ACCOUNTINGSOMEKEYPOINTSTOREMEMBER.docVIP

Accounting: Some Key Points to Remember George W. Gallinger Basic Concepts Assets of an entity are the things of value that it owns. The sources of funds used to acquire assets are (i) liabilities and (ii) equity. Liabilities are sources from creditors. Equity consists of (i) funds obtained from equity investors, who are owners, and (ii) retained earnings, which result from the entity’s profitable operation. Creditors have a strong claim on the assets. They can sue if the amounts due them are not paid. Equity investors have only a residual claim. Total assets = total liabilities + equity. This is the dual-aspect concept. The amounts of assets, liabilities, and equity as of one point in time are reported on the entity’s balance sheet. Accounting reports only those facts that can be stated in monetary amounts. This is the money-measurement concept. Business accounts are kept for entities, rather than for the persons who own, operate, or otherwise are associated with those entities. This is the entity concept. Accounting assumes that an entity will continue to operate indefinitely. This is the going-concern concept. Monetary assets are reported at their fair value; other assets are reported at a number based on cost. This is the asset-measurement concept. Assets are valuable items that are owned or controlled by the entity and that were acquired at a measurable cost. Goodwill is not an asset unless it is purchased. Current assets are cash and other assets that are expected to be converted into cash or used up in the near future, usually within one year. Current liabilities are obligations due in the near future, usually within one year. The current ratio is the ratio of current assets to current liabilities. Equity consists of paid-in capital (which in a corporation is represented by shares of stock) plus earnings retained since the entity began. It does not report the value of the stock. Retained earnings is not cash; it is part of the owners’ claim on the assets. B