The entity concept

Well it's Monday of Week 2 and I'm already behind. There are a lot of little tasks to complete in this course so I know things will get away from me if I don't knuckle down. With all that in mind, I'm writing my first blog today while eating lunch at my desk. I read Chapter 1 of the Study Guide over the weekend. Working full-time, the weekend and my lunch breaks are where most of the study action takes place.

Reflecting on the chapter over a sandwich I found the notion of proprietorship and the entity concept of a firm very interesting. I've never given much thought to how large companies manage their finances. To be honest I can hardly manage my own. So it was difficult to wrap my brain around why someone would keep journals and ledgers that both represent the same set of figures but in different formats and then I had my first 'ah ha!' moment.

The two separate records are important for a number of reasons but by relating my learning back to communications I realized that one of these reasons is that they are prepared for two separate audiences.The shareholders of a firm are more likely to be interested in the bigger picture - the equity and how this is projected. The day-to-day transactions of a firm that may be interesting to a business manager do little to project the future of a firm unless they are represented as:

Assets: Assets are those aspects of a firm we expect will provide future economic benefits to a firm; that is we expect will add value to a firm in the future.

Liabilities: Liabilities are those aspects of a firm we expect will use up future economic benefits of a firm; that is we expect will take away value from a firm in the future.

Equity is often referred to as a ‘left over’ concept: what is ‘left over’ for the owners of a firm after liabilities are deducted from assets.

Assets and liabilities represent the value of a firm. Equity represents the value of the interest of its owners in the firm.

Revenue are additions to equity as a result of increases to assets or reductions in liabilities of a firm (but not those changes to assets and liabilities that relate to transactions between a firm and its equity owners).

As the Study Guide explains -

"Accounting is a model, or simplification, of each firm’s economic and business realities. It is an abstraction of all the complex activities of a firm."

I don't know about you but understanding why something is done helps me to process and memorize the way it is done. Accounting is another form of reporting, of looking at the big picture, looking to the future, and presenting this information to your boss with their interests in mind. 

Now back to my sandwich...