What are Property and Financial Claims?
Double entry bookkeeping and accounting are based on the fundamental premise that for each property a business has there will be an equal financial claim on that property, and that both property and financial claims are measured in monetary amounts.
A property is anything of value that the business owns or controls, for example the business might own manufacturing equipment. A financial claim is a legal right over the property, for example if you paid for the equipment in cash then the owners of the business have the legal right to the property.
The reason it is important to separate the property from the financial claim over the property is that, while the business might own and control the property, the financial claims to it can come from a number of sources.
Property and Financial Claims Example
As an example, suppose a business pays £20,000 cash for an asset. The asset is owned and controlled by the business and the owners of the business have a financial claim over the asset for the same amount.
|Financial claim: Owners Equity claim|
Now suppose instead of cash the asset was bought on account from a supplier. The business still owns and controls the asset, however the financial claim is now from the supplier, the business has a liability to the supplier (until they have been paid).
|Financial claim: Liability to supplier|
When the supplier is paid, the financial claim to the asset transfers to the owner.
Now what happens when the asset is part paid for with a 30% deposit in cash and the balance is funded with credit from the supplier. In this case, the business again owns and control the asset, however two parties now have a financial claim. The owner of the business has a 30% claim and the supplier has a 70% claim.
|Liability to supplier||Owners Equity|
So for each asset there can be a number of financial claims, owners, suppliers, banks, etc.
If you look at the table above for the last example, you will notice that this can be more generally written as follows:
Which is the basic accounting equation.
One side represents the assets of the business (buildings, stock, vehicles etc), and the other side represents who has a claim on those assets (owners, suppliers, banks etc.).