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Assets are probable future economic benefits obtained or controlled as a result of past transactions or events. Debits increase assets and credits decrease them.
Generally, asset accounts that normally carry a credit balance are called "contra-asset" accounts. One example of a contra-asset account would be the Allowance for Doubtful Accounts. When an organization knows that an account will not be paid, it normally writes off the receivable immediately. The Allowance for Doubtful Accounts, however, is an estimation of the amount that will not be collected in Accounts Receivable from "doubtful" accounts (accounts that the business suspects may not be paid, but are not certain).
To be considered an asset, an economic resource must have the following characteristics:
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Receivables consist of a variety of claims against customers and other parties arising from the operations of the business enterprise. Accounts receivable are the result of credit sales to customers.
Accounts receivable are valued on the balance sheet at net realizable value. To To achieve this net realizable value, an offsetting Allowance for Doubtful Accounts is set up as a contra-asset account to reflect the amount of receivables the company does not reasonably expect to collect. As a result, the net of Accounts Receivable and the Allowance for Doubtful Accounts informs the reader of the net realizable value of amounts in accounts receivable.
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Liabilities are probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services in the future as a result of past transactions or events. Credits increase liabilities and debits decrease them.
An obligation must have three characteristics to be considered a liability.
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Current liabilities are those reasonably expected to require the use of existing resources which have been classified as current assets, or the creation of other liabilities within one year or the normal operating cycle, whichever is longer.
Some of the most common liability accounts are defined as follows:
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