Determining the type of entry to make in a given financial statement is a key factor that one should make when preparing financial statements (Hoyle et al., 2015). In the case of the balance sheet, one has to understand the underlying principal behind the basic accounting equation. The principle states that for every credit entry made, a corresponding debit entry has to be made (Gregory et al., 2014). In the case provided, the accounting concept to be used in the case where the owner withdraws cost of a certain value, the economic concept where goods withdrawn are recorded as withdrawals and not part of expenses (Weygandt et al., 2015). This is because the value of the goods will be withdrawn from the owners capital by debiting capital amount and crediting the balance sheet on the inventory account.
The basic accounting equation states that Assets is the sum of capitals and liabilities in any given business. This is represented by the equation below:
Total Assets= Capital + Total Liabilities
Therefore, Capital= Total Assets Total Liabilities
Implying that Drawings in this case will be: (4000-1250) =2750
Understanding accounting requires having a basic understanding of some concepts in accounts and accounting practices. Some of the basic concepts that define the practice and application of accounts include concepts such as consistency concept, accrual concept, conservatism concept, going concern concept, materiality concept and economic entity concept (Weil et al., 2013). Despite the fact that these concepts are related, each concept has its unique definition and application in accounts as will be seen below:
Consistency concept: The consistency concept refers to the adherence to a specific accounting method chosen by the business (Edmonds et al., 2015). Once the business opts for that policy, it has to stick to it as a way of consistency hence the name. A good example of this concept in accounting practice is in the case where a straight-line depreciation method is used in a given business. For instance, a business may opt to use a 25% straight-line depreciation factor for its vehicles over a given life-time.
Accrual concept: The accrual concepts refers to an accounting concept where the companys revenues are only recognized when earned and expenses recognized when the companys assets are consumed (Stittle and Wearing, 2008). According to this concept, the business will only categorize expenditure and sales in a different format to that when paying and receiving cash. A good example of this concept in play is when a company records total sales of $900000 and receives only $400000 in cash form, and finally reports or records total sales as being $900000 regardless of the amount received in cash.
Conservatism concept: The conservatism concept operates on the basis that revenues earned by a given firm will only be recognized when the firm ascertains that they should be recognized. The same principle of applies to expenses, only when the firm ascertains that there is a higher possibility of incurring them.
Going concern concept: The going concern concept is based on the concept that the company prepares its financial statement with a vision of its foreseeable future in place (Bilgin and Danis, 2016). This implies that the company may defer its collection of receivables and payment of its liabilities in the future. For instance, a company may opt to record uncollected cash amounting to $45000 as debtors in its next financial period, an indication of its foreseeable future.
Materiality concept: The materiality concept focuses on the disregard for trivial matters and reporting or recording of matters that have great impact on the firm (Vallabhaneni, 2013). A good illustration of this concept is when a company fails to report an amount of debts amounting to $5 which were not recorded correctly.
Economic entity concept: The economic entity concept is based on the assumption that the firm and the owner of the business are different entities (Needles et al., 2013). Therefore, they must be treated differently. An example of this will be the cash drawings of the business owner being treated as drawings and not expenses incurred by the business.
The treatment of outstanding expenses accrued will have an effect on the income statement. They will be debited in the P and L account whereas the outstanding expenses will be included in the balance sheet as a creditor by being credited. Also, the prepaid expenses will be depicted in the financial statements by being debited as debtors in the balance sheet and credited in the P and L accounts, which will be deducted from the total expenses hence leading to a complete contra entry in the accounts.
The following financial statement shows the effects of transactions and how they reflect the basic accounting equation: Assets= Capital + Liabilities. The effects of each transaction have been recorded for each day and its impact on the assets, capital and liabilities side:
Assets Capital Liabilities
Cash 10,500 + A/c receivables 1,500+ Office supplies 750 + bridal dress 63,000 Capital 62,250 13,500
75750 62250 13,500
2-July Cash 3,000 + A/c receivables 1,500+ Office supplies 750 + bridal dress 70500 62250 13,500
75750 62250 13,500
4-July Cash 3,000 + A/c receivables 1,500+ Office supplies 750 + bridal dress 70500 62250 - 22500 13500+Wedding jewelry hire charges 22,500
75750 39750 36,000
6-July Cash 3,000 - rent 1,500 + A/c receivables 1,500+ Office supplies 750 + bridal dress 70500 39750 36,000
74250 38250 36,000
10-July Cash 3,000 - rent 1,500 - salary 1,200 + A/c receivables 1,500+ Office supplies 750 + bridal dress 70500 73050 37050 36,000
11-July Cash 3,000 - rent 1,500 - salary 1,200 + collection 600 + A/c receivables 1,500+ Office supplies 750 + bridal dress 70500 73650 37650 36,000
14-July Cash 3,000 - rent 1,500 - salary 1,200 - supplies 300 + collection 600 + A/c receivables 1,500+ Office supplies 750+300 + bridal dress 70500 73650 37650 36,000
15-July Cash 3,000 - rent 1,500 - salary 1,200 - supplies 300 + collection 600 + A/c receivables 1,500+ Office supplies 750+300 + bridal dress 70500 + hair accessories 3,00076650 37650 39,000
20-July Cash 3,000 - rent 1,500 - salary 1,200 - supplies 300 + collection 600 + A/c receivables 1,500 - supplies payment 1500+ Office supplies 750+300 + bridal dress 70500 + hair accessories 3,000 75150 37650 37,500
22-July Cash 3,000 - rent 1,500 - salary 1,200 - supplies 300 + collection 600 + A/c receivables 1,500 - supplies payment 1500 - electricity bill 1500 + Office supplies 750+300 + bridal dress 70500 + hair accessories 3,000 73650 36150 37,500
25-July Cash 3,000 - rent 1,500 - salary 1,200 - supplies 300 + collection 600 + A/c receivables 1,500 - supplies payment 1500 - electricity bill 1500 + Office supplies 750+300 + bridal dress - payables 13500+ 70500 + hair accessories 3,000 60150 36150 24,000
30-July Cash 3,000 - rent 1,500 - salary 1,200 - supplies 300 + collection 600 + A/c receivables 1,500 - supplies payment 1500 - electricity bill 1500 + Office supplies 750+300 + bridal dress - payables 13500+ 70500 + hair accessories 3,000 - 6,000 54150 30150 24,000
The basic accounting equation is illustrated in the above transactions and their effects in each given day as shown in the table above.
The following table shows the journal entries for Marble Limited accounts for the period ended on 30th June 2016. The effects of the transactions are noted in the debit or credit side and how it affects the different accounts by the firm as at that period. Caution is considered in each transaction to ensure that the rule of contra entry (for every credit entry, there is a corresponding debit entry) to avoid misrepresentation of financial transactions and their effects in a given firm.
Marble Limited Journal accounts for the period ended 30th June 2016
Date Journal Entry Description DR CR
1-Jun-16 Commenced business with 10,000 Bank 10,000 Capital 10,000
3-Jun-16 Purchase of furniture worth 15,000 Furniture 1500 Bank 1,500
5-Jun-16 Purchase of goods worth 3,000 from stone limited on credit Inventory 3,000 Stone 3,000
10-Jun-16 sales on credit to Iron limited Iron limited 2,500 Sales 2,500
15-Jun-16 Received of cash from iron limited 2,500 Bank 2,500 Iron limited 2,500
20-Jun-16 Payment to stone limited Stone limited 3,000 Bank 3,000
22-Jun-16 Sales on cash Bank 800 Inventory 800
25-Jun-16 Purchase of office equipment office equipment 1100 Bank 1,000
28-Jun-16 Payment of wages wages 400 Bank 400
30-Jun-16 Withdrawal from bank 300 Cash in hand 300 Bank 300
Marble Limited Trial balance for the period ended 30th June 2016
Details DR CR
Bendrey, M., Hussey, R. and West, C. 2004. Essentials of financial accounting in business. London: Thomson, p.41.
Bilgin, M. and Danis, H. 2016. Entrepreneurship, business and economics. [S.l.]: Springer, p.118.
Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts. McGraw-Hill Education.
Gregory, B., Uys, P. and Gregory, S., 2014. The role of instant feedback in improving student understanding of basic accounting concepts. Rhetoric and Reality: Critical perspectives on educational technology. Proceedings ascilite Dunedin, pp.634-637.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.
Stittle, J. and Wearing, R. 2008. Financial accounting. Los Angeles: Sage Publications, p.25.
Vallabhaneni, S. 2013. Wiley cia exam review 2013 focus notes. Hoboken, N.J.: Wiley, p.560.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
If you are the original author of this essay and no longer wish to have it published on the thesishelpers.org website, please click below to request its removal:
- DQI Microeconomics: Impact of Currency Fluctuations. Essay Example.
- Research Paper Sample: Financial Crisis in the Clubs Under the Premier League
- Contemporary Issues in Financial Management: Aviva Insurance Company. Essay Example.
- Financial Analysis - Problem Solving Example
- The World Bank on Financing Development Through Microfinance in Contemporary Congo - Research Proposal Example
- Comparison of Costing Systems - Essay Sample
- Deflation: Causes, Effects & U.S. CPI Index