Answer to Question #114403 in Accounting for Nikki Concepcion

Question

Provide some examples of items that would be adjusted directly against equity, rather than being included as part of profit or loss.

Answer 1

Accounting theory is considered a notion that uses speculations, methodologies and strategies in studying financial reporting as well as how financial reporting principles are applied in the accounting industry. Its serves as a foundation for the understanding of financial reporting taking into consideration how organizations channel their financial statements using the appropriate strategies (Jones, 2015). On the other hand, equity is the basic risk capital of an enterprise which has no guaranteed return and no timetable for the repayment of the capital investment. Therefore, equity finances can be most confidently invested in long-term assets as seen by Riahi-Belkaoui (2004). However, entrepreneurs generally have a notion that equity funds can be exposed to the greatest potential risks.

Items that can be adjusted against equity include net assets by making changes in both capital and performance. It is important to note that net assets are the total assets less total liabilities of a firm. Changes to capital are related to the introduction and return of capital to shareholders through the issuance of new shares, paying out of dividends to shareholders and buy-back of own shares from the market (Godfrey, Hodgson, Tarca, Hamilton and Holmes, 2010). A good example includes the following: If an organization’s owners invest additional cash in the firm, the money will increase the company's current assets with no increase in current liabilities. As a result, working capital will increase. Performance changes come from the activities of the company and not from the shareholders. These can be classified as primary performance or main revenue-producing activities which include gains related to primary performance such as the sale of property, plant or equipment (Bhattacharyya,2006). An example is Google that makes use of people analytics to navigate their people management practices. It has taken a scientific approach that aims at improving employee retention, workplace collaboration and diversity. As a result, the organisation is assured that everything is working in properly for its prosperity.

In conclusion, it should be noted that an accounting theory is a notion that uses speculations, methodologies and strategies in studying financial reporting. Equity offers no guarantee or timeline for its repayment since it is a basic risk capital of a company. Instead of companies concentrating on equity, they can do some adjustments in the net assets. These include capital and performance changes which ensure that they are not included in either profit or loss of the company.

References

Bhattacharyya, A. K. (2006). Indian Accounting Standards: Practices, Comparisons, and Interpretations. Tata McGraw-Hill.

Godfrey, J., Hodgson, A., Tarca, A., Hamilton, J., & Holmes, S. (2010). Accounting theory.

Jones, S. (Ed.). (2015). The Routledge companion to financial accounting theory. Routledge.

Riahi-Belkaoui, A. (2004). Accounting theory. Cengage Learning EMEA.