In a letter to Treasury’s Financial Crimes Enforcement Network, the AICPA says the additional time will supply all businesses a fair and reasonable time frame to become aware of the new and complex rule.
FAR history - CPA Financial Accounting and Reporting Updated: 2023
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FAR CPA Financial Accounting and Reporting
Within the Blueprints, you will find the following information for each test section:
Content organized by Area, Group and Topic along with score weighting
Sample task statements that represent what you may be asked to do when testing
Skill levels at which tasks are tested
Reference materials that support the sample task statements
Number of item types you must complete (multiple-choice questions, task-based simulations and written communication tasks)
Score weighting of each item type
Content area allocation Weight
I. Conceptual Framework, Standard-Setting and Financial Reporting 25–35%
II. Select Financial Statement Accounts 30–40%
III. Select Transactions 20–30%
IV. State and Local Governments 5–15%
Each test section is delivered in five smaller sections called testlets. Each testlet features different item types (see below) used to test your knowledge and skills. To learn more about how each section is organized, including when you can take a break, review the CPA test structure.
Exam Item Types
You will be tested during the CPA test using three types of test items that appear within specific testlets in each section.
Multiple-Choice Questions (MCQ)
The multiple-choice portions are presented in the first two testlets of each test section.
Task-Based Simulations (TBS)
Task-based simulations are condensed case studies that test accounting knowledge and skills using real life, work-related situations. All task-based simulations are intended to assess knowledge and skills that are appropriate for an entry-level accountant. There are three TBS testlets in the AUD, FAR and REG sections, and two TBS testlets in the BEC section.
Written Communication Tasks
Written communication tasks appear only in the BEC section of the CPA Exam. For each of three written communication tasks, you must read a scenario and then write an appropriate document relating to the scenario. The instructions state what form the document should take (such as a memo or letter) and its focus. Your response should provide the correct information in writing that is clear, complete and professional.
Each of the four test sections is broken down into five smaller sections called testlets. These testlets feature multiple-choice questions (MCQs) and task-based simulations (TBSs). In the case of BEC, you also have to complete three written communication tasks. The number of MCQs and TBSs tested varies depending upon the specific section taken. You will receive at least one research question (research-oriented TBS) in the AUD, FAR and REG sections. To complete them, you will have to search the related authoritative literature and find an appropriate reference.
cpa-exam-sections
Breaks
During each test section, you will be offered a 15-minute break after the first TBS testlet. This is about midway through the section (two hours). You may accept this break and pause the test timer or you may continue testing. To accept the break, click the “Take a Break” button. During this break, you must leave the testing room and follow all Prometric security rules. The test timer will restart when the 15-minute break ends.
In addition to the 15-minute break, you may also take optional breaks after all other testlets but you cannot pause the test timer. The timer will continue to run.
The Financial Accounting and Reporting (FAR) section of the Uniform CPA
Examination (the Exam) assesses the knowledge and skills that a newly licensed
CPA must demonstrate in the financial accounting and reporting frameworks
used by business entities (public and nonpublic), not-for-profit entities and state
and local government entities.
The financial accounting and reporting frameworks that are eligible for
assessment within the FAR section of the test include the standards and
regulations issued by the:
• Financial Accounting Standards Board (FASB)
• U.S. Securities and Exchange Commission (U.S. SEC)
• American Institute of Certified Public Accountants (AICPA)
• Governmental Accounting Standards Board (GASB)
• International Accounting Standards Board (IASB)
A listing of standards and regulations promulgated by these bodies, and other
reference materials that are eligible for assessment in the FAR section of the
Exam are included under References at the conclusion of this introduction.
Content organization and tasks
The FAR section blueprint is organized by content AREA, content GROUP and
content TOPIC. Each group or Topic includes one or more representative TASKS
that a newly licensed CPA may be expected to complete in practice.
Tasks in the FAR section blueprint are representative. The tasks are not
intended to be (nor should they be viewed as) an all-inclusive list of tasks that
may be tested in the FAR section of the Exam. Additionally, it should be noted
that the number of tasks associated with a particular content group or topic
is not indicative of the extent such content group, Topic or related skill level
will be assessed on the Exam. For example, the Topic titled “Notes to financial
statements” in Area I includes two tasks that are intended to encompass the
required disclosures for any Topic in the FASB Accounting Standards Codification,
while the group titled “Leases” in Area III includes eight tasks that are limited
to the accounting requirements in the Leases Topic of the FASB Accounting
Standards Codification. The number of tasks included in the blueprint for this
group and this Topic is not intended to suggest that “Leases” are more significant
to newly licensed CPAs or will be tested more than the “Notes to financial
statements.” Similarly, examples provided within the task statements should not
be viewed as all-inclusive.
Content allocation
The following table summarizes the content areas and the allocation of content
tested in the FAR section of the Exam:
Overview of content areas
Area I of the FAR section blueprint covers FASBs Conceptual Framework, FASBs
standard-setting process and several different financial reporting topics. The
financial reporting Topics include the following:
• General-purpose financial statements applicable to for-profit entities,
not-for-profit entities and employee benefit plans under the FASB Accounting
Standards Codification
• Disclosures specific to public companies including earnings per share
and segment reporting under the FASB Accounting Standards Codification
and the interim, annual and periodic filing requirements for U.S. registrants in
accordance with the rules of the U.S. SEC
• Financial statements prepared under special purpose frameworks as described
in AU-C Section 800 of the Codification of Statements on Auditing Standards
Area II of the FAR section blueprint covers the financial accounting and
reporting requirements in the FASB Accounting Standards Codification that are
applicable to select financial statement accounts.
• To the extent applicable, each group and Topic in the area is eligible for testing
within the context of both for-profit and not-for-profit entities.
– If significant accounting or reporting differences exist between for-profit
and not-for-profit entities for a given group or topic, such differences are in
representative not-for-profit tasks in the blueprint.
Area III of the FAR section blueprint covers the financial accounting and
reporting requirements for select transactions that are applicable to entities
under the FASB Accounting Standards Codification and the IASB standards.
• The testing of content under the IASB standards is limited to a separate group
titled, “Differences between IFRS and U.S. GAAP.”
• To the extent applicable, the remaining groups in the area are eligible for
testing within the context of both for-profit and not-for-profit entities.
– If significant accounting or reporting differences exist between for-profit and
not-for-profit entities, such differences are in representative not-for-profit
tasks in the blueprint.
Area IV of the FAR section blueprint covers GASBs conceptual framework as
well as the financial accounting and reporting requirements for state and local
governments under the GASB standards and interpretations.
Section assumptions
The FAR section of the test includes multiple-choice questions, task-based
simulations and research prompts. When completing questions in the FAR
section of the Exam, candidates should assume that all of the information
provided in each question is material. In addition, candidates should assume
that each question applies to a for-profit business entity reporting under U.S.
GAAP unless otherwise stated in the fact pattern for a question. For example,
questions that apply to not-for-profit entities specify the nature of these entities
as “not-for-profit” or “non-governmental, not-for-profit.” Questions that apply to
IFRS include phrases such as “under IFRS” or “according to IFRS.” Questions
that apply to the state and local governments include phrases such as “local
government,” “state,” “municipality” or “city.”
Skill allocation
The test focuses on testing higher order skills. Based on the nature of
the task, each representative task in the FAR section blueprint is assigned
a skill level. FAR section considerations related to the skill levels are
discussed below.
Skill levels
Evaluation The examination or assessment of problems, and
use of judgment to draw conclusions.
Analysis
The examination and study of the interrelationships
of separate areas in order to identify causes and find
evidence to support inferences.
Application The use or demonstration of knowledge, concepts
or techniques.
Remembering and
Understanding
The perception and comprehension of the
significance of an area utilizing knowledge gained
Remembering and Understanding tasks are in all four areas of the FAR blueprint.
These tasks, such as identifying transactions and financial reporting requirements,
frequently require newly licensed CPAs to demonstrate their comprehension of
accounting concepts and standards. Area IV has the highest concentration of
remembering and understanding tasks.
• Application tasks are in all four areas of the FAR blueprint. These tasks, such as
preparing journal entries and financial statements, frequently require newly licensed
CPAs to use accounting concepts and standards to measure and recognize financial
statement amounts.
• Analysis tasks are in Area I, Area II and Area III of the FAR blueprint. These tasks,
such as reconciling account balances, interpreting agreements and detecting
financial reporting discrepancies, frequently require newly licensed CPAs to
demonstrate a higher level of interpretation. Area I and Area II have the highest
concentration of analysis tasks.
The representative tasks combine both the applicable content knowledge and the
skills required in the context of the work that a newly licensed CPA would reasonably
be expected to perform. The FAR section does not test any content at the Evaluation
skill level as newly licensed CPAs are not expected to demonstrate that level of skill in
regards to the FAR content.
AICPA Accounting history
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FAR
CPA Financial Accounting and Reporting
https://killexams.com/pass4sure/exam-detail/FAR
Question: 154
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992
financial statements. This question represents one of Quo's transactions. List B
represents the general accounting treatment required for these transactions. These
treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting
from the accounting change or error correction in the 1993 financial statements, and do
not restate the 1992 financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial
statements and adjust 1992 beginning retained earnings if the error or change affects a
period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but
do not restate 1992 financial statements.
Item to Be Answered
Quo changed from LIFO to FIFO to account for its finished goods inventory. List B
(Select one)
A. Cumulative effect approach.
B. Retroactive or retrospective restatement approach.
C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. A change in accounting principle should be shown in the retained
earnings statement of the earliest year presented as an adjustment of the beginning
balance. All prior year financial statements are recast.
Question: 155
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies. Quo's 1993 financial statements will be presented in
comparative form with its 1992 financial statements. This question represents one of
Quo's transactions. List A represents possible clarifications of these transactions as: a
change in accounting principle, a change in accounting estimate, a correction of an error
in previously presented financial statements, or neither an accounting change nor an
accounting error.
Item to Be Answered
Quo changed from FIFO to average cost to account for its raw materials and work in
process inventories. List A (Select one)
A. Change in accounting principal.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting error.
Answer: A
Explanation:
Choice "a" is correct. Change in inventory pricing method from FIFO to average cost is a
change in accounting principle.
Question: 156
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies. Quo's 1993 financial statements will be presented in
comparative form with its 1992 financial statements. This question represents one of
Quo's transactions. List B represents the general accounting treatment required for these
transactions. These treatments are: . Cumulative effect approach - Include the
cumulative effect of the adjustment resulting from the accounting change or error
correction in the 1993 financial statements, and do not restate the 1992 financial
statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial
statements and adjust 1992 beginning retained earnings if the error or change affects a
period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but
do not restate 1992 financial statements.
Item to Be Answered
Quo changed from FIFO to average cost to account for its raw materials and work in
process inventories. List B (Select one)
A. Cumulative effect approach.
B. Retroactive or retrospective restatement approach.
C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. A change in accounting principle should be shown in the retained
earnings statement of the earliest year presented as an adjustment of the beginning
balance. All prior year financial statements are recast.
Question: 157
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992
financial statements. This question represents one of Quo's transactions. List A
represents possible clarifications of these transactions as: a change in accounting
principle, a change in accounting estimate, a correction of an error in previously
presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo sells extended service contracts on its products. Because related services are
performed over several years, in 1993 Quo changed from the cash method to the accrual
method of recognizing income from these service contracts.
List A (Select one)
A. Change in accounting principal.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting error.
Answer: C
Explanation:
Choice "c" is correct. Change from the cash method to the accrual method is a correction
of an error in previously presented financial statements.
Question: 158
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992
financial statements. This question represents one of Quo's transactions. List B
represents the general accounting treatment required for these transactions. These
treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting
from the accounting change or error correction in the 1993 financial statements, and do
not restate the 1992 financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial
statements and adjust 1992 beginning retained earnings if the error or change affects a
period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but
do not restate 1992 financial statements. Item to Be Answered
Quo sells extended service contracts on its products. Because related services are
performed over several years, in 1993 Quo changed from the cash method to the accrual
method of recognizing income from these service contracts.
List B (Select one)
A. Cumulative effect approach.
B. Retroactive or retrospective restatement approach.
C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. If comparative FS are issued, restate prior year's FS. If
comparative FS are not issued, restate prior year-end's retained earnings account by
"adjusting" (net of tax) the opening balance of the current retained earnings statement.
Note that when an error is corrected, retroactive restatement is used, and when there is a
change in accounting principle, retrospective restatement is done. However, this is only a
difference in terminology.
Question: 159
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies. Quo's 1993 financial statements will be presented in
comparative form with its 1992 financial statements. This question represents one of
Quo's transactions. List A represents possible clarifications of these transactions as: a
change in accounting principle, a change in accounting estimate, a correction of an error
in previously presented financial statements, or neither an accounting change nor an
accounting error.
Item to Be Answered
During 1993, Quo determined that an insurance premium paid and entirely expensed in
1992 was for the period January 1, 1992, through January 1, 1994.
List A (Select one)
A. Change in accounting principal.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting error.
Answer: C
Explanation:
Choice "c" is correct. Expensing insurance premiums when paid (rather than allocating
them to the periods benefited) is a correction of an error in previously presented financial
statements.
Question: 160
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992
financial statements. This question represents one of Quo's transactions. List B
represents the general accounting treatment required for these transactions. These
treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting
from the accounting change or error correction in the 1993 financial statements, and do
not restate the 1992 financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial
statements and adjust 1992 beginning retained earnings if the error or change affects a
period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but
do not restate 1992 financial statements.
Item to Be Answered
During 1993, Quo determined that an insurance premium paid and entirely expensed in
1992 was for the period January 1, 1992, through January 1, 1994.
List B (Select one)
A. Cumulative effect approach.
B. Retroactive or retrospective restatement approach.
C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. If comparative FS are issued, restate prior year's FS. If
comparative FS are not issued, restate prior year-end's retained earnings account by
"adjusting" (net of tax) the opening balance of the current retained earnings statement.
Question: 161
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992
financial statements. This question represents one of Quo's transactions. List A
represents possible clarifications of these transactions as: a change in accounting
principle, a change in accounting estimate, a correction of an error in previously
presented financial statements, or neither an accounting change nor an accounting error.
During 1993, Quo increased its investment in Worth, Inc. from a 10% interest, purchased
in 1992, to 30%, and acquired a seat on Worth's board of directors. As a result of its
increased investment, Quo changed its method of accounting for investment in Worth,
Inc. from the cost method to the equity method.
List A
A. Change in accounting principle.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting error.
Answer: D
Explanation:
Choice "d" is correct. A change from the cost method (less than 20% ownership) to the
equity method (20% or more ownership or a Board seat or other significant influence) of
accounting for investment in an investee is neither an accounting change nor an
accounting error. If it is not an accounting change, it cannot be a change in accounting
principle or a change in accounting estimate since those two types of changes are both
accounting changes.
There is a considerable amount of controversy on this particular answer. Some people
think that this change is a change in accounting principle (something certainly changed,
but was it the accounting principle?), and others think it is a change in accounting entity
(which is not one of the available answers; anyway, did the accounting entity actually
change or is it the same entity accounted for differently?). Under SFAS No. 154, a
change in accounting principle is treated retrospectively and a change in accounting
entity is treated retrospectively.
This kind of change (cost to equity) has never been specifically identified in any
accounting literature as either a change in accounting principle or a change in accounting
entity. The words "cost method" were never mentioned in APB 20 (other than the full
cost method for oil & gas companies, which is an entirely different subject), nor was it
mentioned in SFAS No. 154. It was, however, discussed in APB 18 (the pronouncement
for the equity method) in Paragraph 19m (bold added): "An investment in common stock
of an investee that was previously accounted for on other than the equity method may
become qualified for use of the equity method by an increase in the level of ownership
described in paragraph 17 (i.e., acquisition of additional voting stock by the investor,
acquisition or retirement of voting stock by the investee, or other transactions). When an
investment qualifies for use of the equity method, the investor should adopt the equity
method of accounting. The investment, results of operations (current and prior periods
presented), and retained earnings of the investor should be adjusted retroactively in a
manner consistent with the accounting for a step-by-step acquisition of a subsidiary."
What does all this mean? It means that, when there is a change in the percentage of
ownership that changes accounting from the cost method to the equity method, the
change is treated retroactively (just like changes in accounting entity used to be treated,
although they are now treated retrospectively). It does not say that the change is a change
in accounting principle or anything else. Nothing in SFAS No.154 changed this
treatment. So all this still makes Choice "d" correct. This whole issue might easily be
considered to be splitting hairs, at the very least. Some questions on the CPA test are
just that way. Most are not.
Question: 162
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed,
working closely with Quo's president and outside accountants, made changes in
accounting policies, corrected several errors dating from 1992 and before, and instituted
new accounting policies. Quo's 1993 financial statements will be presented in
comparative form with its 1992 financial statements. This question represents one of
Quo's transactions. List B represents the general accounting treatment required for these
transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting
from the accounting change or error correction in the 1993 financial statements, and do
not restate the 1992 financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial
statements and adjust 1992 beginning retained earnings if the error or change affects a
period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but
do not restate 1992 financial statements.
During 1993, Quo increased its investment in Worth, Inc. from a 10% interest, purchased
in 1992, to 30%, and acquired a seat on Worth's board of directors. As a result of its
increased investment, Quo changed its method of accounting for investment in Worth,
Inc. from the cost method to the equity method.
List B
A. Cumulative effect approach.
B. Retroactive or retrospective restatement approach.
C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. The equity method of accounting is applied retroactively when the
investor has acquired 20% ownership. Prior to acquiring the ability to influence the
investee, the cost method is proper. The retroactive restatement approach does not mean
that this change is the correction of an error (which is now treated retroactively), a change
in accounting principle (which is now treated retrospectively), or a change in accounting
entity (which is now treated retrospectively). It just means that retroactive restatement is
the proper treatment.
Question: 163
According to the FASB conceptual framework, what does the concept of reliability in
financial reporting include?
A. Effectiveness.
B. Certainty.
C. Precision.
D. Neutrality.
Answer: D
Explanation:
Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality,
representational faithfulness and verifiability.
Choices "a", "b", and "c" are incorrect, per the above.
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What Was the Accounting Standards Executive Committee (AcSEC)?
The Accounting Standards Executive Committee (AcSEC) is the former senior technical organization within the American Institute of Certified Public Accountants (AICPA) that determined the AICPA's technical policies related to financial reporting standards. The group is now known as the Financial Reporting Executive Committee (FinREC) when the group changed its name in 2010.
FinREC is authorized to make public statements on behalf of the American Institute of Certified Public Accountants without explicit consent from the AICPA's board of directors.
Key Takeaways
- The Accounting Standards Executive Committee (AcSEC) manages the technical aspects of the American Institute of Certified Public Accountants (AIPCA).
- As of 2010, AcSEC is known as the Financial Reporting Executive Committee (FinREC) of the AIPCA.
- AICPA is a non-profit professional organization representing certified public accountants (CPA) in the United States.
Understanding the Accounting Standards Executive Committee (AcSEC)
The Accounting Standards Executive Committee's (AcSEC) duties have been assumed by the Financial Reporting Executive Committee (FinREC). According to then Chair of AICPA, Robert R. Harris, the name change was to better reflect the committee's ever-changing role and its broader responsibilities.
FinREC exists to create technical policies for, and to act as, the spokesbody for the American Institute of Certified Public Accountants. FinREC meets four to six times per year and meetings are open to the public (except when the meeting pertains to administrative or otherwise confidential matters). FinREC is responsible for compiling letters of comments on behalf of the AICPA to external groups including the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB).
The American Institute of Certified Public Accountants (AICPA)
The American Institute of Certified Public Accountants (AICPA) was founded in 1887, under the name American Association of Public Accountants, to ensure that accountancy gained respect as a profession and was practiced by ethical, competent professionals. The AICPA exists to provide its more than 418,000 members with the resources, information, and leadership to provide CPA services in the highest professional manner.
From its earliest iteration in 1887 to as late as the 1970s, the AICPA was the only body setting generally accepted technical and professional standards for CPAs in a number of areas. In the 1970s, the Financial Accounting Standards Board (FASB) took over responsibility for setting generally accepted accounting principles (GAAPs). However, the AICPA still retains its standards-setting responsibilities in such areas as professional ethics, business valuation, financial statement auditing, attest services, and CPA firm quality control.
The AICPA is integral to rule-making in the largely self-regulated CPA profession and serves as an advocate for legislative bodies and public interest groups. It sets standards for obtaining and maintaining the CPA designation, which is earned by accountants who pass a series of accounting exams and satisfy other experience requirements, and oversees CPA practitioners to make sure they are meeting competence and performance standards.
Members of the AICPA consist of professionals in business and industry, public practice, government, and education. Offices are located in New York City; Washington, D.C; Durham, North Carolina; and Ewing, New Jersey.
Although the AICPA obtained its current appellation in 1957, the organization traces its history back through several iterations, beginning when the American Association of Public Accountants (AAPA) opened in 1887.
The AICPA & CIMA, in conjunction with the World Business Council for Sustainable Development, unveiled research on a framework to facilitate business strategy development.
Dubbed the Integrated Performance Management Framework, it focuses on strategy execution and refinement based on a clear, defined organizational purpose, a robust strategy and effective corporate governance. The framework includes mechanisms for continuous feedback on performance and supports refinement. Each component provides feedback loops on the execution of strategy. It includes components related to leadership, culture, resource management and processes. The framework aims to facilitate the provision of management information to drive insights into effective strategic execution, providing data on productivity, functional utilization and moral hazard risk reduction.
The framework derives from Phase Two of the Integrated Performance Management research project, aimed at reorienting organizations to Strengthen their performance. The research report discusses why business strategies can fail to permeate throughout an organization and aren't executed properly. The report talks about leadership, organizational structure, culture and incentives.
"Modern business strategy must incorporate a wide range of capitals, notably environmental and social capital, and it must recognize that most value is driven by people," said Peter Spence, associate technical director at AICPA & CIMA, in a statement Thursday. "Our research identified gaps that can open up in this environment between strategic intent and delivery. To address these issues we created the Integrated Performance Management Framework, which organizations can use to optimize performance and deliver sustainable value to all their stakeholders. It links leadership, culture, resource management and processes together to form a new blueprint for the high-performing organizations of the future."
The framework aims to build a performance culture where people are empowered, trusted and engaged. All employees would be engaged in conversations about strategy. Authority would reside with strategic leaders, and strategic objectives would be owned by "strategic executive officers" who would access functional expertise on a supply-and-demand basis in a matrix structure.
"As much as 90% of a company's value is now made up of intangible assets," said Pepijn Rijvers, executive vice president at the WBCSD, in a statement. "These are the thoughts, experiences and expertise of people in the workforce. It was staggering to us to discover that even in successful companies, many leaders are struggling to make the connection between individuals and the strategic objectives of the organizations. Through the IPM Framework, we've taken the learnings from our extensive research into leading practice and distilled them down into actions that can be implemented by any organization, irrespective of size, sector or geography."
The AICPA & CIMA operate together as the Association of International Certified Professional Accountants and include the American Institute of CPAs and the Chartered Institute of Management Accountants.
CliftonLarsonAllen welcomed a group of about 30 high school interns and Future Business Leaders of America to the Top 10 Firm's New York offices on Tuesday to tell them about accounting, consulting and other careers.
CLA launched a summer high school internship program in March in conjunction with FBLA, which has been preparing students for generations to join the business world (see story). The students, who hailed from Marvin Ridge High School in North Carolina, as well as Philadelphia, attended a panel discussion and later broke into smaller groups to collaborate and explore different concepts such as accounting, finance and the workforce of the future.
They also learned to build LinkedIn profiles and had professional headshot photos taken. Later in the day, they enjoyed a pizza party in the CLA offices followed by a boat ride around New York City.
Courtesy of CLA
"When you can really get students here in your office location, it is so special," said CLA CEO Jen Leary. "They've told us so. It's really special for us as well at CLA because there's just a liveliness to the office today that you really cherish, so we learn a lot from them as well."
The accounting profession has been working to attract young people as the pipeline of accounting graduates appears to be shrinking. The AICPA's 2023 Trends report found 47,067 students earned a bachelor's degree in accounting in the 2021-22 school year, down 7.8% from the previous year (see story). Meanwhile, the number of students who earned a master's degree in accounting dropped 6.4% to 18,238.
FBLA clubs have long been a presence in high schools across the country inspiring students to build business careers. "We see, as a national organization, as students are sorting through career opportunities, because this generation is so brand driven, they often don't realize that a company like CLA is a driver behind their favorite brands," said FBLA president and CEO Alexander Graham. "We've done focus groups with middle school and high school students, and they will not pick or choose or identify with an organization like CLA because they don't see the relevance to themselves. But when they go onsite, they say, 'Well, wait a minute, this is a company that I know who it is, or I understand,' because they're so brand conscious, just by virtue of their devices and how society has become."
Courtesy of CLA
He sees a need for students, particularly post pandemic, to really open up their thinking about what the future could be, and organizations like CLA can be part of it.
Students shared their experiences with the CLA executives as well. "They talked a lot about just having an opportunity to be out at the client location and spend time learning about their businesses," said James Watson, a regional managing principal at CLA. "That happened later in my career. To see that on the front end and make that connection of what they're trying to accomplish while they're witnessing it in real time, I think, is unbelievably impactful for them. To me that was the biggest takeaway from our high school internship program. Secondly would probably be working together in groups. They seem to do that really well. In education, that seems to be the focus, but they really got a big kick out of being in the office together and sitting around a table and working through problems."
Courtesy of CLA
Students are beginning to consider accounting as a future career thanks to the program. "I've never been interested in accounting, but coming here to CLA and listening to everyone's experiences and their history with accounting has definitely opened up my eyes," said Natasha Naheir, a student at Marvin Ridge High. "And even when it comes to AI, I think AI is something that can enrich accounting. It's not something that will push it down, necessarily, but I think CLA has opened up my eyes to the field of accounting, and even looking at other fields in relation to accounting."
Another student, Robert Fan, is also looking at accounting more favorably because of the experience. "I took an accounting course in high school, and it was really interesting, so I definitely considered going into accounting," he said. "But then with the rise of AI and machine learning and things like that, I was thinking accounting might get replaced by machines. From this experience, I realized that accounting isn't just numbers. It can be working with clients. It's definitely refueled my interest in accounting."
Courtesy of CLA
Teachers see students showing varied interests, not just accounting. "Students are interested in business, but they don't know which direction to go," said Troy Burns, who teaches IB business management and computer science at Marvin Ridge High.
"I teach a class called Theory of Knowledge where we look at what we know or what we claim to know and how we know it," said history teacher Robert Branan.
The event didn't just present accounting to the students, but also other areas that students could pursue.
"Today it's been all about exposure, and just showing them what's possible in their career," said Leary. "At CLA, we have multiple service lines. It could be accounting, it could be finance, it could be wealth, it could be cyber, all kinds of different things. We talked about AI in the discussion there. FBLA is where they get those strong skills. And I think it is a confidence builder for high schoolers to say, 'I know I can put myself out there, I can try for something that maybe I wouldn't have otherwise done. And I can be competitive at my local school level, at my regional level, at the state level, and maybe I can make it to nationals.'"
The national FBLA competition took place at the Georgia World Congress Center in Atlanta in June and attracted 14,000 students, supported by about 2,000 educators, and CLA was there as well.
"They go through a competitive process, and we really try to make sure we keep teenagers busy, especially smart ones, because they will find other things to do," said Graham. "We really look at it like a three-legged stool. When they're not competing, they're in our Future Leaders Expo networking with colleges and universities, employers, and having fun. We make sure they're busy. We offer over 100 different workshops: resume development, even down to personality profiles, like strengths finder, and things to teach them what it's like in the real world." There's also time for games, playing cornhole, but even there, it's competitive.
CLA hopes the student interns will want to build a future at the firm. "For us to be the employer of choice for that young generation, that is 100% a focus of ours," said Leary. "The energy that we want to put into this next generation is beyond just creating jobs. It's about building strong, confident individuals."
A temporary COVID-19 change to allow e-signatures on some forms, documents, and returns has been made permanent in the Internal Revenue Manual. The AICPA had advocated for making this change to the e-signature rules permanent.
The withdrawal program is one step that the IRS is taking to help small businesses that may have filed an ineligible claim while also cracking down on unscrupulous promoters.
The recently introduced bills would increase awareness of accounting at an earlier age through the use of federal funding “to promote the development, implementation, and strengthening of programs to teach accounting.”
The contingency plan calls for furloughs of two-thirds of IRS staff, which Treasury said will result in “significant harmful impacts" on taxpayers.
AICPA and Treasury advocate for congressional action to help thwart the unscrupulous promoters that use the employee retention credit to make money by taking advantage of small businesses.
A new guide posted by the Financial Crimes Enforcement Network describes BOI rules, answers questions, and provides tools to assist with compliance with the BOI reporting rules.
The exposure draft of the Statement on Standards for Attestation Engagements aims to align quality management standards with standards for audits, reviews, and compilations.
Tulane’s School of Professional Advancement will provide a library of online courses for the first class of accounting graduates completing their 150-credit-hour requirement while earning a paycheck via the AICPA and NASBA’s Experience, Learn & Earn program.
The AICPA said the National Pipeline Advisory Group will “play a critical role in guiding” the conversation and making calls to action to address the slowdown in young people choosing accounting as a career.
Generally Accepted Accounting Principles and Governmental Auditing Standards differ and cover different aspects of the financial reporting process. GAAP defines how businesses, both public and private, prepare their financial statements. Governmental Auditing Standards are a series of rules that define how an independent agent is supposed to review a government agency's financial statements and internal processes.
The AICPA and over 50 affiliated organizations recommended in a letter to Treasury's Financial Crimes Enforcement Network (FinCEN) that the agency extend the effective date for the beneficial ownership information (BOI) reporting requirement by one year to supply the millions of affected businesses time to learn about the new and complex rules. The letter asked that the scope of the one-year deadline delay include not only new entities created in 2024, but all entities created thereafter and all entities making updates or corrections to their original filings.
"FinCEN should supply all businesses a fair time frame to gain awareness and a reasonable time frame to comply with BOI requirements," said the letter, dated Oct. 30 and signed by Sue Coffey, CPA, CGMA, the AICPA's CEO–Public Accounting.
Co-signers include CPA societies or associations in the 50 states, Washington, D.C., Guam, and the Virgin Islands.
Effective Jan. 1, 2024, existing companies and companies created or registered before that date, will have one year to file their BOI reports. FinCEN has proposed to extend the filing deadline for entities created or registered during 2024 to 90 days from the earlier of the date on which the company receives real notice that its creation or registration has become effective or the date on which the secretary of state first provides public notice that the company has been created or registered, instead of the previous 30-day deadline.
That change does not go far enough, the letter said, especially considering the steep civil and criminal penalties that can be assessed if authorities determine that a business is willfully not complying with the BOI reporting requirements. Civil penalties are assessed at $500 per day, up to a total of $10,000, for as long as the violation continues, and criminal penalties could include up to two years of prison time.
"To have a meaningful impact on small businesses, we recommend that FinCEN extend the deadline beyond the proposed 90 days to one year," the letter said. "Additionally, the scope of the proposed rulemaking should be expanded to include not only new entities created in 2024 but all entities created thereafter and entities making updates or corrections to their original filings."
The BOI reporting requirement is an anti-money laundering initiative enacted through the Corporate Transparency Act, P.L. 116-283, in 2021, mandating that BOI be reported to FinCEN. The requirement would apply to most companies, with FinCEN estimating about 32.6 million filings in the first year of BOI implementation.
FinCEN also estimates that during the first year of filing about 32.6 million BOI reports will be filed, and about 5 million initial reports will be filed annually after that.
The BOI reporting requirement requires businesses to identify beneficial owners and company applicants and to provide information about both the company and the owners, including full legal name, address, state or tribal jurisdiction of formation, IRS taxpayer identification number, birthdate, and other details.
Most businesses are unaware of the BOI reporting rules, the letter said, citing a survey by the National Federation of Businesses that showed 90% of its members were not at all familiar with them.
FinCEN has made some efforts to inform businesses. In September, it published a Small Entity Compliance Guide. FinCEN also is reaching out to state, local, and tribal governments and state financial institution supervisors, FinCEN director Andrea Gacki said in October.
FinCEN recently updated its FAQs on BOI reporting requirements, including answers to questions such as, "Is a member of a reporting company's board of directors always a beneficial owner of the reporting company?" and "Can a parent company file a single BOI report on behalf of its group of companies?"
FinCEN has said it would open a contact center dedicated to BOI.
Its efforts have fallen short, the AICPA letter said: "Regardless of FinCEN's activities to raise awareness, their efforts remain ineffective, and most businesses are unaware of this filing requirement."
In addition, FinCEN has "woefully underestimated" the burden hours for entities to complete the filing in the first year. The estimate of over 32.8 million burden hours with an estimated cost of up to $2,614.87 per entity, depending on their structure, "does not account for the added stress associated with requiring a monthly tracking of all business owner's information to anticipate when changes could or have occurred," the letter said.
Something as small as an expired driver's license is a reportable change that usually requires business owners to undertake many activities, the letter said.
"If FinCEN extended the filing deadline to one year and expanded the applicability of the deadline to include not only new entities created in 2024, but all entities created thereafter as well as all entities making updates or corrections to their original filings, FinCEN would create the necessary transparency for all businesses to feel certain about meeting their filing requirements," the letter said.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.
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Earlier this year, I contributed an opinion piece discussing the importance of sufficiently funding and retooling the Legislative Auditor’s Office. Today, we need to have a frank conversation regarding local government auditing in the North Star State.
Now to be fair, is local audit sexy? Does its mere utterance inspire revolution on the streets? Unless you’re an accountant, a local finance professional, or a public administration practitioner like myself — the answer is probably not.
But here’s why you should care as a citizen or taxpayer: Minnesota has approximately 3,600 counties, cities, towns, school districts, special purpose districts, metropolitan agencies and other political subdivisions which altogether spend about $64 billion annually. Property taxes, sales taxes, state aids and federal funds passing through state agencies are the predominant sources of revenue driving these expenditures. Putting things into perspective, local spending in Minnesota exceeds standalone state spending — currently around $55.498 billion annually — by a whopping 15.3%! We are not talking chump change, not by a long shot.
The problem is, Minnesota has become incredibly lax in its oversight of local spending over the last two decades. While we have an elected state auditor charged with supervising and auditing local government finances, the auditor’s office is woefully under-resourced and stripped of reasonable statutory authority to keep an eye on taxpayer money. This is undoubtedly the result of consecutive budget cuts and the gradual privatization of the local audit function by the Legislature.
While outsourcing to private accounting firms does lead anecdotally to cheaper financial audits than what the office of the state auditor could ever conduct, privatization also generates significant costs. Case in point, evidence from the United Kingdom and throughout the United States suggests private audits are often delayed and of inferior quality when compared to those conducted by public sector auditors. In addition, privatization promotes an incomplete, fragmented regulatory landscape — one that creates gaps in public accountability and promotes fraud.
In other words, excessive privatization of the local audit function ultimately leads to an opaque control environment wherein policymakers and citizens alike have little to no knowledge of localities’ financial condition, the security of public asset, or the extent to which local spending delivers value to taxpayers.
Minnesotans should find this troubling. Our local governments deliver — close to home — the most basic of public services, be it health and human services, education, transportation, potable water, solid waste, or public safety. Communities thrive and regional economies flourish only because of the operational reliability, political accountability and financial solvency of said services. We cannot afford as a state to let things slide when it comes to local spending oversight.
Setting matters of good governance aside, another problem associated with a privatized local audit function is its heightened vulnerability to any instability in the assurance services workforce — something both Minnesota and the wider United States are currently undergoing.
Indeed, according to the American Institute of Certified Public Accountants (AICPA), almost 75% of all current certified public accounts (CPAs) will retire in the next decade. The CPA shortage has already become so acute here in Minnesota that, as State Auditor Julie Blaha said in an interview with Cook County’s WTIP two months ago, some small localities in rural parts of the state have been unable to procure external auditors to audit their end-of-year financial statements.
To minimize the damage wrought by the looming CPA exodus, Auditor Blaha and the Minnesota Society of CPAs have proposed lowering CPA credential requirements from the current 150 credit hours to 120 credit hours, with the balance replaced by on-the-job training. While this policy alternative is well intentioned and would benefit accounting professionals of color and those from non-traditional backgrounds, changing CPA credentialing requirements at the state level is fundamentally bad policy.
For one thing, it will create burdensome restrictions for Minnesota CPAs and private accounting firms working across state lines, effectively unraveling the delicate interstate system that has allowed finance professionals to practice nationwide for over three decades. In a similar vein, governmental accountants and auditors may earn more than professionals in other fields, but they certainly don’t enjoy exorbitant salaries.
Public finance professionals will leave our state if paid less than what they are due as a result of Minnesota adopting non-conforming CPA credentialing requirements. Correspondingly, depressed pay will also disincentivize public accountants who train out of state from moving here to Minnesota. With all due respect to its advocates, lowering credentialing requirements will blow up the public finance sector. It’s fundamentally irresponsible.
Clearly, Minnesota should be designing policies that stabilize and ameliorate the auditor shortage, not selecting alternatives that will only further it. The Controllers Council encourages the development of coherent career advancement pathways to attract and retain accountants. In keeping with this objective, why not promulgate policies and implement programs that have a proven track record instead of worsening a wicked problem?
For example, the State Board of Accountancy could administer an intern-to-hire scheme for low- and moderate-income accounting, business, finance, and public administration students in partnership with private accounting firms that is modeled on Kentucky’s or Pennsylvania’s successful programs. In tandem, Minnesota’s Office of the State Auditor (OSA) could open up entry-level audit positions (with career advancement opportunities leading up to CPA licensure) to those undergraduate and graduate majors who have only taken intermediate accounting coursework. State auditors in Arizona, California, Massachusetts, New York, Ohio, Pennsylvania, and Washington, among others, all follow this hiring practice. Quite to the contrary, OSA requires entry-level applicants to have, at a minimum, a bachelor’s or master’s degree in accounting to even be considered for employment.
Noah R. McVay
My fellow Minnesotans, the status quo is not working. We can and should do better. We can meet the local audit challenges of the 21st century head-on and, in so doing, make Minnesota a model that is the envy of the entire nation. What those reforms look like will be saved for a future essay.
Noah McVay is a resident of St. Paul and a master of public policy and administration student at Colorado State University. His research interests broadly encompass public budgeting and finance, program evaluation, compliance in the public sector, and machinery of government. He is particularly passionate about state and local government auditing practices.
The history of Las Vegas is the ultimate American rags-to-riches story, filled with unusual heroes and foes. This 103-year-old saga follows the city through its incredible ups and downs, and highlights how and where some of the U.S.’s most monumental moments occurred. The largest American city founded in the 20th century took shape as a railroad watering hole before turning into the "Gateway to the Hoover Dam." From there the town was known by its seedy mob label as “Sin City,” before finally transforming into the corporately-financed adult playground called the "Entertainment Capital of the World." Continue...
What Is the Accounting Equation?
The accounting equation states that a company's total assets are equal to the sum of its liabilities and its shareholders' equity.
This straightforward relationship between assets, liabilities, and equity is considered to be the foundation of the double-entry accounting system. The accounting equation ensures that the balance sheet remains balanced. That is, each entry made on the debit side has a corresponding entry (or coverage) on the credit side.
The accounting equation is also called the basic accounting equation or the balance sheet equation.
Key Takeaways
- The accounting equation is considered to be the foundation of the double-entry accounting system.
- The accounting equation shows on a company's balance sheet that a company's total assets are equal to the sum of the company's liabilities and shareholders' equity.
- Assets represent the valuable resources controlled by a company. The liabilities represent its obligations.
- Both liabilities and shareholders' equity represent how the assets of a company are financed.
- Financing through debt shows as a liability, while financing through issuing equity shares appears in shareholders' equity.
Investopedia / Daniel Fishel
What Are the Key Components in the Accounting Equation?
The financial position of any business, large or small, is based on two key components of the balance sheet: assets and liabilities. Owners’ equity, or shareholders' equity, is the third section of the balance sheet.
The accounting equation is a representation of how these three important components are associated with each other.
Assets represent the valuable resources controlled by a company, while liabilities represent its obligations. Both liabilities and shareholders' equity represent how the assets of a company are financed. If it's financed through debt, it'll show as a liability, but if it's financed through issuing equity shares to investors, it'll show in shareholders' equity.
The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts. Below are examples of items listed on the balance sheet.
Assets
Assets include cash and cash equivalents or liquid assets, which may include Treasury bills and certificates of deposit.
Accounts receivable list the amounts of money owed to the company by its customers for the sale of its products. Inventory is also considered an asset.
The major and often largest value assets of most companies are that company's machinery, buildings, and property. These are fixed assets that are usually held for many years.
Liabilities
Liabilities are debts that a company owes and costs that it needs to pay in order to keep the company running.
Debt is a liability, whether it is a long-term loan or a bill that is due to be paid.
Costs include rent, taxes, utilities, salaries, wages, and dividends payable.
Shareholders' Equity
The shareholders' equity number is a company's total assets minus its total liabilities.
It can be defined as the total number of dollars that a company would have left if it liquidated all of its assets and paid off all of its liabilities. This would then be distributed to the shareholders.
Retained earnings are part of shareholders' equity. This number is the sum of total earnings that were not paid to shareholders as dividends.
Think of retained earnings as savings, since it represents the total profits that have been saved and put aside (or "retained") for future use.
Accounting Equation Formula and Calculation
Assets=(Liabilities+Owner’s Equity)
The balance sheet holds the elements that contribute to the accounting equation:
- Locate the company's total assets on the balance sheet for the period.
- Total all liabilities, which should be a separate listing on the balance sheet.
- Locate total shareholder's equity and add the number to total liabilities.
- Total assets will equal the sum of liabilities and total equity.
As an example, say the leading retailer XYZ Corporation reported the following on its balance sheet for its latest full fiscal year:
- Total assets: $170 billion
- Total liabilities: $120 billion
- Total shareholders' equity: $50 billion
If we calculate the right-hand side of the accounting equation (equity + liabilities), we arrive at ($50 billion + $120 billion) = $170 billion, which matches the value of the assets reported by the company.
What Is the Purpose of the Double-Entry System?
The accounting equation is a concise expression of the complex, expanded, and multi-item display of a balance sheet.
Essentially, the representation equates all uses of capital (assets) to all sources of capital, where debt capital leads to liabilities and equity capital leads to shareholders' equity.
For a company keeping accurate accounts, every business transaction will be represented in at least two of its accounts. For instance, if a business takes a loan from a bank, the borrowed money will be reflected in its balance sheet as both an increase in the company's assets and an increase in its loan liability.
If a business buys raw materials and pays in cash, it will result in an increase in the company's inventory (an asset) while reducing cash capital (another asset). Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.
The double-entry practice ensures that the accounting equation always remains balanced, meaning that the left side value of the equation will always match the right side value.
In other words, the total amount of all assets will always equal the sum of liabilities and shareholders' equity.
The global adherence to the double-entry accounting system makes the account keeping and tallying processes more standardized and more fool-proof.
The accounting equation ensures that all entries in the books and records are vetted, and a verifiable relationship exists between each liability (or expense) and its corresponding source; or between each item of income (or asset) and its source.
Limits of the Accounting Equation
Although the balance sheet always balances out, the accounting equation can't tell investors how well a company is performing. Investors must interpret the numbers and decide for themselves whether the company has too many or too few liabilities, not enough assets, or perhaps too many assets, or whether its financing is sufficient to ensure its long-term growth.
What Is a Real-World Example of the Accounting Equation?
Below is a portion of Exxon Mobil Corporation's (XOM) balance sheet in millions as of Sep. 30, 2023:
- Total assets were $372,259
- Total liabilities were $164,726
- Total equity was $207,533
The accounting equation is calculated as follows:
- Accounting equation: $164,726 (total liabilities) + $207,533 (equity) = $372,259 (which equals the total assets for the period)
Why Is the Accounting Equation Important?
The accounting equation captures the relationship between the three components of a balance sheet: assets, liabilities, and equity. All else being equal, a company’s equity will increase when its assets increase, and vice-versa. Adding liabilities will decrease equity, while reducing liabilities—such as by paying off debt—will increase equity. These basic concepts are essential to modern accounting methods.
What Are the Three Elements of the Accounting Equation?
The three elements of the accounting equation are assets, liabilities, and shareholders' equity. The formula is straightforward: A company's total assets are equal to its liabilities plus its shareholders' equity. The double-entry bookkeeping system, which has been adopted globally, is designed to accurately reflect a company's total assets.
What Is an Asset in the Accounting Equation?
An asset is anything with economic value that a company controls that can be used to benefit the business now or in the future. They include fixed assets, such as machinery and buildings. They may include financial assets, such as investments in stocks and bonds. They also may be intangible assets, like patents, trademarks, and goodwill.
What Is a Liability in the Accounting Equation?
A company's liabilities include every debt it has incurred. These may include loans, accounts payable, mortgages, deferred revenues, bond issues, warranties, and accrued expenses.
What Is Shareholders' Equity in the Accounting Equation?
Shareholders' equity is the total value of the company expressed in dollars. Put another way, it is the amount that would remain if the company liquidated all of its assets and paid off all of its debts. The remainder is the shareholders' equity, which would be returned to them.
The Bottom Line
The accounting equation is based on the premise that the sum of a company's assets is equal to its total liabilities and shareholders' equity. As a core concept in modern accounting, this provides the basis for keeping a company's books balanced across a given accounting cycle.
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