Net worth > net assets > fund balance: Individuals often refer to their equity as their net worth. Not-for-profit organizations use net assets to represent the fact that owner’s equity is the difference between assets and liabilities. Governments use fund balance, because it represents the leftover amount in each fund after assets are used to pay liabilities.
Intangible assets are often particularly hard to measure. Some intangibles, such as goodwill, will only appear on the balance sheet if they have been purchased, rather than developed by the organization. Also, assets often appear on the balance sheet based on their acquisition cost to the organization, rather than based on their current market value.
The CPA’s audit examines the financial statements and the underlying financial records of an organization. Based on their examination, they issue a letter that gives their opinion as to whether the financial statements are free of material (substantial) misstatements and whether they conform to Generally Accepted Accounting Principles (GAAP). GAAP help create some degree of uniformity.
In order to avoid confusion, we want to specifically identify the entity that is the focus of a set of financial reports. Each entity views the world from its own perspective. One transaction could give rise to an asset on the financial records of one entity and a mirror-image liability on the records of another entity.
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