short answers of the following questions
-What is meant by "Transaction**?... „ 21
Differentiate between "External transaction" & Internal transaction**?,..... 23
What is meant by 'Taper transaction"?..... , 23
What do you meant by "Monetary Events" & "Non-Monetary Events" 21
Differentiate between "Quantitative changes'* & Qualitative changes"?.... 22
What are the three basic elements of accounting equation? 24
Liabilities of a business Rs. 1,50,000 which are 0.25 of proprietorship what will be the amount
of: .; ™:......... 24,
'(a) Assets . (b) Capital
• Write a transaction that will: 30
Increase a liability and increase an asset?
Increase an asset and increase Proprietorship?
Decrease an asset and increase an asset?
Decrease an asset and decrease in owner's equity?
Increase an asset and increase a liability?
• What will be the amount of capital if assets are amounting Rs. 50,000 and liabilities
Rs. 35,000 ; , ^ 24
• What are the rules for deciding whether a transaction is cash or credit?. «««..«... ...23
• . Distinguish between cash transaction and credit transaction. ~ «...*.! .22
Define the term "Equities". - 833
mpute the missing amount in each of the following cases; 24
Assets Liabilities Owner's equity
(i) 1,05,000 ? 70,000
(u) ? 35,000 90,000
(Hi) 75,500 40,200 ? \ J
(iv) 99,500 ? 50500
(v) ? 95,000 1,03,000
Ant: fti) L= 35,000; (u) A = 1.25,000; (in) O.E - 35.300; (iv) L * 49.000; (v)A * 1,98.000]
THEORETICAL QUESTIONS
What is a transaction in a business? How does it differ from an event? what are the features bf a
transaction?
What are different types of business transactions?
State with reasons which of the following events may be regarded as transaction Mr. Akram, a
trader;
Mr. Akram started business with Rs. 100,000
He bought furniture for Rs. 10,000 and opened a bank account with Rs. 30,000 .
He placed an order with Rehman & Sons for the. purchase of goods worth Rs. 15000.
He appointed Rizwan as accountant at a salary of Rs. 1500 per month
He bought goods for Rs. 5000
Ana:
4, 5.
He agreed to selj goods/or Rs. 10,000 jo Rashjji :
There was a theft of cash for Rs. 2000 in his business
He dismissed Riz wan from service
He paid Rizwan Rs. 5000 as compensation from his service
He withdrew cash of Rs. 2000 for his private use
{Transactions; 1,2,5,7,9,10]
What do you mean by an Accounting Equation?
Briefly describe the effects of various common transactions on accounting equation.
PROBLEMS
1. Show the affects of following transaction on Accounting Equation:
(i) Mr, Saleem started business with Goods Rs. 40,000 Building Rs. 100,000 & Rs. 110,000.
(B) Purchases goods on account for Rs. 30,000. {ii i) Sold goods on account for Rs. 40,000. (Iv) Cash of Rs. 20,000 deposited into bank. (v) Paid cash to supplier of goods Rs. 20,000. . (vi) Received cash from customers Rs. 30,000.
(vii) A part of building costing Rs. 30,000 was destroyed by fire. (vtti) He made additional invesdnent by cheque Ks. 24),(HM). (fa) Paid salaries Rs. 4,000 by cheque. (x) Goods returned to supplier amounting to Rs. 4,000. Ans: {Rs, 242,000],
2. Show the affects of following transactions on the Accounting Equation;
Mr. Naeem started business with cash Rs. 3,00,000
He purchased furniture for Rs. 15,000
'(c) He purchased goods worth Rs. 75,000 for cash
(d) He paw*>a^ good* worth R«.45,0«0 on credit
(«>' He bought office equipment for Rs. 22,500
(f) He sold goods for Rs. 45,000 costing Rs. 37,500
(g) He sold goods to Saleem for Rs. 30,000 costing Rs. 25,500 on credit basis
(b) He withdrew cash Rs.4,500 for his personal use
(I) He nude additions investment in cash Rs. 22,500 (j) Cash paid to creditors Rs. 37,500 (k) Cash received from Saleem Rs. 22,500 (I) He paid salaries Rs.4,500 (m) He paid rent of building Rs. 3,000. Ana: Rs< 330,000].
Transactions AND ACCOUNTING
Sunday, August 8, 2010
Saturday, August 7, 2010
SETTING UP A BRAND - NEW BUSINESS
Assume that Mr. Naveed decided to start a "shoes business" of his own, to belcnown as Naveed Company." The new business was started on 1st January, 2005, when Mr. Naveed invested Rs. in his business. Recall that the business entity is kept .separate from its owner.
The business unit has borrowed Rs. 5,00,000 from its owner. This is a first transaction of the It brought a double change in the financial position of the business-- an asset (cash) increased by ),OOG and a liability (owner's equity or capital) increased also by Rs. 5,00,000. In omer words, this is consisting of two elements;
The receipt of Rs. 500,000 cash
Supplied by the owner of the business.
ACTION NO. f
The initial accounting equation of the new business men appeared as follows;
Assets = iabjlil a + Owner's equity
Cash
Rs. 500.000
Nil
Capital Rt. 500.000
Equation.2
Mr. Naveed purchased a building for Rs. 2,00,000. This transaction brought two changes- cash decreased by Rs. 2,00,000 and Building (a new asset) increased by Rs.' 2,00,000. Now the equation
Assets
Cash -i- Building Ba. 300.000+ 200.000
Liabilities + Owner's equity
: Capital
Nil + Rs. 500.000
It may be noted that there is no change on the right side of the equation. Simply one asset (cash) converted into another asset (Building). The two sides of the equation remains equal.
COUMTDM EQUATION
The business unit has borrowed Rs. 5,00,000 from its owner. This is a first transaction of the It brought a double change in the financial position of the business-- an asset (cash) increased by ),OOG and a liability (owner's equity or capital) increased also by Rs. 5,00,000. In omer words, this is consisting of two elements;
The receipt of Rs. 500,000 cash
Supplied by the owner of the business.
ACTION NO. f
The initial accounting equation of the new business men appeared as follows;
Assets = iabjlil a + Owner's equity
Cash
Rs. 500.000
Nil
Capital Rt. 500.000
Equation.2
Mr. Naveed purchased a building for Rs. 2,00,000. This transaction brought two changes- cash decreased by Rs. 2,00,000 and Building (a new asset) increased by Rs.' 2,00,000. Now the equation
Assets
Cash -i- Building Ba. 300.000+ 200.000
Liabilities + Owner's equity
: Capital
Nil + Rs. 500.000
It may be noted that there is no change on the right side of the equation. Simply one asset (cash) converted into another asset (Building). The two sides of the equation remains equal.
COUMTDM EQUATION
Friday, August 6, 2010
BUSINESS TRANSACTIONS'UPON THE ACCOUNTING EQUATION
BUSINESS TRANSACTIONS 'UPON THE ACCOUNTING EQUATION
Recall that every business transaction brings about a double change in Ifae financial position of the s. The financial position of a business is represented by the accounting equation:
Assets s Liabilities + Owner's equity.
Regardless of whether a business 'grows or contracts this equality between the assets and the claims the assets is always maintained.. Any increase in the amount of total assets is necessarily lied by an equal increase on the other side of the equation, that is, by an increase in either the or the owner's equity. Any decrease in the amount of total assets is necessarily accompanied by an decrease in liabilities or owner's equity. Any expense incurred will decrease the owner's equity on one and decrease cash on the other side of the equation. Any revenue earned will increase the owner's on one side and increase assets on the other side.
The effect of transactions upon the accounting equation can best be illustrated by taking a brand-•business as an example:-
Recall that every business transaction brings about a double change in Ifae financial position of the s. The financial position of a business is represented by the accounting equation:
Assets s Liabilities + Owner's equity.
Regardless of whether a business 'grows or contracts this equality between the assets and the claims the assets is always maintained.. Any increase in the amount of total assets is necessarily lied by an equal increase on the other side of the equation, that is, by an increase in either the or the owner's equity. Any decrease in the amount of total assets is necessarily accompanied by an decrease in liabilities or owner's equity. Any expense incurred will decrease the owner's equity on one and decrease cash on the other side of the equation. Any revenue earned will increase the owner's on one side and increase assets on the other side.
The effect of transactions upon the accounting equation can best be illustrated by taking a brand-•business as an example:-
Thursday, August 5, 2010
THE ACCOUNTING EQUATION
The three basic elements of accounting are assets, liabilities and owners' equity (capital). The assets represent the things of value that a business owns. The liabilities are me claims of the creditors against those assets. The owner's equity (capital) is the claim of the owner against those assets. Whatever is not claimed by uk creditors belongs to the owner. As a result, the total claims against the assets are always equal to the total assets. This equality between the assets and the liabilities and the owner's equity is expressed by the "accounting equation".
Assets * Liabilities + Owner's Equity.
The two sides of the accounting equation must always be equal because the rights to all the assets of a business are owned by someone. The creditors have a claim against the assets of a business until the liabilities have been paid. The owner has a claim against the remaining assets of the business. If no liabilities exist, then the owners' equity will equal to the total assets.
A. clear understanding of the accounting equation is essential, because most of accounting systems based on it The equation actually identifies the claims (or rights) against the assets held by a business. The two sides represent different versions of the same thing. The left side of the equation, assets, consists of the "resources" (properties) held by the business; the right side of the equation, equities (creditor's claim and owner's claim against the assets) consists of the "sources*1.
Resources Assets
= Sources
= Claims against assets
"The expression of the equality of mi entity's assets with the claims against them is referred to as the accounting equation,"
It should be remembered that the two sides of the equation are always equal because these two sides are merely two views of the same business resources. The assets side shows us "what resources" the business owns, the other side (liabilities and owner's equity) tells us "who supplied these resources'* to the business and how much each group supplied.
AND ACCOUNTING EQUATION
Assets * Liabilities + Owner's Equity.
The two sides of the accounting equation must always be equal because the rights to all the assets of a business are owned by someone. The creditors have a claim against the assets of a business until the liabilities have been paid. The owner has a claim against the remaining assets of the business. If no liabilities exist, then the owners' equity will equal to the total assets.
A. clear understanding of the accounting equation is essential, because most of accounting systems based on it The equation actually identifies the claims (or rights) against the assets held by a business. The two sides represent different versions of the same thing. The left side of the equation, assets, consists of the "resources" (properties) held by the business; the right side of the equation, equities (creditor's claim and owner's claim against the assets) consists of the "sources*1.
Resources Assets
= Sources
= Claims against assets
"The expression of the equality of mi entity's assets with the claims against them is referred to as the accounting equation,"
It should be remembered that the two sides of the equation are always equal because these two sides are merely two views of the same business resources. The assets side shows us "what resources" the business owns, the other side (liabilities and owner's equity) tells us "who supplied these resources'* to the business and how much each group supplied.
AND ACCOUNTING EQUATION
TRANSACTIONS AND ACCOUNTING EQUATION
TRANSACTIONS AND ACCOUNTING EQUATION
The main function of an accountant is to record properly the financial transactions of a business in the books of accounts and to ascertain its true result at the year end. Thus transaction is the tion of accounting - the first and formest element of accounting. In a word, it is the life and blood of ting. Hence the accountant must have a fair idea about the term "transaction."
In ordinary language "transaction" means exchange of something. But in Accounting it is used in a sense. If the financial position of a business concern changes on the happening of en event \ it measurable in terms of money, that event is regarded as a "transaction " in Accounting.
Or
A business event which can be measured in terms of money and which must be recorded i* r of account is called a "transaction ".
IT IS AN EVENT?
In ordinary language "Event" means anything that happens. Human life is fall of events. So many take place in the family and social life of a person. The events may be classified into two:
Monetary Events:
Events which are related with money, i.e. which change the financial position of a person are as "monetary events". For example, daily shopping, marriage ceremony, birthday anniversary, anniversary etc,
Non-Monetary Events:
Events which are not related with money i.e. which do not change the financial position of a person >wn as "non-monetary events". For example, winning a game, delivering a lecture in a meeting etc.
In business accounting only those events which change the/manciaj position of the business and t call tor accounting are recognised as "Events". In other words, all monetary events are regarded as tess transactions."
Remember, it is not that anything which- results in exchange of something will be regarded as action. On the other hand, something may be regarded as a transaction even though it involves no age. For example, Rehman sends a price-list to his customer, Akram. This involves exchange of price-sweet Rehman and Akram, yet it is not regarded as a transaction, because it is not measurable in of money and it does not change the financial position of both the persons. Again, suppose, goods Rs. 1000 are destroyed by fire. This does not involve any exchange, yet it is regarded as a* transaction, te it is measurable in terms of money and it changes me financial position of the business.
It must be noted that an event* although measurable in terms of money, may not be regarded as a on. For example, we receive an order for supply of goods worth Rs. 1000. Although it is able in terms of money, it is not regarded as 3 transaction, since it has not changed the financial 41. It will, however, be regard as transaction when the goods are supplied according to that order
It appears from the above discussion that the following two conditions must be satisfied in that an event may-be regarded as a transaction in Accounting;
The event must be measurable hi terms of money.
The financial position of the business must change on account of that event..
Features:
To. become a transaction an event must have the following features; 1. THERE MUST BE TWO PARTIES:
No transaction is possible without two parties. Just as it takes two hands to clap, so it takes parties for a transaction to take place. There cannot be a giver unless there is,a receiver. Suppose. borrows Rs. 10,000 from a bank. This is a transaction, since there are two parties here - X and bank.
2.
money 3.
THE EVENT MUST BE MEASURABLE IN TERMS OF MONEY;
An event will not be regarded as a transaction, unless it is capable of being measured in terms
THE EVENT MUST RESULT IN TRANSFER OF PROPERTY OR SERVICE:
Suppose, we buy a motor-car from Saleem for Rs. 40000. This results in transfer of property Saleem to us, so it is a transaction. Again suppose, we pay salary to our employee Rs. 2000. This results \ transfer of service - the employee renders service and we receive it So it is a transaction.
4. THE EVENTS MUST CHANGE THE FINANCIAL POSITION OF THE BUSINESS:
Transaction takes place only when there i& a change, in the financial position of the business. change in financial position may be of two kinds:
(a) Quantitative change:
This changes the total value of assets and liabilities of a business concern. Suppose, machinery Rs 20,000 is destroyed. This reduces the total value of the assets of the business. As a result, the final position changes and hence it is a transaction, .
(b) Qualitative change:
This causes increase or decrease in the different elements of assets, or liabilities, but the value \ total assets and total liabilities remains unchanged. Suppose, we buy machinery worth Rs. 50,000. results in exchange of properties - cash Rs. 50,000 goes out of our possession and at the same til machinery of an equal value comes into our possession. This does not change the total value of our as but most causes a qualitative change in our financial position, hence it is a transaction.
The main function of an accountant is to record properly the financial transactions of a business in the books of accounts and to ascertain its true result at the year end. Thus transaction is the tion of accounting - the first and formest element of accounting. In a word, it is the life and blood of ting. Hence the accountant must have a fair idea about the term "transaction."
In ordinary language "transaction" means exchange of something. But in Accounting it is used in a sense. If the financial position of a business concern changes on the happening of en event \ it measurable in terms of money, that event is regarded as a "transaction " in Accounting.
Or
A business event which can be measured in terms of money and which must be recorded i* r of account is called a "transaction ".
IT IS AN EVENT?
In ordinary language "Event" means anything that happens. Human life is fall of events. So many take place in the family and social life of a person. The events may be classified into two:
Monetary Events:
Events which are related with money, i.e. which change the financial position of a person are as "monetary events". For example, daily shopping, marriage ceremony, birthday anniversary, anniversary etc,
Non-Monetary Events:
Events which are not related with money i.e. which do not change the financial position of a person >wn as "non-monetary events". For example, winning a game, delivering a lecture in a meeting etc.
In business accounting only those events which change the/manciaj position of the business and t call tor accounting are recognised as "Events". In other words, all monetary events are regarded as tess transactions."
Remember, it is not that anything which- results in exchange of something will be regarded as action. On the other hand, something may be regarded as a transaction even though it involves no age. For example, Rehman sends a price-list to his customer, Akram. This involves exchange of price-sweet Rehman and Akram, yet it is not regarded as a transaction, because it is not measurable in of money and it does not change the financial position of both the persons. Again, suppose, goods Rs. 1000 are destroyed by fire. This does not involve any exchange, yet it is regarded as a* transaction, te it is measurable in terms of money and it changes me financial position of the business.
It must be noted that an event* although measurable in terms of money, may not be regarded as a on. For example, we receive an order for supply of goods worth Rs. 1000. Although it is able in terms of money, it is not regarded as 3 transaction, since it has not changed the financial 41. It will, however, be regard as transaction when the goods are supplied according to that order
It appears from the above discussion that the following two conditions must be satisfied in that an event may-be regarded as a transaction in Accounting;
The event must be measurable hi terms of money.
The financial position of the business must change on account of that event..
Features:
To. become a transaction an event must have the following features; 1. THERE MUST BE TWO PARTIES:
No transaction is possible without two parties. Just as it takes two hands to clap, so it takes parties for a transaction to take place. There cannot be a giver unless there is,a receiver. Suppose. borrows Rs. 10,000 from a bank. This is a transaction, since there are two parties here - X and bank.
2.
money 3.
THE EVENT MUST BE MEASURABLE IN TERMS OF MONEY;
An event will not be regarded as a transaction, unless it is capable of being measured in terms
THE EVENT MUST RESULT IN TRANSFER OF PROPERTY OR SERVICE:
Suppose, we buy a motor-car from Saleem for Rs. 40000. This results in transfer of property Saleem to us, so it is a transaction. Again suppose, we pay salary to our employee Rs. 2000. This results \ transfer of service - the employee renders service and we receive it So it is a transaction.
4. THE EVENTS MUST CHANGE THE FINANCIAL POSITION OF THE BUSINESS:
Transaction takes place only when there i& a change, in the financial position of the business. change in financial position may be of two kinds:
(a) Quantitative change:
This changes the total value of assets and liabilities of a business concern. Suppose, machinery Rs 20,000 is destroyed. This reduces the total value of the assets of the business. As a result, the final position changes and hence it is a transaction, .
(b) Qualitative change:
This causes increase or decrease in the different elements of assets, or liabilities, but the value \ total assets and total liabilities remains unchanged. Suppose, we buy machinery worth Rs. 50,000. results in exchange of properties - cash Rs. 50,000 goes out of our possession and at the same til machinery of an equal value comes into our possession. This does not change the total value of our as but most causes a qualitative change in our financial position, hence it is a transaction.
Wednesday, August 4, 2010
CLASSIFICATION Accouting
CLASSIFICATION
Transactions may be divided into three groups: CASH TRANSACTION:
If the value of a transaction in met is cash immediately, it is called cash transaction. For ex* we buy furniture for Rs. 2000 from Asif and immediately pay him in cash. It is a cash transaction.
2. CREDIT TRANSACTION:
If the value of the transaction is not met in cash immediately, it is called credit transaction. In above example, if we do not pay Asif Rs. 2000 immediately, it will be credit transaction.
Transaction AND ACCOUNTING Equation
2S
PAPER TRANSACTION:
When there is na question of meeting the value of a transaction, it is regarded as a paper transaction. For example, I have lost Rs. 500. This changes.my financial position-my properties decrease in June by Rs. 500. But there is no question of meeting the value of such a transaction. This is a paper transaction.
Transactions may again be divided into the following two classes;
1. EXTERNAL TRANSACTIONS:
A transaction taking place with an outside person or organization, is called an external transaction, For example, a machine is purchased for Rs. 20,000 from Kashif Bros. This is an external transaction.
2. INTERNAL TRANSACTIONS:
A transaction with which no outside person or institution is involved, is called internal transaction. For example, loss of furniture by fire, decrease in the value of assets on account of use (depreciation) etc.
RULES FOR DECIDING WHETHER A TRANSACTION IS CASH OR
CREDIT; *
Sometimes transactions are worded in such a way that it becomes difficult to decide whether they ace cash or credit transactions. The following rules will make the position clear,
1. A transaction Is regard as a o*sh transaction If:
The word "cash" is mentioned in the transaction. For example Bought goods for cash Rs.
5000 from Arshad.
The name of the seller or buyer is not mentioned in the transaction. For example, Bought
goods Rs.5000.
2. A transaction la regarded as a credit transaction if >
The words "on credit" or "on account" are mentioned in the transaction. For example,
Bought goods Rs. 5000 on credit,
The name of the seller or buyer is mentioned in the transaction and the word "Cash" is not
mentioned. For example, Bought goods from Arshad Rs. 5000.
Thus we may conclude from the above discussion that every business transaction brings a double Atnge in the financial position of the business. It brings a change in the assets, liabilities, owner's equity, 'expenses or revenues of a business,
Transactions may be divided into three groups: CASH TRANSACTION:
If the value of a transaction in met is cash immediately, it is called cash transaction. For ex* we buy furniture for Rs. 2000 from Asif and immediately pay him in cash. It is a cash transaction.
2. CREDIT TRANSACTION:
If the value of the transaction is not met in cash immediately, it is called credit transaction. In above example, if we do not pay Asif Rs. 2000 immediately, it will be credit transaction.
Transaction AND ACCOUNTING Equation
2S
PAPER TRANSACTION:
When there is na question of meeting the value of a transaction, it is regarded as a paper transaction. For example, I have lost Rs. 500. This changes.my financial position-my properties decrease in June by Rs. 500. But there is no question of meeting the value of such a transaction. This is a paper transaction.
Transactions may again be divided into the following two classes;
1. EXTERNAL TRANSACTIONS:
A transaction taking place with an outside person or organization, is called an external transaction, For example, a machine is purchased for Rs. 20,000 from Kashif Bros. This is an external transaction.
2. INTERNAL TRANSACTIONS:
A transaction with which no outside person or institution is involved, is called internal transaction. For example, loss of furniture by fire, decrease in the value of assets on account of use (depreciation) etc.
RULES FOR DECIDING WHETHER A TRANSACTION IS CASH OR
CREDIT; *
Sometimes transactions are worded in such a way that it becomes difficult to decide whether they ace cash or credit transactions. The following rules will make the position clear,
1. A transaction Is regard as a o*sh transaction If:
The word "cash" is mentioned in the transaction. For example Bought goods for cash Rs.
5000 from Arshad.
The name of the seller or buyer is not mentioned in the transaction. For example, Bought
goods Rs.5000.
2. A transaction la regarded as a credit transaction if >
The words "on credit" or "on account" are mentioned in the transaction. For example,
Bought goods Rs. 5000 on credit,
The name of the seller or buyer is mentioned in the transaction and the word "Cash" is not
mentioned. For example, Bought goods from Arshad Rs. 5000.
Thus we may conclude from the above discussion that every business transaction brings a double Atnge in the financial position of the business. It brings a change in the assets, liabilities, owner's equity, 'expenses or revenues of a business,
ACCOUNTING CONVENTIONS
ACCOUNTING CONVENTIONS
Conservatism:
According to this convention accounts follow the rule "anticipate no profit but provide for all losses", while recording business .transactions. In other words, the Accountant follows the policy of safe". On account of this convention, the inventory is valued at cost or, market price whichever is Similarly a provision is made for possible bad and doubtful debts out of current year's profits. This affects principally the category of current assets.
The convention of conservation has been criticised these days as it goes against the convention of disclosure. It encourages the accountant to create secret reserves (e.g. by creating excess provision for and doubtful debts, depreciation etc.)» and me financial statements do not show a true and fair view of of affairs of the business.
Full Disclosure:
According to this convention the users of financial statements (proprietors, creditors and investors) informed of any facts necessary for the proper interpretation of the statements. Full disclosure may be either in the body of financial statements, or in notes accompanying the statements. Significant rial events occurring after the balance sheet date, but before the financial statements have been issued outsiders require full disclosure.
The practice of appending Notes to the financial statements (such as about contingent liabilities or st value of investments or law suits against the company is in pursuant to the convention of full :closure.
Consistency:
This convention states that once an entity has decided on one method, it should use the same method for all subsequent events of the same character unless it has a sound reason to change methods. If an entity made frequent changes in the manner of handling a given class of events in the accounting records, comparison of its financial statements for one period with those of another period would be difficult
Consistency, as used here, has a narrow meaning. It refers only to consistency over time, not to
logical consistency at a given moment of time. For example fixed assets are recorded at cost, but inventories
are recorded at the lower of their cost or market value. Some people .argue mat this in inconsistent.
Whatever the logical merits of this argument, it does not involve the accounting concept of consistency.
This convention does not mean mat the treatment of different categories of transactions must be consistent
with one another 014 only .that transactions in a given category must be treated consistently frqm one
accounting period to the next .
4. Materiality:
The term materiality refers to the relative importance of an item or an event An item is "material"
if knowledge of the item might reasonably influence the decisions of users of financial statements.
Accountants must be sure that all material items are properly reported in the financial statement '
However, the financial reporting process should be cost-effective — that is, the value of the information should exceed the cost of its preparation. In short, the convention of materiality allows accountants to ignore other accounting principles with respect to items that are not material. An example of the materiality convention is found in the manner in which most companies account for low-cost plant assets, such as pencil sharpness or wastebaskets. Although the matching concept calls for depreciating plant assets over their useful lift, these low-cost items usually are charged.immediately to an expense 'account the resulting "distortion" in the financial statement is too small to be of any importance. .
Conservatism:
According to this convention accounts follow the rule "anticipate no profit but provide for all losses", while recording business .transactions. In other words, the Accountant follows the policy of safe". On account of this convention, the inventory is valued at cost or, market price whichever is Similarly a provision is made for possible bad and doubtful debts out of current year's profits. This affects principally the category of current assets.
The convention of conservation has been criticised these days as it goes against the convention of disclosure. It encourages the accountant to create secret reserves (e.g. by creating excess provision for and doubtful debts, depreciation etc.)» and me financial statements do not show a true and fair view of of affairs of the business.
Full Disclosure:
According to this convention the users of financial statements (proprietors, creditors and investors) informed of any facts necessary for the proper interpretation of the statements. Full disclosure may be either in the body of financial statements, or in notes accompanying the statements. Significant rial events occurring after the balance sheet date, but before the financial statements have been issued outsiders require full disclosure.
The practice of appending Notes to the financial statements (such as about contingent liabilities or st value of investments or law suits against the company is in pursuant to the convention of full :closure.
Consistency:
This convention states that once an entity has decided on one method, it should use the same method for all subsequent events of the same character unless it has a sound reason to change methods. If an entity made frequent changes in the manner of handling a given class of events in the accounting records, comparison of its financial statements for one period with those of another period would be difficult
Consistency, as used here, has a narrow meaning. It refers only to consistency over time, not to
logical consistency at a given moment of time. For example fixed assets are recorded at cost, but inventories
are recorded at the lower of their cost or market value. Some people .argue mat this in inconsistent.
Whatever the logical merits of this argument, it does not involve the accounting concept of consistency.
This convention does not mean mat the treatment of different categories of transactions must be consistent
with one another 014 only .that transactions in a given category must be treated consistently frqm one
accounting period to the next .
4. Materiality:
The term materiality refers to the relative importance of an item or an event An item is "material"
if knowledge of the item might reasonably influence the decisions of users of financial statements.
Accountants must be sure that all material items are properly reported in the financial statement '
However, the financial reporting process should be cost-effective — that is, the value of the information should exceed the cost of its preparation. In short, the convention of materiality allows accountants to ignore other accounting principles with respect to items that are not material. An example of the materiality convention is found in the manner in which most companies account for low-cost plant assets, such as pencil sharpness or wastebaskets. Although the matching concept calls for depreciating plant assets over their useful lift, these low-cost items usually are charged.immediately to an expense 'account the resulting "distortion" in the financial statement is too small to be of any importance. .
Tuesday, August 3, 2010
Short Answer Question of Accounting
Write short answers of the following questions:
Define the term "Accounting"
What is the difference between "Book Keeping " & "Accounting"?.
What is meant by the term "Business"
How many forms of business organization are?
What is the difference between "Accounting" & "Accountancy"?
Define "Goods or Merchandises
Explain the following concepts by giving example
Debtors / Accounts receivable.
Creditors / Accounts payable.
Define the term 'Cash Discount
What is the difference between "Assets" & "Liabilities"?
What is Capital or owner's equity? .
Define the term "Drawings"
Define "Separate entity concept"
Define 'K3omg concern concept*'
Define "Money measurement concept"
Define cost concept in accounting
Define "Dual aspect concept"
Define "Accounting period concept".
What do you meant by matching concept of accounting? ,
Define "Realization concept"....
What do you mean by trade discount? .,
Name the three main branches of accounting
Explain the terms "Sales" & "Purchases"
Explain the terms "Credit Sales" & "Credit Purchases"....
What do you understand by the terms "Returns outwards" & "Returns Inwards"?
What is the difference between "Cost accounting" & "Financial accounting"?
What do you understand by the terms "Expenses" and "Revenue"?
Define "Conservatism Convention"
Define "Full Disclosure Convention"
Define "Consistency Convention"
Define "Materiality Convention
10 _._..' •
THEORETICAL QUESTIONS
What is the need and importance of accounting?
What is accounting? How does it differ from Accountancy?
What do you mean by Book-Keeping? How does it differ from Accounting?
"Accounting begins where Book-keeping ends." Discuss the statement
Explain the terms;
(a). Business entity
(b). Goods
(c). Purchases
(d). Purchases returns and allowances
(e). Cash Purchases. & Credit Purchases
„ - (f). . Sales
(g). • Cash sates &* credit sales
(h). Sales returns & allowances
(k). Trade discount
6. Explain the following concepts by giving examples',.
(i) Debtors or Accounts Receivable,.
in; Creditors or Accounts payable.
(iii) Cash Discount
(iv) Capital or owner's equity.
(v) Assets.
(vi) Liabilities. -
(vii) Accounting period.
(viii) Revenue.
(ix) Expenses.
(x) Net profit or net Income.
7. Explain the following concepts by giving examples;
(i) Separate Entity Concept
CM) Cost Concept
(iii) Dual Aspect Concept
(iv) Matching Concept
Define the term "Accounting"
What is the difference between "Book Keeping " & "Accounting"?.
What is meant by the term "Business"
How many forms of business organization are?
What is the difference between "Accounting" & "Accountancy"?
Define "Goods or Merchandises
Explain the following concepts by giving example
Debtors / Accounts receivable.
Creditors / Accounts payable.
Define the term 'Cash Discount
What is the difference between "Assets" & "Liabilities"?
What is Capital or owner's equity? .
Define the term "Drawings"
Define "Separate entity concept"
Define 'K3omg concern concept*'
Define "Money measurement concept"
Define cost concept in accounting
Define "Dual aspect concept"
Define "Accounting period concept".
What do you meant by matching concept of accounting? ,
Define "Realization concept"....
What do you mean by trade discount? .,
Name the three main branches of accounting
Explain the terms "Sales" & "Purchases"
Explain the terms "Credit Sales" & "Credit Purchases"....
What do you understand by the terms "Returns outwards" & "Returns Inwards"?
What is the difference between "Cost accounting" & "Financial accounting"?
What do you understand by the terms "Expenses" and "Revenue"?
Define "Conservatism Convention"
Define "Full Disclosure Convention"
Define "Consistency Convention"
Define "Materiality Convention
10 _._..' •
THEORETICAL QUESTIONS
What is the need and importance of accounting?
What is accounting? How does it differ from Accountancy?
What do you mean by Book-Keeping? How does it differ from Accounting?
"Accounting begins where Book-keeping ends." Discuss the statement
Explain the terms;
(a). Business entity
(b). Goods
(c). Purchases
(d). Purchases returns and allowances
(e). Cash Purchases. & Credit Purchases
„ - (f). . Sales
(g). • Cash sates &* credit sales
(h). Sales returns & allowances
(k). Trade discount
6. Explain the following concepts by giving examples',.
(i) Debtors or Accounts Receivable,.
in; Creditors or Accounts payable.
(iii) Cash Discount
(iv) Capital or owner's equity.
(v) Assets.
(vi) Liabilities. -
(vii) Accounting period.
(viii) Revenue.
(ix) Expenses.
(x) Net profit or net Income.
7. Explain the following concepts by giving examples;
(i) Separate Entity Concept
CM) Cost Concept
(iii) Dual Aspect Concept
(iv) Matching Concept
Accounting problems 2
& Owner's equity
Creditors Rs.80,000
Capital - 188,000
3. On 1st January, 2005, the balances of HV sKhan Bros, am as follows;
Assets
Cask
Debtors of goods Stock of goods Building
Rs. 50,000 34,000 44,000 140.000 26S
Transactions during the month of January; Jan; li Ruddy^ goods for cost
5. Sold goods for cash Rs. 24,000 Costing Rs. 21,000
7. Cash paid to creditors Rs, 50,000
9. Sold goods for cash Rs: 10,000 and as credit balance Rs. 6,000 costing Rs. 12,000.
Ilk Goods returned by a customer Rs. 4,000 costing Rs. 3}800
15. Cash received from debtors Rs. 28,000
18. Cash paid for furniture purchased for owner's domestic use Rs. 2,000
22. Depreciation on buiMing Rs. 2^00
Paid telephone bill Rs. 1,200
Paid salaries Rs, 6,000.
Show the effects of above transactions on the accounting equation. .
{Rs. 212.8QQ].
On 1st March 2005, ihs balanoss of MVS Aambr Bros, ars as follows:
Assets Liabilities
Cash 60,000 Accounts Payable 45,000
Accounts Receivable 45,000 Capital ?
Merchandise Inventory 72,000
Furniture 90,000
Transactions during the month of March 2005. March: 04. Goods costing Rs. 18,000 are sold for Rs. 30,000 subject to 5 % trade discount.
10. Office supplies of Rs. 15,000 are purchased from Khurram Traders.
14. Half of the Accounts Payable on 13,2005 an paid.
22. I'aid for stationery purchased Rs. 3,000.
24. Depredation on furniture Rs. 4,500.
25.* Rs. 21,000 received from accounts receivables.
28. Purchased goods for cash Rs. 15,000 subject to 5 % trade discount
30. Paid Rent for the month Rs. 6,000.
(Rs. 259.5001
Creditors Rs.80,000
Capital - 188,000
3. On 1st January, 2005, the balances of HV sKhan Bros, am as follows;
Assets
Cask
Debtors of goods Stock of goods Building
Rs. 50,000 34,000 44,000 140.000 26S
Transactions during the month of January; Jan; li Ruddy^ goods for cost
5. Sold goods for cash Rs. 24,000 Costing Rs. 21,000
7. Cash paid to creditors Rs, 50,000
9. Sold goods for cash Rs: 10,000 and as credit balance Rs. 6,000 costing Rs. 12,000.
Ilk Goods returned by a customer Rs. 4,000 costing Rs. 3}800
15. Cash received from debtors Rs. 28,000
18. Cash paid for furniture purchased for owner's domestic use Rs. 2,000
22. Depreciation on buiMing Rs. 2^00
Paid telephone bill Rs. 1,200
Paid salaries Rs, 6,000.
Show the effects of above transactions on the accounting equation. .
{Rs. 212.8QQ].
On 1st March 2005, ihs balanoss of MVS Aambr Bros, ars as follows:
Assets Liabilities
Cash 60,000 Accounts Payable 45,000
Accounts Receivable 45,000 Capital ?
Merchandise Inventory 72,000
Furniture 90,000
Transactions during the month of March 2005. March: 04. Goods costing Rs. 18,000 are sold for Rs. 30,000 subject to 5 % trade discount.
10. Office supplies of Rs. 15,000 are purchased from Khurram Traders.
14. Half of the Accounts Payable on 13,2005 an paid.
22. I'aid for stationery purchased Rs. 3,000.
24. Depredation on furniture Rs. 4,500.
25.* Rs. 21,000 received from accounts receivables.
28. Purchased goods for cash Rs. 15,000 subject to 5 % trade discount
30. Paid Rent for the month Rs. 6,000.
(Rs. 259.5001
Accounting Problem
I started a business with Rs. 50,000.
Here transaction is to be considered from the viewpoint of my business, not from my personal viewpoint So, an event changing the financial position of my business will be regarded as a transaction:
1". It is a transaction. It changes the financial position of the business -Cash (asset) increases
by Rs. 50,000 and owner's equity increases by an-equal amount.
•2, It is a transaction. It changes the financial position of my business-Furniture (an asset) increases by Rs. 2,000 and cash (an asset) decreases by an equal amount
It is not a transaction. It does not change the financial position of my business.
It is not a transaction. Mere appointment of a cashier does not change the financial position
of my business.
It is a transaction. It changes the financial position of my business— cash (an asset) decreases
by Rs. 2,000 and.an expense (salary) increases by an equal .amount..
It is a transaction. It changes the financial position of jny business - goods decrease by Rs.
500 and owner's equity also decreases by an equal amount.
It is a transaction. It changes the financial position of my business cash (an asset) decreases
by Rs. 1,000 and owner's equity also decreases by an equal amount.
It is not a transaction. It does not change the financial position of my business.
Here transaction is to be considered from the viewpoint of my business, not from my personal viewpoint So, an event changing the financial position of my business will be regarded as a transaction:
1". It is a transaction. It changes the financial position of the business -Cash (asset) increases
by Rs. 50,000 and owner's equity increases by an-equal amount.
•2, It is a transaction. It changes the financial position of my business-Furniture (an asset) increases by Rs. 2,000 and cash (an asset) decreases by an equal amount
It is not a transaction. It does not change the financial position of my business.
It is not a transaction. Mere appointment of a cashier does not change the financial position
of my business.
It is a transaction. It changes the financial position of my business— cash (an asset) decreases
by Rs. 2,000 and.an expense (salary) increases by an equal .amount..
It is a transaction. It changes the financial position of jny business - goods decrease by Rs.
500 and owner's equity also decreases by an equal amount.
It is a transaction. It changes the financial position of my business cash (an asset) decreases
by Rs. 1,000 and owner's equity also decreases by an equal amount.
It is not a transaction. It does not change the financial position of my business.
ACCOUNTING CONCEPTS
Separate Entity Concept:
Accounts are kept for entities, as distinguished from the persons who associated with these In recording events in accounting, the important question is: "How do these events affect the '-How they affect the persons who own, operate, or otherwise are associated with the entity is For example, when a person invests Rs.200,000 into business it will be deemed that the owner given that money to the business which will be shown as a 'liability' hi the books of the* business. In tie owner withdraws Rs.30,000 from'the business, it will change the position and the net amount by the business to the owner will be shown only as Rs. 170,000.
The concept of separate entity is applicable to all forms of business organizations. For example, in of a sole proprietorship or partnership business, though the, sole proprietor or partners are not as separate entities in the eyes of law, but for accounting purposes they will be considered as entities.
Going Concern Concept:
According to this concept it is assumed that an entity is a going concern — that it will continue to for an indefinite time period it here is no intention to liquidate the particular business venture in the lie future. On account of this concept, the accountant while valuing the asset does not take into the sale value of assets. Moreover, he charges depreciation on fixed assets on the basis of their
life rather than on their market values.
For example, suppose that a company has just purchased a three-year insurance policy for If we assume that the business will continue in operation for three years or more. We will . the Rs.45000 cost of insurance as an asset which provides services to the business over a three-period. On (he other hand, if we assume that the business is likely to terminate in the near future, the policy should be reported at its cancellation value i,e. the amount refundable upon cancellation.
Moreover, the concept applies to the business as a whole. When an enterprise liquidates a branch segment of its operations, the ability of the enterprise to continue as a going-concern is not impaired ly. The enterprise wilt not be considered as a going-concern when it has gone into liquidation.
Money Measurement Concept:
In financial accounting, a record is made only of those information that can be expressed in terms. In .other words, no accounting is possible for an event or transaction which is not tble in terms of money, e.g. passing an examination, delivering lecture in a meeting, winning a prize These are events no doubt, but since these are not measurable in terms of money, there is no question of accounting.
Measurement of business events in money helps in understanding the state of affairs of business in better way. For example. If a business owns, 1500 kg of stock, one car, 1500 square feet of building etc. these amounts cannot be added to produce a meaningful total of what the business owns. sver, if a these items are expressed in monetary terms such as stock Rs.24000, car Rs.300.000 and ig Rs.500,000, all such items can be added in better way and precise estimate about the assets of the will be available.
14
4. Cost Concept:
The concept is closely related to going concern concept According to this concept "An ordinarily entered on the accounting fecord at die (nice paid to acquire it, and this cost is the basis subsequent accounting for the asset". If business buys a bujjdfng for Rs. 5,00,000, the assets would^ recorded in the books at Rs.500,000, even if its market value at that time may be Rs. 550,000. In case a later the market value of this asset comes down to Rs.450,000 it will ordinarily continue to be shown; Rs.500,000 and not at Rs.450,000.
The cost concept does not mean that the asset will always be shown at cost It has also been stafc above that cost becomes the basis for all future accounting for die asset It means that asset is recorded' i cost at-the time of purchase but it may systematically be reduced in its value by charging depreciation.
5. Dual Aspect Concept:
The economic resources of an entity are called 'assets', the claims of various parties against th« assets are called 'equities'. There are two types of equities:
1.. Liabilities, which are the claims of creditors (that is, everyone other than the owners < business) and ,
2. Owner's Equity, which -is the claim of the owners of the business.
Since all of the assets of a business are claimed by someone (either by its owners or by it creditor) so we can say that
Assets • Equities
This is the fundamental accounting equation, which is the formal expression of the dual-aspei concept As we shall see all accounting procedures are derived from this equation. To reflect the two type of equities, the equation is mote commonly expressed as
Assets ss Liabilities + Owner's Equity
Every transaction has a dual impact on the accounting records. Accounting systems are set up a as to record both of these aspects of a transaction; this is why accounting is called a double-entry system.
To illustrate the dual-aspect concept, suppose that Mr. A starts a business with a capital c Rs.30,000. There are two changes, first the business has cash (asset) of Rs.30,000 and second, the busina has to pay to the proprietor a sum of Rs. 10,000 which is taken as proprietor's capital. This expression ca be shown in the form of following equation:
Cash (Assets) = Capital (Equities) .
Rs. 30,000 = Rs.30,000.
Subsequently if the business borrows Rs. 15000 from a bank, the new position would be fl follows:
Assets as Equities
Cash Rs.30,000 + Bank Rs. 15000 = Bank loan Rs. 15000 + Capital Rs.30,000.
The term 'accounting equation* is also used to denote the relationship of equities to assets. Tt equation can be technically, stated as "for every debit, there is an equivalent credit". This has bee explained in detail later in the next chapter.
6. Accounting Period Concept:
The users of financial statements need information that is reasonably current. Therefore, fi financial reporting purposes , the life of a business is divided into a series of relatively short accounting periods of equal length. It is, therefore, absolutely necessary mat after each accounting period the business must 'stop* and 'see back', how things are going. In accounting such accounting period is usually of a year
_^ ; 15
At the end of each accounting period an income statement and a balance sheet is prepared the statement discloses the profit or loss made by business during the year while balance sheet shows ', financial position! of business as on the last day of the accounting period.
The Matching Concept:
A significant relationship exists between revenue and expenses. Expenses are incurred for the of producing revenue. In measuring net income for a period, revenue should be offset by air the incurred in producing that revenue. This concept of offsetting expenses against revenue on the of "cause and effect" is called the Matching Concept
The term 'matching' means appropriate association of related revenues and expenses. In matching
against revenue the question when the payment was made or received is 'irrelevant*. For example
FMtJesman is paid commission in January, 2005, for sales made by turn in December, 2004. According to
concept commission expense should 6e offset against sales of December 2004 because this expense is
for producing revenue in December 2004. On account of this concept, adjustments are made for all
ling expenses, accrued revenues, prepaid expenses and unearned revenues, etc., white preparing the
accounts at the end of accounting period. *
other Concept
According to this concept revenue should be recognized at the time when goods are sold or are rendered. Sale is considered to be made at the point when the property in goods passes to the and he becomes legally liable to pay. The following example will help to understand this point Mr. A on order to Mr. B for supply of certain goods. Mr. B sends goods to Mr. A 15 days after he has lived me order and Mr. A makes payment 10 days after receipt of goods. In this case the sate, will be to have been made not at the time of receipt of the order for the goods or receipt of payment but : the time when goods are delivered to Mr, A.
Accounts are kept for entities, as distinguished from the persons who associated with these In recording events in accounting, the important question is: "How do these events affect the '-How they affect the persons who own, operate, or otherwise are associated with the entity is For example, when a person invests Rs.200,000 into business it will be deemed that the owner given that money to the business which will be shown as a 'liability' hi the books of the* business. In tie owner withdraws Rs.30,000 from'the business, it will change the position and the net amount by the business to the owner will be shown only as Rs. 170,000.
The concept of separate entity is applicable to all forms of business organizations. For example, in of a sole proprietorship or partnership business, though the, sole proprietor or partners are not as separate entities in the eyes of law, but for accounting purposes they will be considered as entities.
Going Concern Concept:
According to this concept it is assumed that an entity is a going concern — that it will continue to for an indefinite time period it here is no intention to liquidate the particular business venture in the lie future. On account of this concept, the accountant while valuing the asset does not take into the sale value of assets. Moreover, he charges depreciation on fixed assets on the basis of their
life rather than on their market values.
For example, suppose that a company has just purchased a three-year insurance policy for If we assume that the business will continue in operation for three years or more. We will . the Rs.45000 cost of insurance as an asset which provides services to the business over a three-period. On (he other hand, if we assume that the business is likely to terminate in the near future, the policy should be reported at its cancellation value i,e. the amount refundable upon cancellation.
Moreover, the concept applies to the business as a whole. When an enterprise liquidates a branch segment of its operations, the ability of the enterprise to continue as a going-concern is not impaired ly. The enterprise wilt not be considered as a going-concern when it has gone into liquidation.
Money Measurement Concept:
In financial accounting, a record is made only of those information that can be expressed in terms. In .other words, no accounting is possible for an event or transaction which is not tble in terms of money, e.g. passing an examination, delivering lecture in a meeting, winning a prize These are events no doubt, but since these are not measurable in terms of money, there is no question of accounting.
Measurement of business events in money helps in understanding the state of affairs of business in better way. For example. If a business owns, 1500 kg of stock, one car, 1500 square feet of building etc. these amounts cannot be added to produce a meaningful total of what the business owns. sver, if a these items are expressed in monetary terms such as stock Rs.24000, car Rs.300.000 and ig Rs.500,000, all such items can be added in better way and precise estimate about the assets of the will be available.
14
4. Cost Concept:
The concept is closely related to going concern concept According to this concept "An ordinarily entered on the accounting fecord at die (nice paid to acquire it, and this cost is the basis subsequent accounting for the asset". If business buys a bujjdfng for Rs. 5,00,000, the assets would^ recorded in the books at Rs.500,000, even if its market value at that time may be Rs. 550,000. In case a later the market value of this asset comes down to Rs.450,000 it will ordinarily continue to be shown; Rs.500,000 and not at Rs.450,000.
The cost concept does not mean that the asset will always be shown at cost It has also been stafc above that cost becomes the basis for all future accounting for die asset It means that asset is recorded' i cost at-the time of purchase but it may systematically be reduced in its value by charging depreciation.
5. Dual Aspect Concept:
The economic resources of an entity are called 'assets', the claims of various parties against th« assets are called 'equities'. There are two types of equities:
1.. Liabilities, which are the claims of creditors (that is, everyone other than the owners < business) and ,
2. Owner's Equity, which -is the claim of the owners of the business.
Since all of the assets of a business are claimed by someone (either by its owners or by it creditor) so we can say that
Assets • Equities
This is the fundamental accounting equation, which is the formal expression of the dual-aspei concept As we shall see all accounting procedures are derived from this equation. To reflect the two type of equities, the equation is mote commonly expressed as
Assets ss Liabilities + Owner's Equity
Every transaction has a dual impact on the accounting records. Accounting systems are set up a as to record both of these aspects of a transaction; this is why accounting is called a double-entry system.
To illustrate the dual-aspect concept, suppose that Mr. A starts a business with a capital c Rs.30,000. There are two changes, first the business has cash (asset) of Rs.30,000 and second, the busina has to pay to the proprietor a sum of Rs. 10,000 which is taken as proprietor's capital. This expression ca be shown in the form of following equation:
Cash (Assets) = Capital (Equities) .
Rs. 30,000 = Rs.30,000.
Subsequently if the business borrows Rs. 15000 from a bank, the new position would be fl follows:
Assets as Equities
Cash Rs.30,000 + Bank Rs. 15000 = Bank loan Rs. 15000 + Capital Rs.30,000.
The term 'accounting equation* is also used to denote the relationship of equities to assets. Tt equation can be technically, stated as "for every debit, there is an equivalent credit". This has bee explained in detail later in the next chapter.
6. Accounting Period Concept:
The users of financial statements need information that is reasonably current. Therefore, fi financial reporting purposes , the life of a business is divided into a series of relatively short accounting periods of equal length. It is, therefore, absolutely necessary mat after each accounting period the business must 'stop* and 'see back', how things are going. In accounting such accounting period is usually of a year
_^ ; 15
At the end of each accounting period an income statement and a balance sheet is prepared the statement discloses the profit or loss made by business during the year while balance sheet shows ', financial position! of business as on the last day of the accounting period.
The Matching Concept:
A significant relationship exists between revenue and expenses. Expenses are incurred for the of producing revenue. In measuring net income for a period, revenue should be offset by air the incurred in producing that revenue. This concept of offsetting expenses against revenue on the of "cause and effect" is called the Matching Concept
The term 'matching' means appropriate association of related revenues and expenses. In matching
against revenue the question when the payment was made or received is 'irrelevant*. For example
FMtJesman is paid commission in January, 2005, for sales made by turn in December, 2004. According to
concept commission expense should 6e offset against sales of December 2004 because this expense is
for producing revenue in December 2004. On account of this concept, adjustments are made for all
ling expenses, accrued revenues, prepaid expenses and unearned revenues, etc., white preparing the
accounts at the end of accounting period. *
other Concept
According to this concept revenue should be recognized at the time when goods are sold or are rendered. Sale is considered to be made at the point when the property in goods passes to the and he becomes legally liable to pay. The following example will help to understand this point Mr. A on order to Mr. B for supply of certain goods. Mr. B sends goods to Mr. A 15 days after he has lived me order and Mr. A makes payment 10 days after receipt of goods. In this case the sate, will be to have been made not at the time of receipt of the order for the goods or receipt of payment but : the time when goods are delivered to Mr, A.
Conventions
The term 'conventions1 includes those customs or traditions which guide the accountant while ating the accounting information. The following are the important accounting conventions:
(i) Convention pf conservatism (ii) . Convention of full disclosure
(iii) Convention of consistency (iv) Convention of materiality.
conventions
BRS
Accounting
bank statement
Ledger
journal
Final Account
Accounting Conventions
(i) Convention pf conservatism (ii) . Convention of full disclosure
(iii) Convention of consistency (iv) Convention of materiality.
conventions
BRS
Accounting
bank statement
Ledger
journal
Final Account
Accounting Conventions
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