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
Thursday, July 22, 2010
Accounting Concepts+Revenue+expenses
TYPES OF REVENUE:
1. Sales: The.total price of goods sold
2. Interest earned
3. Fees earned
4. Rent earned
5. Commission earned
22. EXPENSES:
Expenses are the costs of the goods and services used up in thei process of obtaining revenue.
Or ' . ..'.."'.
Expenses are the cost of producing revenue in a particular accounting period.
Or
An expense is a sacrifice, or cost incurred to generate revenue:
For example, salaries for employees, telephone charges, rent of the building, insurance transportation etc. All these costs are necessary to attract and serve the customers and thereby to obtain revenue. Expenses are sometimes also referred to as the "cost of doing business" or "expired costs".
23. NET INCOME OR NET PROFIT:
Net income or net profit is simply the amount by which die "revenue" for a particular period time exceed the "expenses" incurred to generate them.
Net income or net profit = Revenue- Expenses:
ACCOUNTING PRINCIPLES ,.
It has already been stated in this chapter that Accounting is the language of business tt which economic information is communicated to all the parties concerned. In order to make this languaj easily understandable all over the world, it is necessary to frame or make certain unifonn standards whicl are acceptable universally. These standards are termed as "Accounting Principles".
Accounting principles may be defined as those rules of action or conduct which are adopted by accounts universally while recording accounting transactions. They are a body of doctrines common!] associated with the theory and procedures of accounting. They are serving as an explanation of practices and as a guide for selection of conventions or procedures where alternatives exist. principles can be classified into two groups. .
(i) Accounting concepts (ii) Accounting conventions.
Accounting Concepts:
Going concern concept Cost concept
Accounting period concept Realization concept.
The term 'concepts' includes those basic assumptions or conditions on which the science o^ accounting is based. The following are the important accounting concepts:
(i) Separate Entity Concept (ii)
(iii) Money measurement concept (iv)
(v) Dual Aspect concept (vi)
VII> Matching concept (viii)
1. Sales: The.total price of goods sold
2. Interest earned
3. Fees earned
4. Rent earned
5. Commission earned
22. EXPENSES:
Expenses are the costs of the goods and services used up in thei process of obtaining revenue.
Or ' . ..'.."'.
Expenses are the cost of producing revenue in a particular accounting period.
Or
An expense is a sacrifice, or cost incurred to generate revenue:
For example, salaries for employees, telephone charges, rent of the building, insurance transportation etc. All these costs are necessary to attract and serve the customers and thereby to obtain revenue. Expenses are sometimes also referred to as the "cost of doing business" or "expired costs".
23. NET INCOME OR NET PROFIT:
Net income or net profit is simply the amount by which die "revenue" for a particular period time exceed the "expenses" incurred to generate them.
Net income or net profit = Revenue- Expenses:
ACCOUNTING PRINCIPLES ,.
It has already been stated in this chapter that Accounting is the language of business tt which economic information is communicated to all the parties concerned. In order to make this languaj easily understandable all over the world, it is necessary to frame or make certain unifonn standards whicl are acceptable universally. These standards are termed as "Accounting Principles".
Accounting principles may be defined as those rules of action or conduct which are adopted by accounts universally while recording accounting transactions. They are a body of doctrines common!] associated with the theory and procedures of accounting. They are serving as an explanation of practices and as a guide for selection of conventions or procedures where alternatives exist. principles can be classified into two groups. .
(i) Accounting concepts (ii) Accounting conventions.
Accounting Concepts:
Going concern concept Cost concept
Accounting period concept Realization concept.
The term 'concepts' includes those basic assumptions or conditions on which the science o^ accounting is based. The following are the important accounting concepts:
(i) Separate Entity Concept (ii)
(iii) Money measurement concept (iv)
(v) Dual Aspect concept (vi)
VII> Matching concept (viii)
Accounting Basic Element
ASSETS:
Assets are the economic resources (having certain value) owned by a business on a particular date I which are expected to benefit the future operation of the business.
Or
Assets are the properties and possessions of a business both tangible (have physical existence) and e fliave no ohvsical existence).
te (have no physical existence).
Or
Assets are the things having certain value possessed by a business and receivable by a business on date. For example, cash, furniture, building, land, machinery, stock of goods, Debtors or receivable, Bank balance, 'Goodwill etc.
LIABILITIES:
Liabilities are the debts or obligations of a business.
Or
The outsider's (creditors etc.) claims against the assets of the business are known as "Liabilities". are two main parties who have chums, against the assets of a business; (a) Owner's claim; (b) claims. The owner's claim against the assets of a business is blown as owner's equity and 's claims against the assets of the business are known as "liabilities."
Or
Liabilities mean the total amount which a business is legally bound id pay to the outsiders, e.g, i, Bills payable, Accounts payable, Bank loan etc.
ACCOUNTING PERIOD:
It is a span of time for which a business generally prepares its financial statements (the statement to know the profit or loss of a business and to mow its financial position). Mostly the financial are prepared for one year but they may also be prepared for one month or for one quarter.
REVENUE:
All business organisations are engaged in providing goods or services to theif customers. The which a business charges its customers for these goods or services, measures the revenue of the
tOr It is the price of goods sold or services provided by a business to its customers.
Revenue is the inflow of assets (cash or debtors) in return for services performed or goods (sold) during an accounting period.
Or
It is inflow of cash and debtors (receivable) in exchange for goods sold or services rendered during mting period.
Friday, July 16, 2010
CAPITAL OR OWNER'S EQUITY
CAPITAL OR OWNER'S EQUITY
high bridge capital
equity capital
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To understand. this Tenn, recall that business is an entity (organization) separate from its owner or owners. Equities mean the sources of funds provided to start or" to operate a business entity. Now the question is; who provides funds to a business unit Mainly there are two sources of funds:
(a) Funds supplied by the owner/owners.
(b) Funds supplied by the external parties like bank etc.
So, the amount of cash or goods invested (supplied) by the owner/owners in a business] unit is known as "capital" or owner's equity.
Or
Capital is the money or moneys worth borrowed by a business unit from its owner
Or
It is the claim or right of the owner to owners against the assets (properties etc. possessed by business) of the business.
Or It is the source of funds provided by the owner/owners of the business.
Or It is a part of the total equity which is supplied by the owner/owners.
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CASH DISCOUNT
Cash Discount
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It is a deduction or allowance given by a creditor to a debtor if the amount due is paid by the debtor before the due dale, or it is a reduction in price (usually 2% or less) offered by manufacturers or wholesalers (creditors) to encourage customers, (debtors) to pay their debts within a specified discounted period. For example, X sold .goods to Y (a customer) for Rs. IQOO on credit basis. It means, X is creditor and Y is debtor. X offers an allowance of 2% to Y, if he will pay his debts within 15 days. It means, if Y pays his debts within 15 days, then he will pay only Rs. 980 (1000 - 20) to X. Such a discount is known as' Tash Discount".
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CREDITORS OR ACCOUNTS PAYABLE:
CREDITORS OR ACCOUNTS PAYABLE:
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When goods are purchased from the suppliers (sellers) on credit basis, creditors come into existence. Creditors are the persons or suppliers from whom goods have been purchased on credit basis and bo whom the money is to be paid in near future. The accounts of such persons (suppliers) are known as accounts payable". Accounts payable means, the amount which a business expects to pay to its suppliers for goods purchased or services received from them on credit basis.
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general creditor
DEBTORS OR ACCOUNTS RECEIVABLE
DEBTORS OR ACCOUNTS RECEIVABLE:
When goods are sold to the customers on credit basis (credit sales are made to customers), debtors come into existence. Debtors are Ac persons or customers to whom goods have been sold on credit basis and from whom the business is to receive money in near future. The accounts of such-customers are known as "Accounts Receivable". For example, we sold goods to A for Rs. 3000. toB forRs. 2000 and to C for Rs. 4000 on credit basis. The amount receivable from them (A, B and C) is known as "Debts" and the three customers, A, B and C are our debtors or accounts receivable.
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Accouting best Notes ever
Purchases returns" or "Returns to suppliers". For example, we purchased 100 radio sets (goods) from Lahore Electronics for Rs. 15000. On receiving the delivery of goods, it is found that 10 radio sets are of inferior quality. The return of these 10 radio sets to the seller (Lahore Electronics) will be a case of purchases returns.
7. PURCHASES DISCOUNT AND SALES DISCOUNT:
The Concession given by the supplier to the buyer on purchases of goods is known as "Purchases discount" to the buyer and "Sales discount" to the seller (supplier).
8. ALLOWANCES:
Sometimes, the customers (buyers) find that goods purchased have minor defects. In that case, the seller may agree to reduce the price of damaged or defective goods to induce the. buyer to keep the goods. Such reduction in price is known as "Purchases allowance" to the buyer and "Sales allowance" to the seller.
9. SALES:
We know that goods are purchased for selling purposes^ When these goods are sold to customers at a specific price, it is said that sales have been made. For example, we purchased goods worth Rs. 5000 (our purchases). Suppose, these goods have been sold at a price of Rs. .6000 — in accounting language it will be said that sales have been made at Rs. 6000. So goods sold are called "Sales".
10. CASH SALES:
If goods are sold to customers at a specific price and price of the goods is received from them at the time of sale of goods, such sales are known as "Cash sales". For example, we sold goods to a customer, Mr. A for Rs. 2000 on 10th January, 2005 and received the cash from him on the same date, it will be a case of cash sales.
11. CREDIT SALES;
If goods are sold to a customer and he does not pay the price of goods at the same time but agrees to make payment on some future date, the sales are called "credit sales" or "Sales on account." For example, we sold goods to Mr. X for Rs. 3000 on 15th January, 2005 and he agreed to make payment on 3Ist January, 2005, it will be a case of credit sales or sales on account.
12. SALES RETURNS OR RETURNS INWARDS:
If a customer to whom goods have been sold finds that the goods are defective, unsatisfactory, below standard or not according to specification, he may return these goods to the seller. To the seller, such return of goods is known as "Sales returns" or "Returns Inwards" or "Returns from customers.
13. TRADE DISCOUNT:
At the time of selling goods, the manufacturer or wholesaler allows retailers such a discount (concession). It is allowed at a certain percentage of the listed or catalog price. For example, the list price of the goods is Rs. 30000, and the wholesaler allows a trade discount of 10% on the listed price to the retailer. It means the net price of the goods is 27000 (30000-3000). The trade discount enables the retailer: to sell goods at die listed price; and the customer can be sure about the fair {nice of the goods. It may be noted that both the buyer and seller will record Rs. 27000 (not Rs. 30,000) in their books of account. In other words trade discount is not recorded in books of account Thus, discount allowed by manufacturer or wholesaler at the time of selling goods to retailer as a deduction from the listed price or catalog price, is called Trade Discount.
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7. PURCHASES DISCOUNT AND SALES DISCOUNT:
The Concession given by the supplier to the buyer on purchases of goods is known as "Purchases discount" to the buyer and "Sales discount" to the seller (supplier).
8. ALLOWANCES:
Sometimes, the customers (buyers) find that goods purchased have minor defects. In that case, the seller may agree to reduce the price of damaged or defective goods to induce the. buyer to keep the goods. Such reduction in price is known as "Purchases allowance" to the buyer and "Sales allowance" to the seller.
9. SALES:
We know that goods are purchased for selling purposes^ When these goods are sold to customers at a specific price, it is said that sales have been made. For example, we purchased goods worth Rs. 5000 (our purchases). Suppose, these goods have been sold at a price of Rs. .6000 — in accounting language it will be said that sales have been made at Rs. 6000. So goods sold are called "Sales".
10. CASH SALES:
If goods are sold to customers at a specific price and price of the goods is received from them at the time of sale of goods, such sales are known as "Cash sales". For example, we sold goods to a customer, Mr. A for Rs. 2000 on 10th January, 2005 and received the cash from him on the same date, it will be a case of cash sales.
11. CREDIT SALES;
If goods are sold to a customer and he does not pay the price of goods at the same time but agrees to make payment on some future date, the sales are called "credit sales" or "Sales on account." For example, we sold goods to Mr. X for Rs. 3000 on 15th January, 2005 and he agreed to make payment on 3Ist January, 2005, it will be a case of credit sales or sales on account.
12. SALES RETURNS OR RETURNS INWARDS:
If a customer to whom goods have been sold finds that the goods are defective, unsatisfactory, below standard or not according to specification, he may return these goods to the seller. To the seller, such return of goods is known as "Sales returns" or "Returns Inwards" or "Returns from customers.
13. TRADE DISCOUNT:
At the time of selling goods, the manufacturer or wholesaler allows retailers such a discount (concession). It is allowed at a certain percentage of the listed or catalog price. For example, the list price of the goods is Rs. 30000, and the wholesaler allows a trade discount of 10% on the listed price to the retailer. It means the net price of the goods is 27000 (30000-3000). The trade discount enables the retailer: to sell goods at die listed price; and the customer can be sure about the fair {nice of the goods. It may be noted that both the buyer and seller will record Rs. 27000 (not Rs. 30,000) in their books of account. In other words trade discount is not recorded in books of account Thus, discount allowed by manufacturer or wholesaler at the time of selling goods to retailer as a deduction from the listed price or catalog price, is called Trade Discount.
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Thursday, July 15, 2010
FORMS OF BUSINESS ORGANIZATION
FORMS OF BUSINESS ORGANIZATION
Single or sole proprietorship:
The simplest form of business organization "to organize and operate" is a single or sole proprietorship. This is the most common form of ownership and is found in business such as small retail aborts, service stations etc. The owner is the only one in control and makes all management decisions.
Partnership:
In a partnership, ownership is divided between two or more persons who agree to share their] property and skills to start and operate a business: Like the single proprietorship, 9 partnership business is]
simple to organise.
i
(c) Joint Stock Company:
A joint stock company is* formed under the Companies Ordinance, 1984 and has the legal right tol act as a person. It may be owned by many people. A company has its own name, in which it can buy, own,] and sell property; make contracts; borrow money; and take court action. The persons who have made] investment in the company are known as shareholders.
2. GOODS OR MARCHANDISE
In accounting the word "Goods" has a special meaning. It refers to something which has beer purchased by a trader for resale purposes or anything which has been manufactured for selling purposes.] For example, if a trader purchases furniture for use in the business, it will not be regarded as "goods", but il it is purchased for resale, it will be regarded as "goods". The same article may be "gooaV-for one trader but may not be so to another trader. For -example, turnitiue is not' "goods" for a book seller; but it will regarded as "goods" to a furniture -dealer.
Thus, ctah will be "goods" to a cloth dealer
Watches will be "goods" to a Watch dealer
Books will be "goods" to a Book - Seller
Stationery will be "goods" to a Stationery dealer. But watches, books or stationery will not be considered as "goods" to a cloth dealer.
3. PURCHASES:
In accounting language the word "Purchases" has a special meaning. When saleable goods 'bought in a business, it is said that "purchases" have been made. For example, to a cloth dealer, whenevc cloth Is purchased, il will not be necessary to mention that cloth has been purchased ( simply it wilt be saic mat purchases have been matte. On the other hand, if stationery is purchased, then it will be essential mention mat stationery has been purchased.
4. CASH PURCHASES:
If goods are purchased from a supplier and payment is made to him at the same time, sucl
purchases are known as "Cash Purchases". For example, Mr. X purchased goods from a seller, Mr. Y, to
Rs. 5000 on 1st January, 2005, and payment is made to the seller (Mr. Y) at the same date (1.1.2005), it wil(
be a case of cash purchases. ,
5. CREDIT PURCHASES OR "PURCHASES ON ACCOUNT:
When goods are purchased from a seller and payment is not made to him at the same time, rathe the payment is arranged to be made at some future date, such purchases are known as "credit purchases" "Purchases on account". For example, Mr. A purchased goods from Mr. B for Rs. 5000 on 1st January^ 2005 and Mr. A agreed to make the payment of goods on 15th January, 2005 (payment has not been on 1.1.2005), it wilt be a case of credit purchases. On 15th January Mr. A will pay Rs. 5000 to Mr. B.
6. PURCHASES RETURNS OR RETURNS OUTWARDS:
Goods once purchased may subsequently be sent back to the seller for certain reasons, i.e. gc are defective, not according to specification, damaged or below standard. Such return of goods to the sell.
IMPORTANT ACCOUNTING TERMS AND CONCEPTS
IMPORTANT ACCOUNTING TERMS AND CONCEPTS
Profit making organisations are known as businesses. There are three main types of businesses; those selling services (such as dry cleaners, Motor workshops. Beauty salons, airlines etc.); those selling foods (such as food sellers, automobile dealers etc.); those manufacturing goods (such as automobile manufacturers, fans industries, sugar mills etc.).
A business entity is an economic unit, which enters into business transactions that must be recorded, summarised and repotted. The entity (organisation) is regarded as separate from its owner oc owners; the entity owns its own property and has its own debts. The purpose of accounting is to provide weful information about an organisation (an entity) to peofle who need such information but not about the personal affairs of me owner or owners. So it should be remembered that accounting is done for business activities (what is happening in the business organisation) and it is not concerned with the personal or private matters of the owner. For example, the owner purchases furniture for business use(this is a business activity and it should be recorded in books of accounts. But if he purchases furniture for his domestic use, it wilt not be considered as a business activity and will not be recorded in books of accounts. In the same •ay, the owner may have a personal bank account, a car, a house, and other property, but since these things are not a pan of the business, they are not included in the record of the business unit So, each organisation lor which accounting is done is an independent entity, separate from its owners, managers, customers, creditors, and all other persons and entities with which it deals.
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Wednesday, July 14, 2010
Objects of Accouting
Financial information is necessary, in order to run a business in an efficient manner. Reliable
information will be available only through keeping proper books of accounts.
Proper accounting is essential, if money is to be borrowed for the purpose of business. The tender will only agree to lend money when he is satisfied as to the solvency of the borrower. Information available from books of accounts is the means of measuring such solvency.
[3. Cash in hand can be verified and any defalcation can be detected, if proper books of accounts are maintained.
4. Payment of sales tax and income tax is only possible if books of accounts are maintained.
In case of any dispute, books of accounts can be produced hi the court of law as a documentary evidence.
Government fixes up fair prices, formulates industrial policy, prepares.economic plans, decides import-export quotas and does many other functions on the basis of accounting information available from books of accounts.
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Bracnches of Accounting
BRANCHES OF ACCOUNTING
In order to meet the .ever increasing demands made on accounting by different interested party* (such as owners, management, creditors, taxation authorities etc.) the various branches of accounting come into existence:
1.
FINANCIAL ACCOUNTING:
The main purpose of financial accounting is to ascertain the true result (profit or loss) of business operations during a particular period of time and to state the financial position of the business on particular point of time. Financial accounting produces general purpose reports for use by the great of people who are interested in the organization bu.1 who are not actively engaged in its day operation.
2. COST ACCOUNTING:
The main object of cost accounting is to determine the cost of goods manufactured or produced P the business. It also helps the management of the business in controlling the costs by indicating avoidable losses and wastes.
3. MANAGERIAL ACCOUNTING:
The object of this accounting is to communicate the relevant information periodically to management of the business to enable it to take suitable decisions.
It should be remembered that in this book, we arc concerned only with financial accounting Financial accounting is the oldest and the other branches have developed from it. The objects of financial accounting can only be achieved by recording business transactions in a systematic manner according set of principles.
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In order to meet the .ever increasing demands made on accounting by different interested party* (such as owners, management, creditors, taxation authorities etc.) the various branches of accounting come into existence:
1.
FINANCIAL ACCOUNTING:
The main purpose of financial accounting is to ascertain the true result (profit or loss) of business operations during a particular period of time and to state the financial position of the business on particular point of time. Financial accounting produces general purpose reports for use by the great of people who are interested in the organization bu.1 who are not actively engaged in its day operation.
2. COST ACCOUNTING:
The main object of cost accounting is to determine the cost of goods manufactured or produced P the business. It also helps the management of the business in controlling the costs by indicating avoidable losses and wastes.
3. MANAGERIAL ACCOUNTING:
The object of this accounting is to communicate the relevant information periodically to management of the business to enable it to take suitable decisions.
It should be remembered that in this book, we arc concerned only with financial accounting Financial accounting is the oldest and the other branches have developed from it. The objects of financial accounting can only be achieved by recording business transactions in a systematic manner according set of principles.
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ACCOUNTING VERSUS ACCOUNTANCY
ACCOUNTING VERSUS ACCOUNTANCY
The two words "Accounting" and "Accountancy" are often used to mean the same thing. But it not correct Accountancy is the main subject(Accounting is one of its branches. The word "Accountancy tar extensive; i-e. the scope of accountancy is far wide .and extensive compared to Accounting. It covers entire body of theory and practice, e.g. Book-keeping, Accounting, costing, auditing, Taxation etc.
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The two words "Accounting" and "Accountancy" are often used to mean the same thing. But it not correct Accountancy is the main subject(Accounting is one of its branches. The word "Accountancy tar extensive; i-e. the scope of accountancy is far wide .and extensive compared to Accounting. It covers entire body of theory and practice, e.g. Book-keeping, Accounting, costing, auditing, Taxation etc.
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BOOK-KEEPING VERSUS ACCOUNTING
A great deal of efforts goes into gathering and processing information about a concern before the facts end up in an accounting report. Much of the work required is clerical in nature and can be performed by office workers, machine and computers. The functions of Book-Keeping is to properly record the financial transactions in the books of account. But the function of Accounting is more extensive ( it has many other functions to do except recording transactions, e.g. classification, summarisation and interpretation'of transactions. Thus we see that Book-Keeping is confined to recording aspect of Accounting (It is a small and the simplest part of Accounting. Both .represent two different phases of the main subject "Accountancy". Book-Keeping is the first stage, while Accounting is the final stage, that is why, it is said
that Accounting starts where Book-Keeping ends. The function of Book-Keeping ends with the recording of transactions in the books of account. But the function of Accounting Is to classify the recorded transactions, summarise them, interpret them and collect and communicate necessary information to the management and olhej interested persons. Management performs its function on the basis of mis information, e,g. laying down rules and regulations, taking so many vitaUdecisions etc. Thus we may say that the function of Book-Keeping is primarily of clerical nature, while that of Accounting is concerned with organisational and administrative matters (it is more important and responsible.
Apparently, the functions of Book-Keeping seem to be less important than Accounting, but its necessity can hardly be denied. lust an article cannot be produced without raw material, similarly accounting function cannot be done without obtaining necessary data from Book-Keeping. Again, if there is any defect in raw material the article produced out of it will also be defective. Similarly, if there be any error or mistake in Book-Keeping, the accounting job will also be wrong and create anomalous situation. . Thus we can conclude that "Book-Keepers perform the routine, repetitive tasks of collecting and processing j financial information. Accountants are responsible for designing the systems within which Book-Keepcrs work; supervising the day-to-day work of book-keepers; recording unusual and complex transactions,! preparing, analysing and interpreting accounting reports; auditing the records; *nd -performing a'variety of] other complex accounting activities.
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