Chapter 1 reviewed the analysis of financial transactions and the resulting impact on the accounting equation. We now expand that discussion by introducing the way transaction is recorded in an account. An account accumulates detailed information regarding the increases and decreases in a specific asset, liability, or equity item. Accounts are maintained in a ledger also referred to as the books. We now review and expand our understanding of asset, liability, and equity accounts.

Asset Accounts

Recall that assets are resources that have future economic benefits for the business. The primary purpose of assets is that they be used in day-to-day operating activities in order to generate revenue either directly or indirectly. A separate account is established for each asset. Examples of asset accounts are reviewed below.

• Cash has future purchasing power. Coins, currency, cheques, and bank account balances are examples of cash.

• Accounts receivable occur when products or services are sold on account or on credit. When a sale occurs on account or on credit, the customer has not paid cash but promises to pay in the future.

• Notes receivable are a promise to pay an amount on a specific future date plus a predetermined amount of interest.

• Office supplies are supplies to be used in the future. If the supplies are used before the end of the accounting period, they are an expense instead of an asset.

• Merchandise inventory are items to be sold in the future.

• Prepaid insurance represents an amount paid in advance for insurance. The prepaid insurance will be used in the future.

• Prepaid rent represents an amount paid in advance for rent. The prepaid rent will be used in the future.

• Land cost must be in a separate account from any building that might be on the land. Land is used over future periods.

• Buildings indirectly help a business generate revenue over future accounting periods since they provide space for day-to-day operating activities.