Asset and liability basics


A

archimail

By: Mansi gupta

Knowledge of accounts can make life much easy. If you are to invest in
a new business or joining your forefather's business, planning to
take some loan, looking for job in any marketing company, desire to be
the manager of a multinational company or have the onus to manage your
own assets and liabilities, knowing some basics of accounts becomes
mandatory.


Broadly, accounting is bifurcated into two categories-

Cash Bases Accounting

Accrual Accounting


The Cash Based accounting pertains to the management of an
individual's personal monetary transactions. In this case, he keeps a
track of the money he withdrew, deposited, gave or received from
someone etc. This accounting comes to life when actual cash
transactions take place.

The Accrual Accounting requires an accountant who notes the
transactions even if no money has been actually exchanged. This method
works on the principle of comparing or seeing the ratio of the expenses
to expenditure. If the expenditure is more, you need to cut down your
luxuries, if not then it's always good to have some savings for
future. This type of accounting tells you the amount that you owed;
this might not match with the figure of your bank balance.


In the language of accounting there are several key terms that one
needs to be familiar with. Some of the crucial ones are discussed
below-

The Assets- the assets are generally those possessions of an individual
that have a good market value or are quite valuable. Assets are mainly
classified into three types-
Current Asset- the cash is the most basic asset of any individual. The
money that is being held in accounts like the checking and savings
accounts is also included in the cash. Also inclusive are the
marketable securities in the form of bonds, stocks, shares etc. The
money lent or payments due from clients, even form a part of it.

Fixed Asset- comprises of all the tangible valuable things like
property, machines, equipments, land and the like that are not meant to
be sold.


Intangible Asset- incorporates all the untouchable things like
copyrights, patents, trademarks etc. that have tremendous monetary
significance.


The law of opposites governs the nature; where there are assets, there
will be liabilities. These are the debts that you have to pay back to
your creditors. This can be done through giving cash or any other asset
like jewelry, some other goods etc. Liabilities again are of two kinds-

1. The Current Liabilities- the liabilities that are to be paid back
within a certain time limit and most often through your current assets.
These include the accounts payable i.e. type of bill that you have to
monthly, the Notes Payable-loans taken from banks meant to be repaid
within 30 days and the Accrued Expenses- the compulsory expenses like
taxes, wages, interests etc. where the bills are not received but the
balances of each must be repaid.

2. Long Term Liabilities- those debts that can be repaid at ease for
the tenure is more then a month.



The Financial Capital- is the economic capital. It is any liquid medium
or merchandise that stands for wealth or other styles or capital. There
are four ways to manage and display the financial capital. First, this
capital is needed when a contract is made with any sort of capital
asset. The financial instruments work in the form of currency in case
of sale, purchase or trade of goods i.e. the medium exchanges. Second,
it works as a settled medium or mode like gold for the
Standard of Deferred Payment. Third, The Unit of Account has a market
value attached to it which in turn varies with the economy of the
country. Fourth, The Source of Value is concerned with financial
capital that needs to be saved and recovered. It is a collection of
things like gold, real estate, collectibles etc.


Petty Cash is an important factor in business. It is the smallest
account within a business setting or the cash in bills and coinage
required to pay little expenses.

Types of Business- there are several kinds of business one should be
aware of like


Sole proprietorship- where a single individual who starts the business
owns it too.

Partnerships- the companies or businesses started by two or more
persons where they conjointly own it.


Corporations- involve lot many shareholders or investors who are
responsible in taking decisions for the company.

Limited Liability Companies- can be said to be sisters of corporations.
Here the business members are not under a legal obligation to pay the
debts if the business fails.



Payrolls- the term payroll designates the manner in which you will be
paying the employees of your company and even yourself. Many
multinational companies cater to payroll service provider companies
that do the work quite efficiently.


These are some of the broad guidelines that will help you grasp the
basics of accounting. It is essential to have some such wisdom for
accounts as it is fruitful in all walks of life.


About the author:
Mansi gupta writes about asset and liability Learn more at
http://www.assetsandliabilitiesbook.com


Circulated by Article Emporium

Plese visit -

http://www.informationoutlet.net/category219.html

For many more FREE accounting and finance tips.
 
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N

New Cassandra

Want to tell us how to suck eggs next?


By: Mansi gupta

Knowledge of accounts can make life much easy. If you are to invest in
a new business or joining your forefather's business, planning to
take some loan, looking for job in any marketing company, desire to be
the manager of a multinational company or have the onus to manage your
own assets and liabilities, knowing some basics of accounts becomes
mandatory.


Broadly, accounting is bifurcated into two categories-

Cash Bases Accounting

Accrual Accounting


The Cash Based accounting pertains to the management of an
individual's personal monetary transactions. In this case, he keeps a
track of the money he withdrew, deposited, gave or received from
someone etc. This accounting comes to life when actual cash
transactions take place.

The Accrual Accounting requires an accountant who notes the
transactions even if no money has been actually exchanged. This method
works on the principle of comparing or seeing the ratio of the expenses
to expenditure. If the expenditure is more, you need to cut down your
luxuries, if not then it's always good to have some savings for
future. This type of accounting tells you the amount that you owed;
this might not match with the figure of your bank balance.


In the language of accounting there are several key terms that one
needs to be familiar with. Some of the crucial ones are discussed
below-

The Assets- the assets are generally those possessions of an individual
that have a good market value or are quite valuable. Assets are mainly
classified into three types-
Current Asset- the cash is the most basic asset of any individual. The
money that is being held in accounts like the checking and savings
accounts is also included in the cash. Also inclusive are the
marketable securities in the form of bonds, stocks, shares etc. The
money lent or payments due from clients, even form a part of it.

Fixed Asset- comprises of all the tangible valuable things like
property, machines, equipments, land and the like that are not meant to
be sold.


Intangible Asset- incorporates all the untouchable things like
copyrights, patents, trademarks etc. that have tremendous monetary
significance.


The law of opposites governs the nature; where there are assets, there
will be liabilities. These are the debts that you have to pay back to
your creditors. This can be done through giving cash or any other asset
like jewelry, some other goods etc. Liabilities again are of two kinds-

1. The Current Liabilities- the liabilities that are to be paid back
within a certain time limit and most often through your current assets.
These include the accounts payable i.e. type of bill that you have to
monthly, the Notes Payable-loans taken from banks meant to be repaid
within 30 days and the Accrued Expenses- the compulsory expenses like
taxes, wages, interests etc. where the bills are not received but the
balances of each must be repaid.

2. Long Term Liabilities- those debts that can be repaid at ease for
the tenure is more then a month.



The Financial Capital- is the economic capital. It is any liquid medium
or merchandise that stands for wealth or other styles or capital. There
are four ways to manage and display the financial capital. First, this
capital is needed when a contract is made with any sort of capital
asset. The financial instruments work in the form of currency in case
of sale, purchase or trade of goods i.e. the medium exchanges. Second,
it works as a settled medium or mode like gold for the
Standard of Deferred Payment. Third, The Unit of Account has a market
value attached to it which in turn varies with the economy of the
country. Fourth, The Source of Value is concerned with financial
capital that needs to be saved and recovered. It is a collection of
things like gold, real estate, collectibles etc.


Petty Cash is an important factor in business. It is the smallest
account within a business setting or the cash in bills and coinage
required to pay little expenses.

Types of Business- there are several kinds of business one should be
aware of like


Sole proprietorship- where a single individual who starts the business
owns it too.

Partnerships- the companies or businesses started by two or more
persons where they conjointly own it.


Corporations- involve lot many shareholders or investors who are
responsible in taking decisions for the company.

Limited Liability Companies- can be said to be sisters of corporations.
Here the business members are not under a legal obligation to pay the
debts if the business fails.



Payrolls- the term payroll designates the manner in which you will be
paying the employees of your company and even yourself. Many
multinational companies cater to payroll service provider companies
that do the work quite efficiently.


These are some of the broad guidelines that will help you grasp the
basics of accounting. It is essential to have some such wisdom for
accounts as it is fruitful in all walks of life.


About the author:
Mansi gupta writes about asset and liability Learn more at
http://www.assetsandliabilitiesbook.com


Circulated by Article Emporium

Plese visit -

http://www.informationoutlet.net/category219.html

For many more FREE accounting and finance tips.
 
M

mrs. eliza humperdink

pray tell, with all these formidable terms, why does book value not
reflect how muhc a firm is actually worth?
 
H

Holly J. Sommer

mrs. eliza humperdink said:
pray tell, with all these formidable terms, why does book value not
reflect how muhc a firm is actually worth?
Because there are intangibles involved, and "worth" is a relative term.
There is a "formidable" catch-all that helps place a value on a firm at
the time it matters (acquisition): goodwill.
 
S

SD

Because there are intangibles involved, and "worth" is a relative term.
There is a "formidable" catch-all that helps place a value on a firm at
the time it matters (acquisition): goodwill.
Just like there is a blue book value for car. You may get more then
blue book if the car is in really good shape. Same with a company as
shown by reviewing yearly balance, income, and cash flow statements to
determine the health of a company and its future prospects.
 
M

mrs. eliza humperdink

since book value is off so much from the actual economic value of the
firm, we can only surmise that earnings must be equally way off. with
all these serious errors in accounting, it is laughable that
accountants are recording their numbers to the penny when a million
dollar intangible is not even recorded.
 
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M

mrs. eliza humperdink

at least blue book is usually within a factor of 2 of being correct.

Often, book value could be off by a factor of 4 or more, since
market-to-book could be higher than 5 for some publicly traded
companies.
 
H

Holly J. Sommer

mrs. eliza humperdink said:
since book value is off so much from the actual economic value of the
firm, we can only surmise that earnings must be equally way off. with
all these serious errors in accounting, it is laughable that
accountants are recording their numbers to the penny when a million
dollar intangible is not even recorded.
I can't remember the last time I went through even an academic exercise
that involved recording things to a penny. How do you know book value is
off, and how do you determine economic value, in order to compare it to
book value? Keep in mind, economic value includes opportunity costs,
which are... well, somewhere between WAG and "perhaps." Earnings are
pretty easy to quantify, so that has almost no bearing on whatever it is
you seem to be attempting to discuss.
 
M

mrs. eliza humperdink

How do you know book value is off, and how do you determine economic value, in order to compare it to book value?

The economic value of equity book value is how much shareholders are
willing to pay for the common shares. So it's easy to know the
economic value of equity for any publicly traded company -- it's just
the market cap. Duh!

FYI, for most public companies, the market cap is about 2-3 times the
book value of equity, which means book value is sorely understated
relative to economic value.
 
P

Pete Schult

How do you know book value is off, and how do you determine economic value,
in order to compare it to book value?
The economic value of equity book value is how much shareholders are
willing to pay for the common shares. So it's easy to know the
economic value of equity for any publicly traded company -- it's just
the market cap. Duh![/QUOTE]

Actually, this isn't quite right. The value of the company is the amount
you could get for _all_ the shares, not just the number that traded last
on the exchange. Some people think their shares are worth more than the
exchange price which is part of why they hold and don't sell. Generally
someone attempting a takeover must pay more than the exchange price per
share.

--Pete Schult
 
M

mrs. eliza humperdink

well then, if people are willing to pay a premium over the exchange
price, then book value is even more wrong!
 
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H

Holly J. Sommer

mrs. eliza humperdink said:
well then, if people are willing to pay a premium over the exchange
price, then book value is even more wrong!
Book value... you're talking about balance sheet, right? Well, that does
include what's paid for shares, both par and APIC. So, I'd say it
approximates your definition of economic value pretty closely.

However, your version of "economic" value is sorely narrow. Like I said,
the difference between accounting value and economic value is the
non-quantifiable stuff, like opportunity costs.
 
M

mrs. eliza humperdink

Holly, there is no need to debate. You are dead wrong. Just go look
up the book value of any large firm, like Wal-mart and compare it
against the market value of Wal-mart's common shareholder's equity.
You will find that the market value of wal-mart's equity shares is FIVE
times bigger than the book value of its common shares (including APIC).
We're not talking about a 25% or 50% or even 100% difference here.
We're talking a 500% difference!!
 
H

Holly J. Sommer

mrs. eliza humperdink said:
Holly, there is no need to debate. You are dead wrong. Just go look
up the book value of any large firm, like Wal-mart and compare it
against the market value of Wal-mart's common shareholder's equity.
You will find that the market value of wal-mart's equity shares is FIVE
times bigger than the book value of its common shares (including APIC).
We're not talking about a 25% or 50% or even 100% difference here.
We're talking a 500% difference!!
BUT, look at the book value of, say Enron versus its market value. The
assets certainly aren't worthless anymore, but its market cap is crap.
Market cap is a fickle creature. FAR moreso than book value. Which would
you rather "rely" on?

You began by discussing economic versus accounting values, and wound up
on market cap. That's a pretty big shift in debate topics. More than 25
or 50% shift, I'd say ;)

-Holly
 
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M

mrs. eliza humperdink

market cap may be fickle and noisy, and frequently inflated. but book
value is ALWAYS wrong. book value is a completely WORTHLESS measure.
 

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