OWNER'S EQUITY

Owner's equity is one of the three main components of a sole proprietorship's balance sheet and
accounting equation. Owner's equity represents the owner's investment in the business minus the
owner's draws or withdrawals from the business plus the net income (or minus the net loss) since
the business began.
Mathematically, the amount of owner's equity is the amount of assets minus the amount of
liabilities. Since the amounts must follow the cost principle (and others) the amount of owner's
equity does not represent the current fair market value of the business.
Owner's equity is viewed as a residual claim on the business assets because liabilities have a
higher claim. Owner's equity can also be viewed (along with liabilities) as a source of the
business assets.
Purpose:
To reconcile the owner equity amount stated at the beginning of the time period, with the owner
equity amount determined at the end of the time period.
The term owner equity refers only to a business and this statement includes no information for
an individual person.
Components should include:
1. Beginning owner equity
2. Plus net income amount
3. Minus owner withdrawals
4. Plus contributions received by business
5. Minus contributions distributed to others
6. Equals Change in Retained Earnings/Contributed Capital
7. Ending Owner Equity (Cost Value Basis)

AUDITOR'S REPORT
The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor
or an independent external auditor as a result of an internal or external audit or evaluation
performed on a legal entity or subdivision thereof (called an "auditee"). The report is
subsequently provided to a "user" (such as an individual, a group of persons, a company, a

government, or even the general public, among others) as an assurance service in order for the
user to make decisions based on the results of the audit.
An auditor's report is considered an essential tool when reporting financial information to users,
particularly in business. Since many third-party users prefer, or even require financial
information to be certified by an independent external auditor, many auditees rely on auditor
reports to certify their information in order to attract investors, obtain loans, and improve public
appearance. Some have even stated that financial information without an auditor's report is
"essentially worthless" for investing purposes.
It is important to note that auditor's reports on financial statements are neither evaluations nor
any other similar determination used to evaluate entities in order to make a decision. The report
is only an opinion on whether the information presented is correct and free from material
misstatements, whereas all other determinations are left for the user to decide.
There are four common types of auditor's reports, each one presenting a different situation
encountered during the auditor's work. The four reports are as follows:
Unqualified Opinion
An Unqualified Opinion indicates the following
An opinion is said to be unqualified when the Auditor concludes that the Financial Statements
give a true and fair view in accordance with the financial reporting framework used for the
preparation and presentation of the Financial Statements. An Auditor gives a Clean opinion or
Unqualified Opinion when he or she does not have any significant reservation in respect of
matters contained in the Financial Statements.
(1) The Financial Statements have been prepared using the Generally Accepted Accounting
Principles which have been consistently applied;
(2) The Financial Statements comply with relevant statutory requirements and regulations;
(3) There is adequate disclosure of all material matters relevant to the proper presentation of the
financial information subject to statutory requirements, where applicable;
(4) Any changes in the accounting principles or in the method of their application and the effects
thereof have been properly determined and disclosed in the Financial Statements.

Qualified Opinion report

Qualified report is given by the auditor in either of these two cases:
When the financial statements are materially misstated due to misstatement in one particular
account balance, class of transaction or disclosure that does not have pervasive effect on the
financial statements.
When the auditor is unable to obtain audit evidence regarding particular account balance, class of
transaction or disclosure that does not have pervasive effect on the financial statements.
The report is mostly like a Clear Opinion Report and only includes a paragraph viz. Basis for
Qualification after Scope paragraph and before Opinion paragraph. Opinion paragraph in
addition to its standard wording includes except for the matter described in Basis for
Qualification paragraph the financial statements give true and fair view.
Adverse Opinion report
An Adverse Opinion Report is issued on the financial statements of a company when the
financial statements are materially misstated and such misstatements have pervasive effect on the
financial statements.
In Audit Report after Scope paragraph but before Opinion paragraph, Basis for Adverse Opinion
paragraph is added. In Opinion paragraph the wording changes to, "Because of situations
mentioned in Basis for Adverse Opinion paragraph, in our opinion the financial statements of
XYZ Co. Ltd. as mentioned in first paragraph does not give true and fair view/are not free from
material misstatements."
Disclaimer of Opinion report
A Disclaimer of Opinion is issued in either of the following cases:
When the auditor is not independent or when there is conflict of interest.
When the limitation on scope is imposed by client, as a result the auditor is unable to obtain
sufficient appropriate audit evidence.
When the circumstances indicate substantial problem of going concern in client.
When there are significant uncertainties in the business of client.

CONTINGENT LIABILITY
A contingent liability is a potential liability...it depends on a future event occurring or not
occurring. For example, if a parent guarantees a daughter's first car loan, the parent has a
contingent liability. If the daughter makes her car payments and pays off the loan, the parent will
have no liability. If the daughter fails to make the payments, the parent will have a liability.
If a company is sued by a former employee for $500,000 for age discrimination, the company
has a contingent liability. If the company is found guilty, it will have a liability. However, if the
company is not found guilty, the company will not have an actual liability.
In accounting, a contingent liability and the related contingent loss are recorded with a journal
entry only if the contingency is both probable and the amount can be estimated.
A potential obligation that may be incurred depending on the outcome of a future event. A
contingent liability is one where the outcome of an existing situation is uncertain, and this
uncertainty will be resolved by a future event. A contingent liability is recorded in the books of
accounts only if the contingency is probable and the amount of the liability can be estimated.
Outstanding lawsuits and product warranties are common examples of contingent liabilities.
Three examples of contingent liabilities include warranty of a company's products, the guarantee
of another party's loan, and lawsuits filed against a company. Contingent liabilities are potential
liabilities. Because they are dependent upon some future event occurring or not occurring, they
may or may not become actual liabilities.
To illustrate this, let's assume that a company is sued for $100,000 by a former employee who
claims he was wrongfully terminated. Does the company have a liability of $100,000? It
depends. If the company was justified in the termination of the employee and has documentation
and witnesses to support its action, this might be considered a frivolous lawsuit and there may be
no liability. On the other hand, if the company was not justified in the termination and it is clear
that the company acted improperly, the company will likely have an income statement loss and a
balance sheet liability.
The accounting rules for these contingencies are as follows: If the contingent loss is probable and
the amount of the loss can be estimated, the company needs to record a liability on its balance
sheet and a loss on its income statement. If the contingent loss is remote, no liability or loss is
recorded and there is no need to include this in the notes to the financial statements. If the

contingent loss lies somewhere in between, it should be disclosed in the notes to the financial
statements.

BALANCE SHEET
The accounting balance sheet is one of the major financial statements used by accountants and
business owners. (The other major financial statements are the income statement, statement of
cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the
statement of financial position.
The balance sheet presents a company's financial position at the end of a specified date. Some
describe the balance sheet as a "snapshot" of the company's financial position at a point (a
moment or an instant) in time. For example, the amounts reported on a balance sheet dated
December 31, 2014 reflect that instant when all the transactions through December 31 have been
recorded.
Because the balance sheet informs the reader of a company's financial position as of one moment
in time, it allows someonelike a creditorto see what a company owns as well as what it owes
to other parties as of the date indicated in the heading. This is valuable information to the banker
who wants to determine whether or not a company qualifies for additional credit or loans. Others
who would be interested in the balance sheet include current investors, potential investors,
company management, suppliers, some customers, competitors, government agencies, and labor
unions.
We will begin our explanation of the accounting balance sheet with its major components,
elements, or major categories:
Assets
Liabilities
Owner's (Stockholders') Equity

Assets
Assets are things that the company owns. They are the resources of the company that have been
acquired through transactions, and have future economic value that can be measured and

expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as
prepaid advertising,
Examples of asset accounts that are reported on a company's balance sheet include:
Cash
Petty Cash
Temporary Investments
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Land
Land Improvements
Buildings
Equipment
Bond Issue Costs Etc.
Classifications Of Assets On The Balance Sheet
Accountants usually prepare classified balance sheets. "Classified" means that the balance sheet
accounts are presented in distinct groupings, categories, or classifications. The asset
classifications and their order of appearance on the balance sheet are:
Current Assets
Investments
Property, Plant, and Equipment
Intangible Assets
Other Assets

LIABILITIES
Liabilities are obligations of the company; they are amounts owed to creditors for a past
transaction and they usually have the word "payable" in their account title. Along with owner's
equity, liabilities can be thought of as a source of the company's assets. They can also be thought
of as a claim against a company's assets. For example, a company's balance sheet reports assets

of $100,000 and Accounts Payable of $40,000 and owner's equity of $60,000. The source of the
company's assets are creditors/suppliers for $40,000 and the owners for $60,000. The
creditors/suppliers have a claim against the company's assets and the owner can claim what
remains after the Accounts Payable have been paid.
Liabilities also include amounts received in advance for future services. Since the amount
received (recorded as the asset Cash) has not yet been earned, the company defers the reporting
of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits.
Examples of liability accounts reported on a company's balance sheet include:
Notes Payable
Accounts Payable
Salaries Payable
Wages Payable
Interest Payable
Other Accrued Expenses Payable
Income Taxes Payable
Customer Deposits
Warranty Liability
Liability accounts will normally have credit balances.
Contra liabilities are liability accounts with debit balances. (A debit balance in a liability account
is contraryor contrato a liability account's usual credit balance.) Examples of contra liability
accounts include:
Discount on Notes Payable
Discount on Bonds Payable Etc.
Classifications Of Liabilities On The Balance Sheet
Liability and contra liability accounts are usually classified (put into distinct groupings,
categories, or classifications) on the balance sheet. The liability classifications and their order of
appearance on the balance sheet are:
Current Liabilities
Long Term Liabilities Etc.

OWNER'S (STOCKHOLDERS') EQUITY

Owner's Equity along with liabilities can be thought of as a source of the company's assets.
Owner's equity is sometimes referred to as the book value of the company, because owner's
equity is equal to the reported asset amounts minus the reported liability amounts.
Assets = Liabilities + Owner's Equity
And just rearrange the terms:
Owner's Equity = Assets Liabilities
"Owner's Equity" are the words used on the balance sheet when the company is a sole
proprietorship. If the company is a corporation, the words Stockholders' Equity are used instead
of Owner's Equity. An example of an owner's equity account is Mary Smith, Capital (where
Mary Smith is the owner of the sole proprietorship). Examples of stockholders' equity accounts
include:
Common Stock
Preferred Stock
Paid-in Capital in Excess of Par Value
Paid-in Capital from Treasury Stock
Retained Earnings