Funds contributed by owners in any business are different from all other types of funds. Equity is the residual value of the business enterprise that belongs to the owners or shareholders. The funds contributed by outsiders other than owners that are payable to them in the future. Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year.
The amount of the funds contributed by the owners (the stockholders) added or subtracted by accumulated gains and losses. Equity is the residual value of the business enterprise that belongs to the owners or shareholders.
Funds contributed by owners in any business are different from all other types of funds. Generally, they don’t have any cost of carrying for the business and in the event of winding up of the business, shareholders are entitled to the residual value of the business after discharging all other liabilities. They are expected to remain invested in the business for a long period of time and no immediate payback is anticipated in case of a going concern.
Equity accounts are also referred to as “Capital Account”, “Shareholder’s Funds” or “Accounts”, “Stock, Stake” and “Shareholder Equity”. Normally they have a credit balance and are reflected on the left side of the balance sheet. Profits and losses from each accounting year are added to Equity at the end of each year.
Balances in the Retained Earnings Account are transferred to “Equity” at the end of each accounting year. While running a revaluation of balances, equity is revalued using the historical rates in accordance with the accounting standards. Equity is a separate account type in ERP’s to segregate funds from owners and others.
The number of funds contributed by outsiders other than owners that are payable to them in the future. Liability is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services, or another yielding of economic benefits in the future.
Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.
Liabilities can be from a lot of sources like Loans, External Borrowings, Debt – Secured and Unsecured, Obligation for services received Balance Due or Credit due to Creditors. Some generally known examples of liabilities are any type of borrowing or loans from persons or banks or wages or salaries paid to employees or amounts payable to creditors for their goods and services and taxes payable to Governments.
Balances in the Equity and Liability Accounts are carried forward to next year after the close of the accounting year. While running a revaluation of balances, liability is revalued using the period end rates in accordance with the accounting standards. Liability is a separate account type in ERP’s to segregate funds from owners and others.
Intercompany transactions also result in receivables and liabilities (payables) between different units of the same entity. Such transactions are settled in cash if they are in the normal course of business. At the time of the final consolidation of accounts, these intercompany liabilities and assets need to be eliminated from the books of the parent entity. We will discuss this concept in detail in the Intercompany chapter.
In every journal entry that is recorded, the debits and credits must be equal to ensure that the accounting equation is matched. In this article, we will focus on how to analyze and recorded transactional accounting information by applying the rule of credit and debit. We will also focus on some efficient methods of recording and analyzing transactions.
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.
In this article we will help you understand the double-entry accounting system and state the accounting equation and define each element of the equation. Then we will describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.
What is Accounting & Book Keeping
Accounting is a process designed to capture the economic impact of everyday transactions. Each day, many events and activities occur in an entity, these events and activities are in the normal course of business; however, each of these events may or may not have an economic impact. Events or activities that have an effect on the accounting equation are accounting events.
In most of the automated financial systems, you can define more than 12 accounting periods in a financial year. This article will explain the concept of the adjustment period and the benefits of having adjustment periods. Adjustment periods have their inherent challenges for the users of financial statements and there is a workaround for those who don’t want to use adjustment periods.
There are five types of core accounts to capture any accounting transaction. Apart from these fundamental accounts, some other special-purpose accounts are used to ensure the integrity of financial transactions. Some examples of such accounts are clearing accounts, suspense accounts, contra accounts, and intercompany accounts. Understand the importance and usage of these accounts.
When the quantum of business is expected to be moderate and the entrepreneur desires that the risk involved in the operation be shared, he or she may prefer a partnership. A partnership comes into existence when two or more persons agree to share the profits of a business, which they run together.
GL - Journal Posting and Balances
In this tutorial, we will explain what we mean by the posting process and what are the major differences between the posting process in the manual accounting system compared to the automated accounting systems and ERPs. This article also explains how posting also happens in subsidiary ledgers and subsequently that information is again posted to the general ledger.
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