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modern approach of accounting

There are two types of techniques for accounting for financial transactions. The Traditional Approach and the Modern Approach are two different approaches. Let’s learn more about the modern accounting approach, also known as the accounting equation approach.

Table of Contents

Modern Approach of Accounting

The modern approach of accounting believes that financial accounting provides valuable information in investment and credit decisions. It is a framework for understanding financial accounting, which presents itself as an interpretation of financial statements. Modern approach of accounting uses accounting equation to debit or credit any transaction or account.

It also provides a way of thinking about how financial accounting works and clarifies what statements should look like when they are prepared correctly. For example, any company’s balance sheet will tell you the value of its assets, liabilities, or capital structure at a given time. At the same time, its income statement will report on revenues earned during some period (e.g., month) and expenses incurred during that period.

Accounting Equation

The modern equation approach defines the basic accounting equation as follows: 

                                                 Assets = Liabilities + Capital (Owner’s Equity)

                                                 Assets= Liabilities + Capital + Revenues – Expenses

The key to understanding this formula is that assets are, by definition, anything that can be use to earn revenue and use to help in daily business operations.. The liabilities component of the equation represents those obligations that a business can pay off with assets in a short period (usually within one year). And capital represents the cash or resources invested by owners or shareholders in business.

The modern equation approach believes that financial accounting provides helpful information in investment and credit decisions. However, many accountants, who feel it creates a conflict between their profession’s ethical responsibilities and those of investors and creditors, usually criticize this approach.

Assets are resources owned by a person or company. They can be current or non-current assets, and intangible assets such as patents and copyrights are often grouped with financial instruments like stocks, bonds, and derivatives.

In the modern equation approach to economics, there are two main types of assets: capital goods (tangible) and human capital (intangible).

Classification of Accounts under Modern Approach of Accounting

The accounts are divided into numerous groups, listed below, according to the modern approach to classification.

Assets Accounts

Assets are resources owned by a person or company. They can be current or non-current assets, and intangible assets such as patents and copyrights are often grouped with financial instruments like stocks, bonds, and derivatives.

In the modern equation approach to economics, there are two main types of assets: capital goods (tangible) and human capital (intangible).

Liabilities Accounts

Liabilities are any debts owed by a person or company. Again, they can be current liabilities or non-current liabilities. Examples of liabilities include wages payable, interest payable, long-term borrowings, , bonds payable, income tax payable, and many more.

Capital's Accounts

The money that the owner puts into the business is referred to as capital or owner’s equity. The owner might bring in the capital in cash or assets. It is the difference between total assets and liabilities and represents a company’s total ownership. It’s also known as net assets or net worth.

Revenue Accounts

Revenue Accounts reflect the business’s income and, as a result, have credit balances. Sales revenue, rental income, interest income, and other sources of revenue are examples of revenue accounts.

Expenses Accounts

In accounting, expenses are the funds or charges incurred by a company to earn revenue. When a corporation sells commodities, for example, the associated cost is what it pays to  and sell  those things are considered as expense. For example, transportation expense, advertisement expense, route expenses. 

Modern Rules of Accounting

rules for modern approach of accounting

Example

Analyze the following transactions using rules of debit and credit under the modern accounting approach.

Rent paid 

$50,000

Commission received    

$12,000

Capital invested 

$8,000

Stationary purchased

$6,500

Sale Land and building  

$300,000

Paid salary

$60,000

 Following journal entries will passed;

Following journal entries will passed;

Conclusion

The modern equation approach states that financial accounting provides valuable investment and credit decision information. Therefore, it is essential to understand the basic accounting equation of assets = liabilities + shareholders’ equity. Without knowing this equation, making well-informed decisions about investments or credits will be difficult.

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