After you have read Chapter 2, please review the following.
Concepts of Accounting
Anthony reviews 5 concepts in the early section of Chapter 2. Points we should make note of :
Money measurement: As with Baron Coburg, accounting must have a common unit of measurement to permit comparisons. During a period of relative price stability, money is used as our common denominator of exchange.
Entity concept: Entities are often clearly measurable, however, lines can be blurred when we start to discuss joint ventures, alliances, partnerships and other legal mechanisms to apportion a share of work and responsibility. If we create a separate legal entity to develop a patent or test its market viability, should that entity be considered part of us or accounted for separately. Many issues arise as firms are able to move risky ventures off their financial statements. Examples like "limited partnerships arrangements" are often cited.
Going concern: To account for an entity we must assume that the entity will continue to operate, otherwise we start to consider liquidation values for many of its assets.
| The Cost concept: Question 2-1 When an asset is purchased for $1000 and now we can sell it for $2000, clearly we are better off, but do we recognize a gain in our income statement? Why or why not? |
Assets:
Assets: expenditures which have future economic benefit. The future is usually greater than a year or past the next balance sheet date.
Cash: Cash are moneys held to payoff obligations, the account includes near cash investments which earn interest but are readily available on short notice to be used. Some companies also maintain marketable equity securities as cash equivalents.
Accounts Receivable: Amounts owed from the sale of our product. Using paid within 30 to 60 days, maintained at face value (not discounted), however, an allowance for doubtful accounts is required based on an estimate of potential bad debts.
Inventory: Goods held for the purpose of resale. Carried in our accounts at acquisition cost. When we maintain homogeneous products then cost flows assumptions are used.
The Balance Sheet
The Balance Sheet is referred to as a snapshot of the company at a moment in time. Some theorist consider the Balance Sheet important because it summarizes the values of a company and can be useful in measuring a company’s worth or value. Other theorist believe the Income Statement is most important and the Balance Sheet is more of a place holder for deferrals and accruals needed to correctly measure the flows of a company. You may have to decide for yourselves’ which of the two theories are correct. I think the balance sheet can be quite useful for measuring value changes in liquid assets and very useful in financial statement analysis.
We have start looking at the components of the Balance Sheet. In particular the asset side. Off setting assets are claims to those assets – Liabilities and Equity. Pay particular attention to the various types of liabilities a company may have. Note the importance of separating current liabilities (A/P) from long term liabilities (Bonds).
Anthony shows you both the corporate form of Equity and the proprietorship form. Therefore you show note a difference in terminology. Corporations have stock and Retained Earnings while unincorporated businesses have “capital.”