The two-sided nature of a business entity and its activities


In a nutshell, double-entry accounting means two-sided accounting. Both the assets of a business and the sources of and claims on its assets are accounted for. Suppose that a business reports £10 million in total assets. That means the total sources of and claims on its assets are also reported at a total of £10 million. Each asset source has a different type of claim. Some liabilities charge interest and some don’t; some have to be paid soon, and other loans to the business may not come due for five or ten years. Owners’ equity may be mainly from capital invested by the owners and very little from retained earnings. Or the mix of owners’ equity sources may be just the reverse.Check the site Filmy god

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Dates of the liabilities

The sources of and claims on the assets of a business fall into two broad categories: liabilities and owners’ equity. With a few technical exceptions that we won’t go into, the amount of liabilities that the business reports are the amounts that will be paid to the creditors at the maturity dates of the liabilities. In other words, the amounts of liabilities are definite amounts to be paid at certain future dates.

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In contrast, the amounts reported for owners’ equity are historical amounts, based on how much capital the owners invested in the business in the past and how much profit the business has recorded. Owners’ equity, unlike the liabilities of a business, has no maturity date at which time the money has to be returned to the owners. When looking at the amount of owners’ equity reported in a balance sheet, don’t think that this amount could be taken out of the business. Owners’ equity is tied up in the business indefinitely.

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