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LO 4
Capital:-
It means the amount (in terms of money or
assets having money value) which the proprietor has
invested in the firm or can claim from the firm.
For the firm Capital is a liability towards the
owner. It is so because the owner is treated to be
separate from the business.
Liabilities:-
If an amount is due to be paid to any other person
or institution other than the owner it is called as a liability.
Creditors:-
Drawings:-
It is the amount of money or the value of goods
which the proprietor takes for his domestic or personal use.
Revenue:-
It means the amount which, as a result of
operations, is added to the capital. “Revenue is an inflow of
assets which results in an increase in owner’s equity. E.g.
sale of goods, rent income.
Expense:-
It is the amount spent in order to produce and sell the
goods and services which produce the revenue. “Expenses is
the cost of the use of things or services for the purpose of
generating revenue”. E.g. payment of salary, wages, rent,
etc.
Income:-
It is the profit earned during a period of time. In
other words, the difference between revenue and expense is
called income.
Gross Profit:-
Gross profit is the difference between sales
revenue or the proceeds of goods sold and services rendered
over its direct cost.
Net Profit:-
Net Profit is the profit made after allowing for all
expenses. In case, expenses are more than revenue, it is Net
Loss.
Gain:-
Credit Transaction:-
Turn over:-
It means total trading income from cash sales and
credit sales.
Voucher:-
Any written document in support of a business
transaction is called a voucher. It is an objective evidence in
support of a transaction.
Basis of Accounting
a) Cash Basis
1. Entity
2. Money measurement
3. Going-concern
4. Cost
5. Réalisation
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. Conservatisme
• Accounting concepts The affairs of the
business are distinct from
1. Entity the personal affairs of
2. money measurement its owner. The business is
an independent ENTITY.
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
Records are kept in
1. Entity monetary terms, and only
2. money measurement matters capable of being
expressed in monetary
3. Going-concern terms are reflected in the
4. Cost books.
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement The business is assumed to
have a continuing and
3. Going-concern indefinite life. The
4. Cost business IS NOT on the
verge of extinction.
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
Accountants compute the
3. Going-concern value of an asset by
4. Cost reference to its
acquisition cost, AND NOT
5. realization by reference to its
6. Accruals expected future benefits.
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost Any change in the value of
an asset may only be
5. réalisation recognized at the moment
the firm REALIZES it, or
6. Accruals
disposes of that asset.
7. Matching
8. Periodicity
9. Consistency
10. conservatism
SFAC #1: Accrual
accounting attempts to
• Accounting concepts record the financial
1. Entity effects on an enterprise
of transactions and other
2. money measurement events and circumstances
The
thatrecognition
have cash of an
3. Going-concern
expense (or revenue)
consequences for the and
4. Cost the related in
enterprise liability
the periods
(or asset)
in which results from
these
5. realization
an accounting EVENT,
transactions, and
etc… occur
6. Accruals is not necessarily
rather than only in the
signaled by a cash
periods when cash is
7. Matching transaction.
received or paid.
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
Expenses
Revenues should be
and expenses
5. realization recognized in the
resulting from thesame
same
6. Accruals accounting period
transactions during
(or events,
which the firm has
circumstances, etc…)
7. Matching recognized the associated
should be recognized
8. Periodicity revenues.
simultaneously.
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching Accounting reports must be
8. Periodicity prepared for fixed, and
relatively short, periods
9. Consistency of time.
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching
8. Periodicity Like transactions should
be treated the same way in
9. Consistency consecutive periods.
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
(1) The accountant should
5. realization not anticipate profit, and
should provide for all
6. Accruals
possible losses;
7. Matching (2) Faced with several
methods of valuing an
8. Periodicity asset, the accountant
9. Consistency should choose that which
leads to the lesser value.
10. Conservatisme