An accounting construct which treats a concern individually from its proprietor. The separate entity premise states that the minutess conducted by a concern are separate to those conducted by its proprietors. For illustration, if a concern proprietor bought an plus for their personal usage, the plus is non the belongings of the concern. In accounting, a concern entity is treated as a separate entity from the proprietors. Therefore, any capital injections made by the proprietors are recorded as capital part from proprietors in the books of the concern entity. The proprietor private expenditure/spending are non recorded in the books of the concern entity. There are many cases whereby the proprietor withdrew money from the concern for their personal usage. This is really a loaning of money from the concern to the proprietors and should be recorded as such in the books of the concern entity. On the other manus, when the proprietors inject hard currency into the concern to assist easing tight hard currency flow state of affairs faced by the concern entity, it is a loaning of money from the proprietor to the concern and should besides be recorded as such in the books of the concern entity.
Many proprietors of little concerns ( Three Most Common Types of Small Businesses ) fail to see this “ line ” drawn between the concern and the proprietors. The direct effect is the recording of private/personal outgo in the books of the concern entities and hence the fiscal place and consequences of the concern entities do non demo a “ true image ” of the concern entities. The concern entities may confront the undermentioned jobs: –
Private/personal disbursals non adjusted from the profit/income reported for income revenue enhancement intents and hence minimizing the income topic to revenue enhancement. Unnecessary punishment and more earnestly, gaol footings are possible result.
It may do the application for banking installation unsuccessful should the assessor of the application notice that the proprietor ‘s private outgo is included in the fiscal statements of the concern entities.
In general, this does non make good to the application submitted by the concern entities whereby fiscal statements are to be included in the application ( e.g. undertaking stamp, grant application & A ; etc. )
This job of maintaining the books/accounts of concern entities “ clean ” from proprietors private outgo can be farther compounded if the minutess record maintaining of the concern entities is hapless, doing any attempt to place these private outgo recorded in the books of the concern entities for accommodation intents hard.
A CPA has 3 suites in a house he has rented for $ 3,000 per month. He has setup a single-member accounting pattern and uses one room for the intent. Under the concern entity construct, merely 1/3rd of the rent or $ 1,000 should be charged to concern, because the other 2 suites or $ 2,000 worth of rent is expended for personal intents.
The CPA received $ 900 measure for public-service corporations. He paid the whole sum utilizing his concern history. $ 600 is to be considered a backdown because merely $ 300 ( 1/3rd ) related to concern and the other $ 600 was for domestic intent.
Assuming each public accounting concern is required to pay $ 100 to a local association of CPAs each month. If the CPA pays that sum from a personal bank account the sum shall be considered extra capital.
Mr. John has three suites in a house he has rented for $ 3,000 per month. He has set up a single-member accounting pattern and uses one room for the intent. Under the concern entity construct, merely 1/3 of the rent or $ 1,000 should be charged to concern, because the other two suites or $ 2,000 worth of rent are expended for personal intents.
Assorted accounting systems and techniques are designed to run into the demands of the direction. The information should be recorded and presented in such a manner that direction is able to get at right decisions. The ultimate purpose of the direction is to increase profitableness and losingss. In order to accomplish the aims of the concern as a whole, it is indispensable to fix the accounting statements in conformity with the by and large accepted rules and processs. The term principles refer to the regulation of action or behavior to be applied in accounting. Accounting rules may be defined as “ those regulations of behavior or process which are adopted by the comptrollers universally, while entering the accounting minutess. ”
The accounting rules can be classified into two classs:
I. Accounting Concepts.
II. Accounting Conventions.
I. Accounting Concepts
Accounting constructs mean and include necessary premises or posits or thoughts which are used to accounting pattern and readying of fiscal statements. The following are the of import accounting
( 1 ) Entity Concept ;
( 2 ) Dual Aspect Concept ;
( 3 ) Accounting Period Concept ;
( 4 ) Traveling Concern Concept ;
( 5 ) Cost Concept ;
( 6 ) Money Measurement Concept ;
( 7 ) Matching Concept ;
( 8 ) Realization Concept ;
( 9 ) Accrual Concept ;
( 10 ) Rupee Value Concept.
II. Accounting Conventions
Accounting Convention implies that those imposts, methods and patterns to be followed as a guideline for readying of accounting statements. The accounting conventions can be classified as follows:
( 1 ) Convention of Disclosure.
( 2 ) Convention of Conservatism.
( 3 ) Convention of Consistency.
( 4 ) Convention of Materiality.
Fiscal statements are prepared to assist the users with their determinations. Hence, all such information which has the ability to impact the determinations of the users of fiscal statements is material and this belongings of information is called materiality. In make up one’s minding whether a piece of information is material or non requires considerable judgement. Information is material either due to the sum involved or due to the importance of the event.
The authorities of the state in which the company operates in working on a new statute law which would earnestly impair the company ‘s operations in future. Although there are no figures involved but the impact is so big that revelation is at hand.
The wage paid to the executives and the managers is material.
The accounting policies are material because they help the users understand the figures.
Materiality might be based on a per centum of gross revenues such as 0.5 % of gross revenues or on entire assets. Materiality is helpful in finding which figures are to be reported on income statement and balance sheet and which one in the notes. It is besides helpful in assisting make up one’s mind which points should look as line points and which 1s are aggregated with others.
Land and edifice
Long term bank loan
1 ) Shutting stock is RM19500
2 ) Depreciation for:
New balance value
Furniture = 55000 ten 5 % = 2750
Office equipment = 72000 ten 10 % =7200
3 ) Provision for dubious debt ( PFDD ) is 5 % on net gross revenues
PFDD = 5 % x 17000 = 850
( – ) PFDD = ( 17000-850 = 16150
4 ) Accrued advertisement is
( + ) Income statement
Current liabilities / balance sheet
Income Statement for the twelvemonth ended 31/7/2011
Gross saless return
( 1000 )
Net gross revenues
Less: Cost of goods sold
( + ) Purchases
( – ) Purchases return
( 9100 )
( + ) Passenger car inwards
Cost of goods available for sale
( – ) Shutting Inventory
( 19500 )
( 25000 )
Gross net income
( + ) Grosss:
( – ) Expenses:
Ad ( 1500 + 200 )
Depreciation for furniture
Depreciation for office equipment
Provision for dubious debt
( 32100 )
Net net income
Balance Sheet as at 31/7/2011
( – ) Accumulated depreciation
( 15200 )
( – ) Accumulated depreciation
( 2750 )
Closing stock list
Debtors ( Accounts receivable )
( – ) Provision for dubious debt
( 850 )
( – ) Current liabilities
Creditors ( Accounts payable )
( 43400 )
( 7750 )
( + ) Internet Net income