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,
Wednesday, August 4, 2010
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
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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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