Select the account classification that matches with the description. Descriptions Account Classifications a. Sales of products or services. b. Owners’ claims to resources. C. Distributions to stockholders. d. Costs of selling products or services. e. Resources of a company. f. Amounts owed. Assets
The correct answer and explanation is:
The correct answer is e. Resources of a company.
Explanation:
Assets are resources owned or controlled by a company that have economic value and are expected to provide future benefits. They are critical to a company’s operations because they are used to generate revenue, enhance productivity, or provide utility in delivering products or services.
Types of Assets:
- Current Assets: These are short-term assets expected to be used, sold, or converted into cash within a year, such as cash, accounts receivable, and inventory.
- Non-Current Assets: These are long-term resources that provide value over an extended period, such as property, plant, equipment (PPE), patents, trademarks, and goodwill.
Importance of Assets: Assets are fundamental to a company’s operations because they allow a business to function. For example:
- Cash and equivalents provide liquidity for daily operations.
- Inventory represents goods ready to be sold.
- Equipment and machinery enable production processes.
Accounting Treatment: Assets are reported on the company’s balance sheet under different classifications based on their liquidity. The balance sheet follows the accounting equation: Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}
This formula ensures that the company’s financial position is balanced and accurately reflects the resources available to management and investors.
Example in Practice: If a company purchases a piece of machinery for $100,000, it would classify this machinery as a non-current asset on its balance sheet. Over time, the machinery might depreciate, reducing its book value, but it continues to contribute to production and revenue generation.
In conclusion, assets are an essential category of account classification, representing what a company owns and uses to achieve its financial and operational goals.