Owners Equity and the Accounting Concepts free essay sample

Assets, liabilities and owner’s equity are the three components that make up a company’s balance sheet. The balance sheet, which shows a business’s financial condition at any point, is based on the equation of assets equals to liabilities plus owner’s equity. This equation is also the framework track of money as it flows in and out of a company. Starting with the first penny a company earn, will be recorded in a general ledger each and every transaction using double-entry system of debits and credits. Assets get recorded on the top or the left side of the balance sheet while liabilities and owner’s equity are recorded on the bottom or the right side of the balance sheet. An assets is anything of value that a company owns including cash. There are several types of assets that is current assets, investment, capital assets and intangible assets. Current assets are assets with dollar amounts that continually change for example cash, accounts receivable, inventory or raw material of a company uses to make a product. We will write a custom essay sample on Owners Equity and the Accounting Concepts or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Investment are assets companies like individuals can own securities such as stock and bonds. While capital assets is also called plant assets which is permanent things that a company owns, use within the business and are not items that the company sells such as land, building, equipment and vehicles. Intangible assets are like patents copyrights and other nonmaterial assets that have value. Liabilities are anything that a company owes to people businesses other than its owners. There are two types of liabilities that is current liabilities and long-term liabilities. In general, if a liability must be paid within a year, it is considered as current assets that includes bills, money a company owe to vendors and suppliers, employee payroll and short-term loans. A long-term liability is any debt that extends beyond one year such as mortgage. Owner’s equity is also called as capital is any debt owed to the business owners. In keeping the books of business, a company must decide the amount to for assets purchased and liabilities incurred. The amount that a company should record assets and liabilities are at the historical cost principle. Historical cost principle is a simple concept which means that the data you see on the balance sheet is recorded at the historical cost. The historical cost is therefore the cost at the time the company or entity completed the transaction. Historical cost accounting is therefore the opposite of current cost accounting. Current cost accounting would record account transactions at the current cost that is the cost at the time the financials were prepared. For example, an asset of land purchased 15 years ago will have appreciated, but it is still shown in the accounting records at its purchase price. Accounting can be completed as it can be simple. In preparing accounts there are several accounting concepts that provide guidance to have a good recorded accounts of your company. It is also commonly referred as generally acceptable accounting principles (GAAP). There are several generally acceptable accounting principles (GAAP). The first principle is the accrual principle. The accrual principle may be called the mother of all accounting principles. It ensures that revenues and expenses are recorded when earned and incurred and not necessarily when cash is exchanged. The accrual principle therefore brings into play other important principles such as revenue recognition and matching principle. The company will therefore record revenue when the sale is made based on the principles of revenue recognition and will record expenses when incurred and against the revenue it helped to generate based on the matching principle. The second principle is the consistency principle. It requires that accounts be prepared using the same method from period to period. Changes are inevitable, however when these changes are made the accountant is required to explain the change in the notes to the financials. This principle is very important, as different methods of preparing the accounts may render completely different results. This would make it difficult for users of the financials to accurately interpret the financial results. Without the consistency principle, unscrupulous accountants would be able to change methods in an attempt to manipulate the results. The consistency principle also ensures that the method used to allocate cost is the same method used to establish the value of assets. The third principle is the separate legal entity concept. It is important that the accounts of the business be kept separate from the personal accounts of the owners. The business is what is referred to as a separate legal entity and maintains its separate accounts. This accounting principle, are applied not only to small companies but to large complicated companies as well. For example, the payment of dividends which is a transaction between the business and its owners, basically the owners withdrawing cash or other assets from the business is not treated as an expense, but as distribution to owners. The fourth principle is the going concern concept which is all about the assumption that the business will continue into the foreseeable future. At first glance, this may be considered mundane, however it is important that the going concern status of the business be extremely clear. Where it is known that the business will not continue to operate it should be clearly stated as well. For a business that is not a going concern, the value of the assets will be determined differently than for a going concern. This will therefore affect any analytical review of the accounts. The fifth principle is the conservative principle. Accountants are not supposed to be too optimistic or ambitious in their work. In personal life they may well be the most ambitious and optimistic among us, but not at work. Accountants are required to be conservative in their preparation of the books. The accountant should be careful therefore not to overstate assets or understate liabilities. Provision for bad debt is a good example of the conservatism principle at work. The provision is made because it is generally accepted that not all debtors will pay all of what they owe. The accountant will therefore make a deduction for a percentage she or he thinks will not be collected. The sixth and seventh principle is the matching principle and the prudence principle. The matching principle is the one to remember, because it cuts deep into what accounting is all about. This principle states simply that the expense incurred to generate the revenue earned in this period should be expensed in this period as well. So the expense should be recorded in the same period the revenue is earned. Keep that info close to your heart, it’s that important. While the prudence principle is similar to the conservative principle which is the need for accountants to be more willing to understate than overstate profit. Under the prudence principle revenue should not be anticipated, while expenses and losses should be anticipated and charged against income. Finally, it is the matching principle. This principle allows the accountant to ignore generally accepted accounting principles. By doing so it would not influence the financial position of the company and/or would be costly and difficult to accomplish. Where an entry affects the financial position of the business entity, the entry is considered material and should be recorded according to GAAP stipulations.