Explain the Business Entity Concept in the Accounting Process
Rancakmedia.com – The following is an explanation of the concept of business entity that you should know. The principles and basic elements of accounting are the foundation and basic framework for defining business operations, which culminate in the form of financial statements.
Application accountancy in supporting profit-oriented and non-profit companies cannot be separated from the basic understanding of accounting. When studying expenses and business entities, how well do accounting concepts work?
If we incorrectly identify a business activity, the financial statements, which are a summary of the activities that occur within a business, will be incorrect.
Because of this, we know that future strategy analysis will also be flawed, resulting in losses and even business for the company.
This week we'll talk about expenses and business entities, two basic concepts of accounting.
Accounting Understanding of the Concept of Cost
To better understand the concept of cost, consider the following example:
Cost Concept
Cost concept This will usually affect the company's profit and loss, because the size of the company's profit and loss is very dependent on the amount of costs incurred.
Simple accounting questions and answers including those listed below.
If a piece of land with a building standing on it is obtained at a price of Rp. 250,000,000, then that amount must be documented in the land and building acquisition records.
The price of IDR 300,000,000 can be offered by the vendor. Buyers can bid on land and buildings in advance for Rp. 200,000,000.
And for the purposes of Land and Building Tax (PBB), land and buildings can also be evaluated at Rp. 225,000,000, and buyers can also get offers from other parties of Rp. 275,000,000 after the land and buildings have been acquired.
Because they do not reflect the value of the land and buildings as they would be traded from seller to buyer, the values above do not affect the books.
The cost concept is the basis for calculating the exchange price of IDR 250,000,000 or the cost reported in the books for the purchase of land and buildings.
For example, an offer of Rp. 275,000,000 for the land and buildings that have been acquired indicating that the buyer managed to secure the land and buildings at a low price of Rp. 250,000,000.
However, if Rp. 275,000,000 is recorded in the books, the unearned revenue will be incorrectly recorded.
The buyer may recognize and record a gain of IDR 25,000,000 if, after purchasing the land and building, he accepts the offer and sells it to another party for IDR 275,000,000.
The purchase cost of the land and building is expected by the buyer to be IDR 175,000,000.
Relationship between the Cost Concept and Other Accounting Concepts
Using the cost concept combines two additional basic accounting concepts, namely:
- objectivity
- There are several units of measurement.
- The concept of objectivity mandates that accounting and reporting records be based on objective data.
Whenever a transaction occurs between a buyer and a seller, both are looking for the best deal. For accounting reasons, only the final agreed value can be considered objective.
When carrying amounts are frequently fluctuated up and down depending on bids, judgments, and opinions, accounting reports may become unstable and unreliable.
The unit of measure concept requires that economic data be recorded in units of currency such as Indonesian rupiahs, United States dollars and Malaysian ringgits.
Money is a unit of measurement that is often used to standardize financial data reporting.
Examples of Cost Concept Questions and Answers
To test our knowledge again, take the example of a service company accounting question and its answer:
Problems example:
Management Finance Network (PT MFN) submitted an offer on 20 March 2021 to purchase a property block in East Surabaya for IDR 225,000,000, which the owner had previously offered for IDR 250,000,000.
On April 10, 2021, PT Management Finance Network and the land owner agreed on a price of IDR 235,000,000.
The land has been appraised by the tax office on April 12, 2021 for IDR 100,000,000 for the purpose of calculating Land and Building Tax (PBB).
Another company submitted a land offer to PT Management Finance Network on April 21, 2021 for IDR 260,000,000.
What is the price of land that must be recorded in the PT Management Finance Network account on April 30, 2021?
Question Answers:
On April 30, 2021, PT Management Finance Network was registered at a price of Rp. 235,000,000. The value of the land must be documented at the exchange cost, as we understand it under the cost concept.
How, easy right?
Understanding of Accounting About the Concept of Business Entities
The following is an explanation of the concept of business entity accounting, including:
Definition of Business Unit
Business units are business entities that require economic data. This may be a shop, i.e
Chanic shop, car dealership, or manufacturing facility.
Accountants need to know which economic data should be reviewed, documented, and summarized in reports so you can identify business entities.
The introduction of Accounting to the Business Entity Concept is very important because this concept limits the economic data in the accounting system to those directly related to business operations.
In other words, a business is considered a distinct entity from its owners, creditors or other stakeholders.
For example, an accounting clerk or accountant for a company owned by one person (sole proprietorship) will record only business actions, not the personal activities, assets or debts of the company owner.
Understanding of Accounting About Types of Business Entities
Common types of business entities in Indonesia are companies:
- individual.
- Federation.
- Company.
- cooperative.
How would you characterize the four different types of entities? Let's take them one by one in turn.
Sole Proprietorship
- Owned by one individual.
- The majority of entities in Indonesia and around the world are owned and operated by a single business.
- Low setup and management costs.
- The financial resources of the business owner are an important consideration.
- Implemented by small businesses.
Federal Company
- Similar to sole proprietorship but held by two or more people.
- Firma and CV are a kind of partnership, as they are known in Indonesia.
- Combine the expertise and resources of more than one individual.
Company Company
- This is regulated through laws and regulations as a separate legal entity subject to tax.
- How many shares you own depends on how many you sell to investors.
- Issuing stock is a great way to raise a lot of money quickly.
implemented by large-scale organizations.
Cooperative
When a group of individuals owns a business, you are known as the owner. Cooperatives are governed by and for members only. For example employee cooperatives, shoe and bag entrepreneur cooperatives, fishermen cooperatives.
Understanding of Accounting About the Type of Business
What types of business can be managed by the four business entities above?
To get started, let's take a look at the many types of companies that exist. Types of business can be divided into three broad categories as follows:
- Business and Service Industry
- Commercial and Trading Business
- Manufacturing companies and businesses
Commercial or Service Oriented Company
Customer service oriented business.
Example:
- Bank Mandiri, Financial Services.
- Telkom, Telecommunications Services.
- Hotel Indonesia, Hospitality Services.
- PT Kereta Api, Transportation and Logistics Services.
Trading Business
A business that sells goods acquired from other parties to clients. Retailers are businesses that bring goods and consumers together under one roof.
Example:
- Selling consumer goods is Alfa Retailindo Tbk's core business.
- Toko Gunung Agung Tbk is a company that sells books and stationery.
- The business engaged in the clothing sector is Matahari Putra Prima Tbk.
Business or Manufacturing Sector
A business or company that converts basic inputs into goods that are sold to individual clients.
Example:
- Kalbe Farma Tbk, a manufacturing business that produces medicines.
- Krakatau Steel is made by Krakatau Steel Tbk, a business that makes steel.
- Gudang Garam Tbk, a manufacturing business that makes cigarettes.
- Basically, the four forms of business entities, namely individuals, partnerships, corporations and cooperatives, can carry out service, trading and manufacturing businesses.
However, not all types of businesses can manage all three types of entities. Consider a manufacturing business as an example. To run a business in the manufacturing sector requires large amounts of cash, so most of these companies are limited liability companies.
Likewise, large shops are often operated by business entities in the form of limited liability companies (PT).
FAQs
The following is a list of frequently asked questions and their associated answers:
Mention What is Included as a Business Entity?
Individual company. This type is used on a small business scale on behalf of individuals.
partnership company. In this kind of company, the ownership and management of the business are shared by two or more people.
- Company.
- cooperative.
What Does the Entity Include?
Individuals or individuals are examples of entities that are not legal entities. Uninterrupted success. To give an idea of what types of legal entities exist, here are some examples:
- PT (Limited Liability Company)
- CV (limited company)
- Firm.
- Foundation.
- Cooperative.
Conclusion
Knowledge and understanding of the concept of cost and business entity is needed so that the company's operations can be carried out properly and effectively so that the company's goals can be achieved.
As was very clear in the previous discussion, we will limit our last statement to reiterating the need to study the foundations of any discipline, including accounting.
Thus the information about the concept of business entities in accounting, I hope the article above can be useful and helpful for all of you.