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Alternative views of accountancy principles

5 August, 2015 - 14:41

Accountancy may have been an elaboration of an accidental discovery, much like the tale Archimedes and the bathtub discovery of water volume displacement equals floating object volume. Some idly rich mathematicians found that assets equals liabilities plus equities.

The official story is that accountancy was first systematically expounded by Luca Pacioli in the Renaissance, who in a section of a mathematical book he is generally thought to have written, describes the Venetian method, or double entry accounting.

Double entry accounting maintains the assertion or constraint that assets = liabilities + equity. It gives rise to the concept of periodic trial balances, where the equation is checked at the end of a period. There is also a concept of closing entries, where in addition to the more permanent account types of asset accounts, liability accounts, and equity accounts, there are temporary operational income accounts and expense accounts, which are updated ideally throughout a period of operation, or as a minimum, before the end of a reporting period with journalised historical data, and closed off , i.e. the result of income minus expenses is added to equity , and the temporary income and expense accounts made to have zero balances for the next reporting period.

There is also the concept of accrual vs cash accounting : cash accounting requires an entry whenever cash is exchanged , so doesn't record borrowings or loans , and therefore isn't very sufficient , whereas accrual accounting makes a recording whenever an enforceable or highly probable obligation arises for the future movement of cash to an entity ( receivables, a subtype of asset ), or out of an entity ( liabilities) occur.

Because there are transactions that are accrued , they record an obligation, later transactions are needed to record when obligations are met. Some obligations gradually are met over time, so are calculated according to the amount of time that has expired since the last calculation was made and recorded , and these fall under the category of adjusting entries. Examples of end of period adjusting entries include the recording depreciation, usage of prepaid expenses such as insurance, rent , the performance of services paid in advance by customers ( unearned revenue fulfillment ). End of period adjusting entries are made before the closing entries that closes off temporary income and expense accounts and updates equity.

There are other uses of adjusting entries, such as in adjusting entries for subsequent periods. These occur because end of period deadlines may be straddled by the periods for which prepayments exist, or periods for which current liabilities fall due, and because these are only partially accounted for in the end of period adjusting entries.