Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft. Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the lRead more
Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft.
Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the loan taken from the bank. When there is an overdraft balance the treatment is just the opposite of that of favorable balance.
Generally for business overdraft occurs when there is immediate or emergency funding for the short term. This can be seen for small and medium-sized businesses. This is considered to be convenient for these businesses because there is no requirement to pay interest on the lump-sum loan, only have to pay interest on the fund you use. Generally linked to an existing transaction account.
To reconcile this we need to prepare a Bank reconciliation statement. The procedure of preparing BRS under unfavorable conditions is as follows
If we start from the cash book balance then “ADD” all the transactions resulting in an increase in the passbook. “DEDUCT” all the transactions that resulted in a decrease in the balance of the passbook. Then the net overdraft balance should be the same as in the passbook.
If we start from the balance as per the passbook then “ADD” all the transactions resulting in an increase in the balance of the cashbook and “DEDUCT” all the transactions related to a decrease in the balance of the cash book. The net overdraft balance as per the passbook should reconcile with the cash book.
Let us take one example considering one of the above conditions.
The cash book of M/s Alfa ltd shows a credit balance of Rs 6,500.
A Cheque of Rs 3,500 was deposited but not collected by the bank.
The firm issued a cheque of Rs 1,000 but was not presented for payment.
There was a debit balance in the passbook of Rs 200 and Rs 400 for interest and bank charges.
Bank Reconciliation Statement
Particulars
Add
Deduct
1. Balance as per cash book
6,500
2. Cheque issued but not yet presented
1,000
3. cheque deposited but not yet credited by the bank
A cash discount is a discount allowed to customers when they make payments for the items they purchased. This type of discount is generally based on time. The early the payment is made by the debtors, the more discount they earn. To be more precise cash discount is given to simulate or encourage earRead more
A cash discount is a discount allowed to customers when they make payments for the items they purchased. This type of discount is generally based on time. The early the payment is made by the debtors, the more discount they earn. To be more precise cash discount is given to simulate or encourage early payment by the debtors.
Trade discount is a discount allowed by traders on the list price of the goods to the customer at specified rate. Unlike cash discount, trade discount is based on number of sale i.e, more the sale more the discount earned. This is mainly given on bulk orders by the customers.
To understand trade discount and cash discount let me give you simple example
Mr. X purchased goods from Mr. Y of list price Rs 10,000. Mr. Y allowed a 10% discount to Mr.X on the list price for purchasing goods in bulk quantity. Further, he was provided with cash discount of Rs 500 for making an immediate payment. Therefore the entry for the above transaction in the books of Mr. X would be
Purchase A/c                                                       ……Dr
9,000
          To Cash A/c
8,500
          To Discount received
500
(Being goods purchased from Mr. Y worth Rs. 10,000@ 10% trade discount and cash discount of Rs. 500)
The answer is B. False. Before jumping on the solution to know why goodwill is not fictitious, we need to know what are fictitious assets? Fictitious assets are false assets or not true assets. These are not assets but expenses & losses that are not written off from the profit & loss accountRead more
The answer is B. False. Before jumping on the solution to know why goodwill is not fictitious, we need to know what are fictitious assets?
Fictitious assets are false assets or not true assets. These are not assets but expenses & losses that are not written off from the profit & loss account but shown in the balance sheet as assets under the head miscellaneous expenditure. For example preliminary expenses, loss on issue of debentures, etc.
Goodwill is not a fictitious asset but an intangible asset which means it has no actual physical appearance and cannot be touched and felt like other assets like buildings and machinery. It is nothing but a firm’s reputation which can be sold just like other assets help the business grow and earn revenue. Goodwill is shown in the balance sheet as follows:
First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation. Annual depreciation charged is an expeRead more
First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation.
Annual depreciation charged is an expense for the business and hence has a debit balance. Whereas provision for depreciation as a contra asset account has a credit balance.
The journal entry for provision for depreciation is
Depreciation A/c                                                     ……….Dr
XXX
          To Provision for depreciation
XXX
Explaining the credit nature of this account. As we know that the depreciation is an expense for the business hence as per modern rules “Debit all the expenses and losses and credit all incomes and gains” therefore it is debited whereas the provision of depreciation is contra account it has a credit balance as it reduces the value of assets. So according to modern rule, we know a decrease in assets has a credit balance, hence shown in a negative balance on the balance sheet under long-term assets.
With the preparation of this account, we do not credit depreciation in the asset account but transfer every year to the accumulated depreciation account, and when assets are disposed of or sold we credit the ‘total’ of the provision on depreciation to the credit of the asset account just to calculate the actual profit or loss on a sale of the asset.
The journal entry for a loan to an employee is as follows: Loans to employee A/c                                           …..Dr xxx            To Bank/Cash A/c xxx (Being loan given to employee) From the above journal entry, we see that there are two accounts-first one is "Loan to employee accounRead more
The journal entry for a loan to an employee is as follows:
Loans to employee A/c                                           …..Dr
xxx
           To Bank/Cash A/c
xxx
(Being loan given to employee)
From the above journal entry, we see that there are two accounts-first one is “Loan to employeeaccount” and the second one is “Bank/cash account“. Both are assets for the company.
Loan to employees is considered an asset because they are expected to be returned by the employee within the stipulated time period. If the loan is repaid within one year it will be shown under the current asset and if it is not expected to be collected within a year or in short might be repaid after a year then it will be shown under long-term assets.
Also, we all know Bank/cash is an asset for the company.
Why loan to employee A/c is debited and Bank/cash A/c is credited?
As per the modern rule:
ASSETS
Increase
Debit
Decrease
Credit
Connecting the above-stated entry with the modern rule “loan to an employee” is debited as money comes back into the business hence there is an increase in an asset therefore debited. While in the second case “bank/cash account” is credited as the money goes out of the business, there is a decrease in assets of the company therefore credited.
Loan to employee
The inflow of cash in a future date
Increase in an asset
Debit
Bank/ cash
The outflow of cash
Decrease in an asset
Credit
We notice that in this entry there is an increase in one asset while a decrease of another asset. Therefore the impact on the balance sheet is Nil.
Let me give you a simple illustration of the above entry
Mr. Ross was an employee of Maxwell Pvt ltd. Mr. Ross was lent Rs 2,00,000 by the company for some emergency purpose. So as per modern rules the accounting entry in the books of the company will be as follows:
Loans to Mr. Ross A/c                                           …..Dr
The "Income and Expenditure" account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizatiRead more
The “Income and Expenditure” account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizations (NPO) prepare this type of account to ascertain surplus earned or deficit incurred by them during the period.
Talking about the format of income and expenditure accounts we generally see that all the expenses are recorded on the debit side while all incomes are recorded on the credit side. One important thing to note is that items so recorded are revenue items while capital nature items are generally ignored because only current period items are recorded in this statement.
Since it is a Nominal account, we follow the golden rules to prepare this, stating “debit all expenses and losses and credit all incomes and gains”. The closing balance at the end shows the surplus or deficit for the year. If the balancing figure appears on the debit side it is surplus and if the balancing figure appears on the credit side it is a deficit for the entity.
Following is the format of income and expenditure account
As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below. As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as inRead more
As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below.
As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as investments in fixed assets. Therefore they are treated accordingly like other fixed assets and are depreciated periodically in an organized and regular time period. The useful life of such solar devices is taken to be 5 years.
Giving you a small example of the depreciation on solar panels.
Solar panels were purchased by Agro Farm ltd. for installing them to be used for electricity generation. These panels were bought for Rs 2,00,000. Therefore depreciation to be charged as per income tax act over its useful life of 5 years is as follows:
Depreciation as per WDV = (Cost of an asset – salvage value)* rate of depreciation
Depreciation for 1st year = (2,00,000 – 0)* 40% = Rs 80,000
WDV at the end of 1st year = (2,00,000 – 80,000) = Rs 1,20,000
Depreciation for 2nd year = (1,20,000 – 0)* 40% = Rs 48,000
the same process will continue till the useful life of an asset.
The depreciation amount will be written off from the book value as shown below:
Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. AsRead more
Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. As per the companies act 2013, the following extract of the depreciation rate chart is given for computers.
Giving you a short example, suppose M/s spy Ltd purchased 20 computers worth Rs 30000 each. As per the companies act 2013, the computer’s useful life is taken to be 3 years, and the rate of depreciation rate is 63.16%. Applying the WDV method we can calculate depreciation as follows:
 Depreciation as per WDV =
(Cost of an asset – salvage value)* Depreciation rate
So for the first year, the depreciation amount will be
Cost of computers = Rs 6,00,000 (20*30000)
Salvage value = NIL
Rate of depreciation as per the Act = 63.16%
Therefore depreciation = (6,00,000 – NIL)* 63.16%
= Rs 3,78,960
this amount of depreciation will be shown in the profit & loss account as depreciation charged to computers and the same will be adjusted in the balance sheet. The extract of Profit & Loss and corresponding year Balance sheet is shown below.
Advantages of Bill of Exchange: Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows: CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-Read more
Advantages of Bill of Exchange:
Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows:
CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-drawee, debtors creditors, etc. Issuing the Bill of Exchange binds the party into a legal relationship. It acts as a legal document and proof in a court of law.
TERMS AND CONDITIONS: When a Bill of Exchange is issued, it mentions all the terms and conditions of payments. The terms and conditions can be like the amount of bill, date of payments, place of payment, interest amount if any, maturity period, etc.
ACT AS MEANS OF CREDIT: With the help of the Bill of Exchange, buyers can purchase goods on a credit basis and make payment after the credit period expires. If in case of emergency the drawer can also get such Bills discounted before the maturity period.
WIDER ACCEPTANCE:Â The Bills of Exchange carries a wide acceptance feature for the parties through which payments can be received and made without any difficulty.
RELATIONSHIP FRAMEWORK: The Bill of Exchange acts as an instrument that provides a framework enabling the smooth credit transaction between the parties as per the agreement.
MUTUAL ACCOMMODATION: Sometimes bills are mutually accommodated for the benefit of the parties. The Bill is drawn and accepted by drawer and drawee. Then the same bill is discounted by the drawer and the agreed sum is remitted to the drawee. This is basically done mutually to provide financial help to each other.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS: 1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. CoRead more
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS:
1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. Comparability enables inter-firm and intra-firm comparisons. It helps to ascertain the growth and progress of the business over time and in comparison to other businesses.
For example, managers of ITC ltd want to know which business of his is performing well and which needs progress so they would compare the financial statement of its different businesses and make the decision accordingly.
2. RELEVANCE: It generally means that the essential information should be easily and readily available and any irrelevant information should be avoided. The user of accounting information needs relevant accounting information for a good decision-making process, planning, and predicting future circumstances.
For example, a firm is expected to provide the total amount owed by the debtors in the balance sheet, whereas the total number of debtors is not important.
3. UNDERSTANDIBILITY: The financial statement should be presented so that every user can interpret the information without any difficulty in a meaningful and appropriate manner. To be more precise it should be complete, concise, clear, and organized.
For example, mentioning note number in the financial statement for any items which needs disclosure. This helps the users of accounting to interpret the financial statement without any difficulty.
4. RELIABILITY: This means the accounting information must be free from material error and bias. All accounting information is verifiable and can be verified from the source documents basically, information should not be vague or false.
For example, any significant matters like amount due, damages, losses, etc. which impact the financial stability shall be mentioned as disclosure since it is useful for all the users of accounting to be aware of such facts and not to be misguided by incomplete information.
What is the meaning of unfavourable balance as per cash book?
Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft. Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the lRead more
Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft.
Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the loan taken from the bank. When there is an overdraft balance the treatment is just the opposite of that of favorable balance.
Generally for business overdraft occurs when there is immediate or emergency funding for the short term. This can be seen for small and medium-sized businesses. This is considered to be convenient for these businesses because there is no requirement to pay interest on the lump-sum loan, only have to pay interest on the fund you use. Generally linked to an existing transaction account.
To reconcile this we need to prepare a Bank reconciliation statement. The procedure of preparing BRS under unfavorable conditions is as follows
Let us take one example considering one of the above conditions.
The cash book of M/s Alfa ltd shows a credit balance of Rs 6,500.
Bank Reconciliation Statement
What is the difference between cash discount & trade discount?
A cash discount is a discount allowed to customers when they make payments for the items they purchased. This type of discount is generally based on time. The early the payment is made by the debtors, the more discount they earn. To be more precise cash discount is given to simulate or encourage earRead more
A cash discount is a discount allowed to customers when they make payments for the items they purchased. This type of discount is generally based on time. The early the payment is made by the debtors, the more discount they earn. To be more precise cash discount is given to simulate or encourage early payment by the debtors.
Trade discount is a discount allowed by traders on the list price of the goods to the customer at specified rate. Unlike cash discount, trade discount is based on number of sale i.e, more the sale more the discount earned. This is mainly given on bulk orders by the customers.
To understand trade discount and cash discount let me give you simple example
Mr. X purchased goods from Mr. Y of list price Rs 10,000. Mr. Y allowed a 10% discount to Mr.X on the list price for purchasing goods in bulk quantity. Further, he was provided with cash discount of Rs 500 for making an immediate payment. Therefore the entry for the above transaction in the books of Mr. X would be
Goodwill is a fictitious asset?
The answer is B. False. Before jumping on the solution to know why goodwill is not fictitious, we need to know what are fictitious assets? Fictitious assets are false assets or not true assets. These are not assets but expenses & losses that are not written off from the profit & loss accountRead more
The answer is B. False. Before jumping on the solution to know why goodwill is not fictitious, we need to know what are fictitious assets?
Fictitious assets are false assets or not true assets. These are not assets but expenses & losses that are not written off from the profit & loss account but shown in the balance sheet as assets under the head miscellaneous expenditure. For example preliminary expenses, loss on issue of debentures, etc.
Goodwill is not a fictitious asset but an intangible asset which means it has no actual physical appearance and cannot be touched and felt like other assets like buildings and machinery. It is nothing but a firm’s reputation which can be sold just like other assets help the business grow and earn revenue. Goodwill is shown in the balance sheet as follows:
See lessCan you tell me journal entry for provision for depreciation?
First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation. Annual depreciation charged is an expeRead more
First, let us understand the meaning of a provision of depreciation. It is nothing but the total collection of all the depreciation over the years. This account is not like a normal account but a contra asset account. It is also called accumulated depreciation.
Annual depreciation charged is an expense for the business and hence has a debit balance. Whereas provision for depreciation as a contra asset account has a credit balance.
The journal entry for provision for depreciation is
Explaining the credit nature of this account. As we know that the depreciation is an expense for the business hence as per modern rules “Debit all the expenses and losses and credit all incomes and gains” therefore it is debited whereas the provision of depreciation is contra account it has a credit balance as it reduces the value of assets. So according to modern rule, we know a decrease in assets has a credit balance, hence shown in a negative balance on the balance sheet under long-term assets.
With the preparation of this account, we do not credit depreciation in the asset account but transfer every year to the accumulated depreciation account, and when assets are disposed of or sold we credit the ‘total’ of the provision on depreciation to the credit of the asset account just to calculate the actual profit or loss on a sale of the asset.
See lessWhat is the journal entry for loan to employee?
The journal entry for a loan to an employee is as follows: Loans to employee A/c                                           …..Dr xxx            To Bank/Cash A/c xxx (Being loan given to employee) From the above journal entry, we see that there are two accounts-first one is "Loan to employee accounRead more
The journal entry for a loan to an employee is as follows:
From the above journal entry, we see that there are two accounts-first one is “Loan to employee account” and the second one is “Bank/cash account“. Both are assets for the company.
Loan to employees is considered an asset because they are expected to be returned by the employee within the stipulated time period. If the loan is repaid within one year it will be shown under the current asset and if it is not expected to be collected within a year or in short might be repaid after a year then it will be shown under long-term assets.
Also, we all know Bank/cash is an asset for the company.
Why loan to employee A/c is debited and Bank/cash A/c is credited?
As per the modern rule:
Connecting the above-stated entry with the modern rule “loan to an employee” is debited as money comes back into the business hence there is an increase in an asset therefore debited. While in the second case “bank/cash account” is credited as the money goes out of the business, there is a decrease in assets of the company therefore credited.
We notice that in this entry there is an increase in one asset while a decrease of another asset. Therefore the impact on the balance sheet is Nil.
Let me give you a simple illustration of the above entry
Mr. Ross was an employee of Maxwell Pvt ltd. Mr. Ross was lent Rs 2,00,000 by the company for some emergency purpose. So as per modern rules the accounting entry in the books of the company will be as follows:
Can you please explain income and expenditure account?
The "Income and Expenditure" account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizatiRead more
The “Income and Expenditure” account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizations (NPO) prepare this type of account to ascertain surplus earned or deficit incurred by them during the period.
Talking about the format of income and expenditure accounts we generally see that all the expenses are recorded on the debit side while all incomes are recorded on the credit side. One important thing to note is that items so recorded are revenue items while capital nature items are generally ignored because only current period items are recorded in this statement.
Since it is a Nominal account, we follow the golden rules to prepare this, stating “debit all expenses and losses and credit all incomes and gains”. The closing balance at the end shows the surplus or deficit for the year. If the balancing figure appears on the debit side it is surplus and if the balancing figure appears on the credit side it is a deficit for the entity.
Following is the format of income and expenditure account
See lessDepreciation on solar panels as per income tax act?
As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below. As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as inRead more
As per the Income-tax act, solar panels are categorized under the heading renewal energy devices. The rate of depreciation for these devices is mentioned below.
As per the act, the rate of depreciation for solar panels is given as 40% as per the WDV method. Generally, these devices are treated as investments in fixed assets. Therefore they are treated accordingly like other fixed assets and are depreciated periodically in an organized and regular time period. The useful life of such solar devices is taken to be 5 years.
Giving you a small example of the depreciation on solar panels.
Solar panels were purchased by Agro Farm ltd. for installing them to be used for electricity generation. These panels were bought for Rs 2,00,000. Therefore depreciation to be charged as per income tax act over its useful life of 5 years is as follows:
Depreciation as per WDV = (Cost of an asset – salvage value)* rate of depreciation
Depreciation for 1st year = (2,00,000 – 0)* 40% = Rs 80,000
WDV at the end of 1st year = (2,00,000 – 80,000) = Rs 1,20,000
Depreciation for 2nd year = (1,20,000 – 0)* 40% = Rs 48,000
the same process will continue till the useful life of an asset.
The depreciation amount will be written off from the book value as shown below:
See lessWhat is depreciation on computer as per companies act 2013?
Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. AsRead more
Let me brief you about the nature of computers, their parts, laptops according to the companies act 2013. Basically, these are treated as non-current tangible fixed assets. This is because these types of equipment are used in business to generate revenue over its useful life for more than a year. As per the companies act 2013, the following extract of the depreciation rate chart is given for computers.
Giving you a short example, suppose M/s spy Ltd purchased 20 computers worth Rs 30000 each. As per the companies act 2013, the computer’s useful life is taken to be 3 years, and the rate of depreciation rate is 63.16%. Applying the WDV method we can calculate depreciation as follows:
So for the first year, the depreciation amount will be
Cost of computers = Rs 6,00,000 (20*30000)
Salvage value = NIL
Rate of depreciation as per the Act = 63.16%
Therefore depreciation = (6,00,000 – NIL)* 63.16%
= Rs 3,78,960
this amount of depreciation will be shown in the profit & loss account as depreciation charged to computers and the same will be adjusted in the balance sheet. The extract of Profit & Loss and corresponding year Balance sheet is shown below.
See lessAdvantages of Bill of Exchange?
Advantages of Bill of Exchange: Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows: CONCLUSIVE EVIDENCE: It acts as a shred of conclusive evidence in case of any dispute between the parties like seller-buyer, drawer-Read more
Advantages of Bill of Exchange:
Bill of Exchange is generally used as an instrument of credit as it offers many advantages to its users. The advantages are as follows:
- MUTUAL ACCOMMODATION: Sometimes bills are mutually accommodated for the benefit of the parties. The Bill is drawn and accepted by drawer and drawee. Then the same bill is discounted by the drawer and the agreed sum is remitted to the drawee. This is basically done mutually to provide financial help to each other.
See lessExplain the qualitative characteristics of accounting information?
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS: 1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. CoRead more
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ARE AS FOLLOWS:
1. COMPARABILITY: Comparison of financial statements is one of the most frequently used and effective tools of financial analysis. It helps the users of accounting information to compare, analyze and take decisions accordingly. Comparability enables inter-firm and intra-firm comparisons. It helps to ascertain the growth and progress of the business over time and in comparison to other businesses.
For example, managers of ITC ltd want to know which business of his is performing well and which needs progress so they would compare the financial statement of its different businesses and make the decision accordingly.
2. RELEVANCE: It generally means that the essential information should be easily and readily available and any irrelevant information should be avoided. The user of accounting information needs relevant accounting information for a good decision-making process, planning, and predicting future circumstances.
For example, a firm is expected to provide the total amount owed by the debtors in the balance sheet, whereas the total number of debtors is not important.
3. UNDERSTANDIBILITY: The financial statement should be presented so that every user can interpret the information without any difficulty in a meaningful and appropriate manner. To be more precise it should be complete, concise, clear, and organized.
For example, mentioning note number in the financial statement for any items which needs disclosure. This helps the users of accounting to interpret the financial statement without any difficulty.
4. RELIABILITY: This means the accounting information must be free from material error and bias. All accounting information is verifiable and can be verified from the source documents basically, information should not be vague or false.
For example, any significant matters like amount due, damages, losses, etc. which impact the financial stability shall be mentioned as disclosure since it is useful for all the users of accounting to be aware of such facts and not to be misguided by incomplete information.
See less