Accounting Tips For You

Accounting Principles - The Separate Entity Or Business Entity Concept

The business entity concept holds that a business is a separate entity from its owner or owners, whatever the legal position of the enterprise may be. A business could take several forms, i.e. partnership, sole trader or corporation. These types of business have a certain legal status. For example, sole traders do not have a separate legal status, whereas a corporation has a separate legal status from the owner. That makes the corporation a separate legal entity.

The business entity concept is a principle that applies to all types of organisation. It is so fundamental, that it is one premise for the accounting equation: Assets = Capital + Liabilities. Recall that capital represents the owners’ financial input in the business. It is what the business owes to the business owner, in addition to liabilities from external sources (lenders or suppliers, for example).

The business entity concept is also central to the preparation of financial statements. It, along with key accounting assumptions, governs the preparation of statements of financial position and income statements. One primary aspect of this assumption is that it governs the treatment of transactions by owners, even if the transactions are for personal purposes, as in the example of the sole trader.

Sole traders have one legal identity, that is, the sole trader is the same entity as the business. As a result, the sole trader has unlimited liability. However, the business entity concept has implications for the sole trader. The trader cannot treat business funds as his own piggy bank because of this principle.

If the owner (sole trader) deposits or withdraws money from the business, it is a separate from transaction from his personal account. For example, if the owner withdraws money from the business account for personal use, it is recorded as drawings. Any injection Read the rest of this entry »

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Accounting Terms - Overheads

In accounting, overheads refer to indirect costs that are charged to production and other functions or departments. Indirect costs are those that are not fully attributable to a product, service or department. They apply to materials, wages/labour and expenses. As such, it follows that there are indirect materials, indirect wages and indirect expenses for different functions departments that relate to those categories.

== Production overhead ==

Production overheads are also known as factory overheads. These cover indirect costs that are incurred during the completion of a product or provision of a service. Factory overheads include materials that are too negligible in terms of charges or quantity for cost tracing. For example, if you are using 8 screws that cost 50 cents per screw, that amount might be immaterial in relation to other charges associated with the product manufactured.

The commissions or wages of non-productive workers are also part of production overhead. However, if a supervisor does not actually work on the product, he is productive if his salary/wages are directly traceable to a product, service or department. Indirect expenses are another dimension of production overheads. Examples of those include depreciation of equipment and plant maintenance.

== Administrative overhead ==

In producing a product, an entity will have expenses related to administrative personnel and processing costs-such as stationery. Salaries of office staff and insurance for the business premises are additional overheads that relate to administration.

== Distribution overhead ==

A product or service must reach clients and there are charges attached to packaging and delivering the goods. Distribution overheads deal with aspects of the completed product and do not include transport fees to other plants before the produ Read the rest of this entry »

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Accounting Terms - Overheads

In accounting, overheads refer to indirect costs that are charged to production and other functions or departments. Indirect costs are those that are not fully attributable to a product, service or department. They apply to materials, wages/labour and expenses. As such, it follows that there are indirect materials, indirect wages and indirect expenses for different functions departments that relate to those categories.

== Production overhead ==

Production overheads are also known as factory overheads. These cover indirect costs that are incurred during the completion of a product or provision of a service. Factory overheads include materials that are too negligible in terms of charges or quantity for cost tracing. For example, if you are using 8 screws that cost 50 cents per screw, that amount might be immaterial in relation to other charges associated with the product manufactured.

The commissions or wages of non-productive workers are also part of production overhead. However, if a supervisor does not actually work on the product, he is productive if his salary/wages are directly traceable to a product, service or department. Indirect expenses are another dimension of production overheads. Examples of those include depreciation of equipment and plant maintenance.

== Administrative overhead ==

In producing a product, an entity will have expenses related to administrative personnel and processing costs-such as stationery. Salaries of office staff and insurance for the business premises are additional overheads that relate to administration.

== Distribution overhead ==

A product or service must reach clients and there are charges attached to packaging and delivering the goods. Distribution overheads deal with aspects of the completed product and do not include transport fees to other plants before the produ Read the rest of this entry »

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