset sources.

Revenues and expenditures

Revenues and expenditures are “cumulative sums over time”. They reflect the aggregation of many transactions that have occurred during the specified period.

• Revenues are the amounts recorded by the organization associated with increases in economic resources related to its operating activities. Examples are grants from governments (or foundations) and contributions (donations).

• Expenditures (or expenses) are the amounts spent by the organization in its operating activities. Examples are salaries, rent and office supplies. Also included in expenditures is “depreciation” of capital assets (usually called “amortization of capital assets”) as the cost of capital assets is usually spread over a number of periods, based on the useful life of each asset.

• Net Revenues (or “Excess of Revenues over Expenditures”) is the difference between total revenues and total expenditures. In equation form: Net Revenues = Total Revenues – Total Expenditures. A positive number reflects an operating surplus, whereas a negative number means an operating deficit, described as a “Deficiency of Revenues over Expenditures”.

Thanks,

Mrs. ET Sopheak

Lecturer in Economics