11072016

Accounting Conceptsand
BalanceSheet

Dr.NikunjPatel
AssistantProfessor
InstituteofManagement,
NirmaUniversity,
Ahmedabad

AccountingConcepts
1. MoneyMeasurement
2. Entity
3. GoingConcern
BalanceSheet
4. Cost
5. DualAspect Concepts
6. AccountingPeriod
7. Conservatism
8. Realization StatementofProfit
9. Matching andLossAccount
10. Consistency
11. Materiality
Concepts
 11072016

MoneyMeasurement
Alltransactionsofthebusinessarerecordedintermsof
money
Itprovidesacommonunitofmeasurement
Examples
Marketconditions,technologicalchangesandthe
efficiencyofmanagementwouldnotbedisclosedin
theaccounts

Entity
Thebusinessanditsowner(s)aretwoseparate
existenceentity
Anyprivateandpersonalincomesandexpensesofthe
owner(s)shouldnotbetreatedastheincomesand
expensesofthebusiness
Insurancepremiumsfortheownershouse
Theownerspropertyshouldnotbeincluded
Anypaymentsfortheownerspersonalexpenses
 11072016

GoingConcern
Thebusinesswillcontinueinoperationalexistenceforthe
foreseeablefuture
Financialstatementsshouldbepreparedonagoing
concernbasisunlessmanagementeitherintendsto
liquidatetheenterpriseortoceasetrading,orhasno
realisticalternativebuttodoso.

Cost
Assetsshouldbeshownonthebalancesheetatthecost
ofpurchaseinsteadofcurrentvalue
Example
Thecostoffixedassetsisrecordedatthedateof
acquisitioncost.Theacquisitioncostincludesall
expendituremadetopreparetheassetforitsintended
use.Itincludedtheinvoicepriceoftheassets,freight
charges,insuranceorinstallationcosts,knownas
ACQUISITIONCOST.
 11072016

DualAspect
Assets=economicresources.
Equities=claimsagainstassets.
Liabilities=claimsofcreditors(everyoneother
thanowners).
Ownersequity=claimsofinvestors
(Shareholdersorstockholdersequityfora
corporation).

BalanceSheet

Assets=Liabilities+Ownersequity

ResourcesSourcesoffinancing
 11072016

BalanceSheet

Assets = Liabilities + Equity

Liabilities &
Assets
Equity

BalanceSheet
Liabilities:Claimsbycreditors.
Accountspayable.
LongtermLiabilities.
OwnersEquity:Claimsbyinvestors.
Amountsprovideddirectlybyequityinvestors(Paidincapital).
Amountsretainedfromearnings,i.e.profits(Retained
earnings).
 11072016

Assets

Cash
Trade Notes
Receivable Receivable
Resources
ownedor
Vehicles
controlled
bya Land

company

Store Buildings
Supplies Equipment

Liabilities

Trade Notes
Payable Payable

Creditors
claimson
assets
Taxes Wages
Payable Payable
 11072016

Equity

Owner Owner
Investments Withdrawals

Owners
claims
on
assets

Revenues Expenses

IncomeStatement
Summariesresultsofoperatingactivityoveraperiodoftime.
Revenues Expenses=NetIncome.
Netincome(ornetloss)istheamountaddedto(subtracted
from)Retainedearnings.
 11072016

FinancialStatementObjectives
Isusefulforinvestmentdecisions.(Allfinancial
statements).
Iscomprehensible.(Allfinancialstatements).
Showseconomicresourcesandclaimsonresources
(BalanceSheet).
Showsfinancialperformanceduringaperiod
(IncomeStatement).
Showscashflows(StatementofCashFlows).

AccountingEquation
Assetsareresourceswithfuturebenefitsthatareownedor
controlledbyacompany.
Liabilitiesarewhatacompanyowesitscreditorsinfuture
productsorservices.
Equityreferstotheclaimsofitsowner(s).

Formsoffunds=Sourcesoffunds
Whatresourcesdoes thefirmhave?(Assets)=Wheredothose
resourcescomefrom?(LiabilitiesandEquity)
Afirmacquiresassetsbyfunds.Liabilitiesandequityarethe
sources offundstoacquirethoseassets.
 11072016

FundamentalAccountingEquation
Assets=Liabilities+OwnersEquity.
Everyaccountingtransactionmaintainsequalityof
equation.
PurchaseRs.20,000ofequipmentforcash.
IncreaseEquipment(asset)byRs.20,000anddecreaseCash
(asset)byRs.20,000.Nonetchangetoassets.
PurchaseRs.20,000ofequipmentoncredit.
IncreaseEquipment(asset)byRs.20,000andincrease
Payable(liability)byRs.20,000.

TransactionAnalysis
Transaction (1): Ray Neal decides to open a computer
programming service which he names Softbyte. On September 1,
2014, Ray Neal invests $15,000 cash in the business.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel
 11072016

TransactionAnalysis
Transaction (2): Purchase of Equipment for Cash.
Softbyte purchases computer equipment for $7,000
cash.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel

TransactionAnalysis
Transaction (3): Softbyte purchases for $1,600 from Acme
Supply Company computer paper and other supplies expected to
last several months. The purchase is made on account.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel
 11072016

TransactionAnalysis
Transaction (4): Softbyte receives $1,200 cash from
customers for programming services it has provided.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel

TransactionAnalysis
Transaction (5): Softbyte receives a bill for $250 from
the Daily News for advertising but postpones payment
until a later date.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel
 11072016

TransactionAnalysis
Transaction (6): Softbyte provides $3,500 of programming
services for customers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel

TransactionAnalysis
Transaction (7): Softbyte pays the following
expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel
 11072016

TransactionAnalysis
Transaction (8): Softbyte pays its $250 Daily
News bill in cash.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel

TransactionAnalysis
Transaction (9): Softbyte receives $600 in cash
from customers who had been billed for services [in
Transaction (6)].

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel
 11072016

TransactionAnalysis
Transaction (10): Ray Neal withdraws $1,300 in
cash from the business for his personal use.

TakenfromAccountingPrinciples,6th Edition,Weygandt,Kieso,Kimmel