Page 165 - Plant design and economics for chemical engineers

COST AND ASSET ACCOUNTING 139
Statements showing the financial condition of the business concern are
prepared periodically from the ledger accounts. These statements are presented
in the form of balance sheets and income statements. The balance sheet shows
the financial condition of the business at a particular time, while the income
statement is a record of the financial gain or loss of the organization over a
given period of time.

BASIC RELATIONSHIPS IN ACCOUNTING
In the broadest sense, an asset may be defined as anything of value, such as
cash, land, equipment, raw materials, finished products, or any type of property.
At any given instant, a business concern has a certain monetary value because of
its assets. At the same instant, many different persons may have a just claim, or
equity, to ownership of the concern’s assets. Certainly, any creditors would have
a just claim to partial ownership, and the owners of the business would have
some claim to ownership. Under these conditions, a fundamental relationship in
accounting can be written as
Assets = equities (1)

Equities can be divided into two general classes as follows: (1) Proprietor-
ship-the claims of the concern or person who owns the asset; and (2) liabilities
-the claims of anyone other than the owner. The term proprietorship is often
referred to as net worth or simply as ownership or capital. Thus, Eq. (1) can be
written as?

Assets = liabilities + proprietorship (2)

The meaning of this basic equation can be illustrated by the following
simple example. Five students have gone together and purchased a secondhand
automobile worth $1000. Because they did not have the necessary $1000 they
borrowed $400 from one of their parents. Therefore, as far as the students are
concerned, the value of their asset is $1000, their proprietorship is $600, and
their liability is $400.
Equation (2) is the basis for balancing assets against equities at any given
instant. A similar equation can be presented for balancing costs and profits over
any given time period. The total income must be equal to the sum of all costs
and profits, or

Total income = costs + profits (3)

Wquation (2) is sometimes expressed as “Assets = liabilities,” where “liabilities” is synonymous
with “equities.”