1. Define each term and explain why it should be included as an asset in a business organization.
Inventories: These include raw materials, work in progress and finished goods that are held by a business organization for the purpose of resale in the ordinary course of business (Douglas, 2014). Inventories are considered to be an important part of an organization's assets because the revenue from the sale of stock is a primary source of income for the business and earnings for owners/shareholders.
Account receivable: These are monies that a business organization has the right to receive because it provided its customers/clients with goods and or services on credit. In other words, these are debts owed to the business by their customers. Accounts receivable should be included as an asset in a business organization because as we have seen from the definition, it is the property of the business organization (Douglas, 2014).
Cash and cash equivalents: Cash is the money in the form of currency that a business organization has both in hand and at bank (Douglas, 2014). Cash equivalents are investments that can readily be converted into cash within a period of not more than three months e.g. commercial papers and treasury bills. Since cash and cash equivalents are owned by the business, they form an integral part of its assets.
Intangible assets: These are non -physical long term assets with a useful life of more than one year. They include assets such as goodwill, patent, copyright, trademark, etc. (Douglas, 2014). A business organization has a legal right to these assets and is, therefore, its legal property.
Prepaid expenses: These are expenses that are expected to be incurred in future but have been paid for in advance. They include costs such as insurance. Since the organization has not yet utilized these expenses, it means that the payment made is still its property and can be refunded if the expense in not incurred (Douglas, 2014)
2. Locate six terms that you consider to be associated with balance sheet liabilities and equity (liabilities and leftovers).
Total current liabilities
3. Define each term, and explain why it should be included as a liability or equity in a business organization.
Retained earnings: These are profits that a business organization has earned as at the end of accounting period minus any dividends and distributions paid to shareholders and other investors (Douglas, 2014). Retained earnings are part of an organization's equity since it represents the earnings left for the organizations, after all, the necessary deductions.
Long-term liabilities: These are commitments that a business owes that are not less than one year from the date of the balance sheet date. These are long- term debts that a business owes to others and are therefore liabilities (Douglas, 2014).
Total current liabilities: These are debts and obligations that a business organization owes its suppliers for the credit supplies and must be paid within one year.
Accounts payable: This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable include suppliers and materials acquired on credits. Common Stock- This is stock issued as part of the initial or later-stage investment in the business.
Capital: This is the difference between assets and liabilities of a business organization and represents the equity interest of the owner in the enterprise. It is part of the organizations Equity.
Douglas, B. (2014). Human Capital Assets on the Balance Sheet. Available at SSRN 2398575.
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