Sunday, 20 July 2014

What is Business Entity Concept ?

The business entity concept, also known as the economic entity principle, states that all business entities should be accounted for separately. In other words, businesses, related businesses, and the owners should be accounted for separately. Even though the tax law looks at a sole proprietorship and the owner as one entity, GAAP disagrees. The owner and the business are two separate entities and should be accounted for separately. The same goes for partnership and corporations. The partners and shareholders' activities should be kept separate from the partnership and corporate transactions because they are separate economic entities.

 The business entity concept does not always apply to a legal entity. For instance, a parent corporation and its subsidiaries can issue consolidated financial statements without contradicting the economic entity principle. A single company can also segregate business operations by department if the definition of "entity" is deemed to be within a company.

This business separation is useful for financial statement users. They can differentiate between the actual company activity and the ownership involvement. In other words, an investor can see if the business has good cash flow from it's profitable operations or because the owner keeps funding the business with owner contributions.


- Mike, a partner in Big House Realty, LLC, often uses his company credit card for personal expenses like dry cleaning and new clothes. He insists that these are business expenses because he must wear new clothes in order to show houses. Unfortunately, these are not business expenses. Clothing is a personal expense and can't be recorded in the company financial statements. This would violate the business entity concept. Instead, these transactions should be accounted for as an owner withdrawal.

- Assume Bob, a local landscaping business owner, decides to branch out and buy another existing business: a concrete company. This way his concrete company can pour footings and walkways and his landscaping business can landscape around them. Since Bob owns both companies personally, he thinks that he can combine both companies accounting records into one Quickbooks file. According to the business entity concept, both of these companies are separate entities and must be accounted for separately even though Bob is the owner of both companies. If Bob's landscaping company had bought the concrete company, both companies would have merged and could be reported together.

- Jim, an owner of a pizza shop, decides to buy a new delivery car. Since the company was low on cash, Jim decided to pay for the car himself out of his personal bank account. Jim intends to add the car to the balance sheet of the pizza shop. The economic entity principle requires Jim and his company to keep activities separated, so the car must remain a personal vehicle unless Jim contributes it to the company or the company buys it from Jim personally.

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Saturday, 19 July 2014

What is an overdraft?

An overdraft usually refers to a checking account where the amount of checks presented to the bank for payment exceeds the amount on deposit. When this occurs we say that the checking account customer has overdrawn its account. The overdraft means that the bank's records indicate a negative checking account balance.

A checking account overdraft will likely result in bank fees for either 1) returning the checks to the endorser or payee so that the account balance will not remain negative, or 2) not returning the checks and allowing the checking account balance to remain negative. If checks are returned, they are often noted as being returned for insufficient funds or not sufficient funds (NSF). The bank of the check endorser is also likely to charge its customer a fee for processing the returned checks.

Many companies write checks for more than the amount on deposit in their checking accounts but may not experience a bank overdraft. The reason is the time delay between writing checks and having them clear the checking account on which they are drawn. Taking advantage of this time delay and not having an overdraft is referred to as playing the float.

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Thursday, 17 July 2014

Can a fully depreciated asset be revalued?

No. A fully depreciated asset cannot be revalued because of accounting's cost principle, matching principle, and going concern assumption.

For instance, let's assume that a company purchased a building 30 years ago at a cost of $600,000. The company then depreciated the building at a rate of $20,000 per year for 30 years. Today the building continues to be used by the company and it plans to continue using it for many more years. The company's current balance sheet will report the building at its cost of $600,000 minus its accumulated depreciation of $600,000. In other words, the building will be reported at its book value of $0.

 The cost principle prevents the company from recording and reporting more than its actual cost of $600,000. The matching principle requires that only the actual cost of $600,000 can be allocated or matched to the years in which the company benefits from the use of the building. Lastly, the company is assumed to be a going concern and therefore it is not liquidating. Hence the amount that the company would receive if it sold the building is not appropriate for its financial statements.

Even if the building's current value is estimated to be $2 million, the financial statements must report the actual cost and the depreciation based on that cost—even if this means reporting a book value of $0. It also means there will be no additional depreciation expense reported after the $600,000 of actual cost has been reported as depreciation expense.

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Wednesday, 16 July 2014

What is accrued rent?

Accrued rent could be the rent that a landlord has earned but has not been received from the tenant. Under the accrual method of accounting this would be reported by the landlord on the income statement as Rent Revenue or Accrued Rent Revenue and on the balance sheet as the asset Rent Receivable.

Accrued rent could also refer to the rent expense that the tenant has incurred but has not yet paid the landlord. Under the accrual method of accounting the tenant would report the accrued rent as Rent Expense on its income statement and on its balance sheet as the liability Accrued Expenses or Rent Payable.

If the rent is to be paid at the beginning of each month, there would be accrued rent only if the tenant fails to pay the rent when it was due.

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Tuesday, 15 July 2014

The Result Date and Time of the Common Proficiency Test (CPT) June, 2014

                                [Set up by an Act of Parliament]

July 11, 2014


The result of the Common Proficiency Test (CPT) held in June, 2014 is likely to be declared on Wednesday, the 16th July, 2014 around 4.00 P.M. and the same as well as the merit list (candidates securing a minimum of 60% and above marks and upto the maximum of 10th Rank in the case of Common Proficiency Test and in accordance with the decision of the Examination Committee) on all India basis will be available on the following website:

Arrangements have also been made for the students of Common Proficiency Test (CPT) desirous of having results on their e-mail addresses to register their requests at the above website, i.e., from 11th July, 2014. All those registering their requests will be provided their results through e-mail on the e-mail addresses registered as above immediately after the declaration of the result.

In addition to above, it may be noted that for accessing the result at the above website i.e. the student shall have to enter his registration no. and PIN no. alongwith his roll number.

Further, facilities have been made for students of Common Proficiency Test (CPT) held in June, 2014 desirous of knowing their results with marks on SMS. The service will be available through India Times.

For getting results through SMS students should type:

i) for Common Proficiency Test result the following

CACPT(Space)XXXXXX (Where XXXXXX is the six digit Common Proficiency Test roll number of the candidate

e.g. CACPT 000171

and send the message to:

58888 - for all mobile services - India Times


If inventory is understated at the end of the year, what is the effect on net income?

If inventory is understated at the end of the year, the net income for the year is also understated.

Here's a brief explanation. If a company has a cost of goods available of $100,000 and it assigns too little of that cost to inventory, then too much of that cost will appear on the income statement as the cost of goods sold. Too much cost on the income statement will mean too little net income.

Another way to view this is through the accounting equation, Assets = Liabilities + Owner's Equity. If you assign too little of the cost of goods available to Assets, then the amount of Owner's Equity will be too little—caused by net income being too little.

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Monday, 14 July 2014

Which accounts are debited in the closing entries?

The closing entry or entries at the end of the accounting year will include

1) a debit to each revenue account that has a credit balance,
 2) a debit to each gain account, and
3) a debit to each contra expense account.

The amount of each debit entered into an account will be the amount of each account's credit balance.

The closing entry or entries will also include

4) a credit to each expense account that has a debit balance,
5) a credit to each loss account, and
6) a credit to each contra revenue account such as sales returns and allowances.

The amount of each credit entered will be the amount of the debit balance in each account.

If the debits to the revenue, gain, and contra expense accounts have a total that is greater than the closing entry credits to the expense, loss, and contra revenue accounts, the corporation had a positive net income. The net income amount will be credited to Retained Earnings, either directly or through an Income Summary account.

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Let's illustrate this with some numbers. Assume that the revenue, gain, and contra expense accounts had credit balances totaling $600,000; and the expense, loss, and contra revenue accounts had debit balances that totaled $530,000. This will require closing entries resulting in $600,000 of debit amounts, $530,000 of credit amounts, and a $70,000 credit to Retained Earnings. If the expenses and losses were greater than the revenues and gains, there will be a debit to Retained Earnings.

The purpose of the closing entries is to end up with a zero balance in every temporary account before starting the next accounting year.