Accounting tis the process of communicating about a business entity to users such as shareholder, manager and stakerholder. The communication is generally in the form of financial statement that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable. The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookm keeping. and auditing.
The American Institute of Certified Professional Accounting (AICPA) defines accountancy as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."
ACCOUNTING EQUATION
The 'basic accounting equation' is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.
ASSETS=LIABILITY + EQUITY
This equation is also the framework for keeping track of money as it flows in and out of your company. Starting with the first penny you earn, you'll record in a general ledger each and every transaction using a double-entry system of debits and credits. Assets get recorded on the top or the left side of the balance sheet; liabilities and owners' equity are recorded on the bottom or the right side of the balance sheet.
The information on each company's general ledger is unique to that business; however, all companies classify their general ledger accounts as assets, liabilities or owners' equity. Businesses use more specific accounts within each classification, for example, "current assets" or "long-term liabilities," to organize and track their finances.
Assets
An asset is anything of value that your company owns — including cash. Assets get recorded on the balance sheet in terms of their dollar values. Remember, even if you used credit to purchase an asset, you still own it. Its full dollar value gets recorded on one side of the balance sheet as an asset, and the amount you owe gets recorded on the other side of the balance sheet as a liability. There are several types of assets
Current assets:These are assets with dollar amounts that continually change, for example, cash, accounts receivable,
inventory or raw materials your company uses to make a product. They are listed on the balance sheet in order of their liquidity,
or how fast they can be converted into cash.
Fixed Assets:
Moreover, a fixed/non-current asset can also be defined as an
asset not directly sold to a firm's consumers/end-users. As an
example, a baking firm's current assets would be its inventory (in this case, flour, yeast, etc.), the value of sales owed to
the firm via credit (i.e. debtors or accounts receivable), cash
held in the bank, etc. Its non-current assets would be the oven
used to bake bread, motor vehicles used to transport
deliveries, cash registers used to handle cash payments, etc.
Each aforementioned non-current asset is not sold directly to
consumers.
- Intangible Assets:
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.
Fictitious Assets:
Asset created by an accounting entity (and included under assets in the balance sheet) that has no tangible existence or realizable value but represents actual cash expenditure. The purpose of creating a fictitious asset is to account for expenses (such as those incurred in starting a business) that cannot be placed under any normal account heading. Fictitious assets are written off as soon as possible against the firm's earnings.
:
dissolution of firm is called fixed liability. Examples are
Capital, Reserve and Surplus.
Long-term liability:
The liability which is not payable within the next accounting
period is called long-term liability. Examples are Debentures
of a company, Mortgage Loan etc.
Current liability:
The liability which is to be paid of in the next accounting period is current liability.. Examples: Sundry, creditors,
Bills Payable and Bank overdraft etc.
Trade liability:
Liability which is incurred for goods and services supplied
or expenses incurred is called trade liability. Example; Bill payable and Sundry period.
Financial liability:
Liability which is incurred for financial purposes is called
financial liability. Example: Bank overdraft, load taken for a short period.
Contingent liability:
A contingent liability is one which is not an actual
liability but which will become an actual one on the
happening of some event which is uncertain. Examples: Bills
discounted before maturity, Liability of a case pending in
the court.
EQUITY
In accounting, equity is usually defined as the value
of the assets contributed by the owners. This is added to
the total income earned and retained by the company to give the company's total equity value. This description of equity is correct but very simplistic. A more profound description is really that used by the homeowner, that is, equity is the owner's value in an asset or group of assets. So the business raises funds without incurring debt and has no obligation to repay specific sums at specific milestones.
TYPES OF EQUITY
Share Capital:
Share capital (UK English) or capital stock (US English) refers to the portion of a company's equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can issue shares in exchange for computer servers, instead of purchasing the servers with cash.
The term has several meanings. In its narrow, classical sense, still commonly used in accounting, share capital comprises the nominal values of all shares issued, less those repurchased by the company.
a liability is defined as 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 other yielding of economic benefits in the future. A liability is defined by the following characteristics:
Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time;
A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;
A duty or responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement;
and,A transaction or event obligating the entity that has already occurred.Types of LiabilityFixed liability
Authorised share capital is also referred to, at times, as
registered capital. It is the total of the share capital which a limited company is allowed (authorized) to issue. It presents the upper boundary for the actually issued share capital.
Issued share capital is the total of the share capital issued (allocated) to shareholders. This may be less or equal to the authorized capital. Shares outstanding are those issued shares which are not treasury shares. These are all the shares held by the investors in the company.
Treasury shares are those issued shares which are held by the issuing company itself, the usual result of Issued capital can be subdivided in another way, examining whether it has been paid for by investors:
a buyback.
Subscribed capital is the portion of the issued capital, which has been subscribed by all the investors including the public. This may be less than the issued share capital as there may be capital for which no applications have been received yet ("unsubscribed capital").
Called up share capital is the total amount of issued capital for which the shareholders are required to pay. This may be less than the subscribed capital as the company may ask shareholders to pay by installments.Paid up share capital is the amount of share capital paid by the shareholders. This may be less than the called up capital as payments may be in installments ("calls-in-arrears").
Reserves:
Equity reserves are created from several possible sources:
Reserves created from shareholders' contributions, the most common examples of which are:
legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital
share premium - amount paid by shareholders for shares in excess of their nominal value Reserves created from profit, especially retained earnings, i.e. accumulated accounting profits, or in the case of nonprofits, operating surpluses. However, profits may be distributed also to other types of reserves, for example:
legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits
remuneration reserve - will be used later to pay bonuses to employees or management.
translation reserve - arises during consolidation of entities with different reporting currencies.
Reserve is the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days
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