AccountingQA Latest Questions

Simerpreet
SimerpreetHelpful
In: >

Explain Business entity, money measurement concept, Going concern concept etc.

Accounting ConceptsGAAP
  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Accounting Concepts Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period. These concepts constitute theRead more

    Accounting Concepts

    Accounting concepts are the rules, assumptions and methods generally accepted by accountants in the preparation and presentation of financial statements of an entity. These concepts have been developed by the accounting profession for a long period.

    These concepts constitute the foundation of accounting and one has to be aware of them to maintain correct and uniform financial statements.

    I have listed and briefly explained the following accounting concepts.

    1. Entity Concept 
    2. Money Measurement concept 
    3. Going on concern 
    4. Periodicity concept 
    5. Accrual concept 
    6. Cost concept 
    7. Realisation concept 
    8. Matching concept 
    9. Dual aspect concept 
    10. Conservatism concept 
    11. Materiality concept 
    12. Consistency concept

     

    #1 Entity Concept 

    As per this concept, the business and its owner are separate entities from the point of view of accounting. It means the assets and liabilities of the business and owner are not the same. 

    However, in the eyes of law, the business and its owner may be a single entity.

     

    #2 Money measurement concept

    This concept states that the transaction which can be measured in terms of money shall only be recorded in the books of accounts.

    Any transaction which cannot be measured in terms of money shall not be recorded.

    #3 Going concern concept 

    Going concern concept is also a fundamental accounting assumption. It assumes that an enterprise will continue to be in business for the foreseeable future.

    It means its accounts will also be prepared to take such assumptions that the business will continue in future.

     

    #4 Periodicity concept 

    The periodicity concept states an entity needs to carry out accounting for a definite period, generally for a year known as the accounting period. The period can also be half-year or a quarter.

    The cycle of accounting restarts at the start of every accounting period.

     

    #5 Accrual concept 

    The word accrual comes from the word

    As per the accrual concept, the expense and incomes are recorded in the books of accounts in the period in which they are expected to incur whether payment in cash is made or cash is received or not.

    For example, the salary to be paid by a business is to be recorded as an expense in the year in which it is expected or liable to be paid.

     

    #6 Cost concept 

    It is concerned with the purchase of the assets of a business. As per the cost concept, a business shall record any asset in its books at the acquisition cost or purchase cost.

     

    #7 Realisation concept 

    This concept is concerned with the sale of assets. A business shall record the sale of the assets in its books only at the realised cost.

     

    #8 Matching concept 

    As per this concept, revenue earned during a period should be matched with the expenses incurred in that period. In short, an entity needs to record the income and the expenses of the same period.

     

    #9  Dual concept 

    This concept is the foundation of double-entry accounting. Dual concepts state that every transaction has two effects, debit and credit. 

    One or more accounts may be debited and other one or more accounts are credited so that the total amount of debit and credit equals.

     

    #10 Conservatism concept 

    The conservatism concept states that an entity has to account for expected losses and expenses but not for future expected profits and gains.

     

    #11 Materiality concept 

    As per this concept, only those items which are material should be shown in the financial statements of an entity. It says that items which are immaterial or insignificant in terms of value or importance to stakeholders can be ignored.

     

    #12 Consistency concept 

    It says that an entity should follow consistent accounting policies every accounting period so that a comparison can be made among the financial statements of different accounting periods.

     

    GAAP 

    Generally Accepted Accounting Principles or GAAP is a combination of authoritative standards which are set by policy boards and commonly accepted methods of recording and presenting accounting information. 

    GAAP or US GAAP is formulated by the Financial Accounting Standards Board or FASB  and almost state in the USA is compliant with GAAP. 

    The main goal of the GAAP is to ensure that the financial statements of an entity are complete, consistent and comparable.

    It can be said accounting concepts are part of GAAP.

     

    Ten key principles of GAAP

    #1 Principle of regularity

    It states that an accountant has to comply with GAAP regulations as a standard.

     

    #2 Principle of Consistency

    Accountants should be committed to applying the same set of standards throughout the accounting and reporting process, from one period to another. This is to be done to ensure comparability of financial statements between periods.  

    Also, the accountants have to fully disclose and explain the reason behind any changed or updated standards in the note of accounts of financial statements.

     

    #3 Principle of sincerity

    It states that the accountant should strive to provide an accurate and unbiased view of the financial situation of a company.

     

    #4 Principle of Permanence of Methods

    As per this principle, a company should be consistent in procedures used in financial statements so that it allows the comparison of the company’s financial information.

     

    #5 Principle of Non-Compensation

    Both negative and positive should be reported with full transparency. There should be no debt compensation i.e. debt should not be set off against any asset or expenses against revenue.

    #6 Principle of Prudence

    It states that financial data presentation should be fact-based. This principle is similar to the conservatism concept.

     

    #7 Principle of Continuity

    This is as same the going concern concept. It states that while valuing assets, it should assume that the business will continue for the foreseeable future.

     

    #8 Principle of Periodicity

    It is the same as the matching concept. It states that the revenue and expenses should be recorded in the period in which they occur.

     

    #9 Principle of Materiality

    Accountants should disclose all the financial information that is significant in the decision-making of the users of financial statements.

     

    #10 Principle of Utmost Good Faith

    It states that all parties to a transaction should act honestly and not mislead or hide crucial information from one another.

    See less
    • 0
Radha
Radha
In: >

Internal Users
  2. Vijay Curious M.Com
    This answer was edited.

    One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll beRead more

    One of the main purposes of accounting is to provide financial data to its users so that decisions are taken at an appropriate time. These users of accounting information are broadly classified into (a) internal users and (b) external users. Since the question concentrates on internal users I’ll be explaining internal users of accounting information in detail.

    Internal users are people within an organization/business who need accounting information to make day-to-day decisions.

    The various internal users of accounting information include:

    • Owners/Promoters/Directors:

    Owners are the people who contribute capital to the business and therefore they are interested to know the profit earned or loss incurred by the business as well as the safety of their capital. In the case of a Sole Proprietorship, the proprietor is the owner of the business. In the case of a Partnership, the partners are considered as the owners of the firm.

    The use for them: To know how the business is doing financially, owners need to know the profit and loss reflected in the financial statements.

    • Management:

    Management is responsible for setting objectives, formulating plans, taking informed decisions, and ensuring that pre-planned objectives are met within the stipulated time period.

    The use for them: To achieve objectives, management needs accounting information to make decisions related to determining the selling price, budgeting, cost control and reduction, investing in new projects, trend analysis, forecasting, etc.

    • Employees/Workers:

    Employees and workers are the ones who implement the plans set by the management. Their well-being is dependent on the profitability of the business.

    The use for them: They are interested to check the financial statements so that they can get a better knowledge of the business. Some organizations also give their employees a share in their profits in the form of a bonus at the year-end. This also creates an interest in the employees to check the financial statements.

    See less
    • 0
A_Team
A_Team
In: >

  2. Vijay Curious M.Com
    This answer was edited.

    Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period. A part of the expense is amortized/written off every year against the compRead more

    Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period.

    A part of the expense is amortized/written off every year against the company’s earnings. The remaining part (which is yet to be written off) is shown as an asset in the balance sheet. They are shown as assets because these expenses are expected to give returns to the company over a period of time.

    Here are some examples of fictitious assets:

    • Preliminary expenses.
    • Promotional expenses.
    • Loss incurred on the issue of debentures.
    • Underwriting commission.
    • Discount on issue of shares.

     

    To make it simple I’ll explain the accounting treatment of preliminary expenses with an example.

    The promoters of KL Ltd. paid 50,000 as consultation fees for incorporating the company. The consultation fee is a preliminary expense as they are incurred for the formation of the company. The company agreed to write off this expense over a period of 5 years.

    At the end of every year, the company will write off 10,000 (50,000/5) as an expense in the Profit & Loss A/c.

    The remaining portion i.e. 40,000 (50,000 – 10,000) will be shown on the Assets side of the Balance Sheet under the head Non – Current Assets and sub-head Other Non – Current Assets. 

    Here are the financial statements of KL Ltd.,

    Note: As per AS 26 preliminary expenses are fully written off in the year they are incurred. This is because such expenses do not meet the definition of assets and must be written off in the year of incurring.

    Source: Some fictitious assets examples are from Accountingcapital.com & others from Wikipedia.

     

    See less
    • 0
Naina@123
Naina@123
In: >

  2. prashant06 B.com, CMA pursuing

    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)
    See less
    • 0
Manvi
Manvi
In: >

  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts. Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future,Read more

    As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts.

    Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future, its creditors and lenders report to the firm about their dues.

    At that time, a firm may get to know that it had failed to record some liabilities in its books and it has settled them now.

    We know that when a partnership firm is dissolved, a realisation account is created to which all the assets and liabilities of the firm are transferred.  Entries are as given below:

    Realisation A/c     Dr.      ₹ Amt

    To Assets A/c                  ₹ Amt

    ( Asset transferred to realisation account)

    Liabilities A/c    Dr.        ₹ Amt

    To Realisation A/c       ₹ Amt

    (Liabilities transferred to realisation account)

    Hence, for transferring unrecorded liabilities, the procedure is the same for the recorded liabilities:

    Unrecorded Liabilities A/c        Dr.     ₹ Amt

    To Realisation A/c                               ₹ Amt

    ( Unrecorded liabilities transferred to realisation account)

    Then to pay off the unrecorded liability the entry is:

    Realisation A/c     Dr.    ₹ Amt

    To Cash / Bank A/c       ₹ Amt

    (Unrecorded liabilities paid off)

    That’s it, I hope I was able to make you understand.

    See less
    • 0
Jayesh Gupta
Jayesh GuptaCurious
In: >

  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement proviRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. Unlike a balance sheet that provides information about the company on a particular date, a cash flow statement provides information about the flow of cash over a period of time.

    OBJECTIVE

    Information obtained through cash flow statements is aimed to assess the ability of a business to generate cash and at the same time, maintain liquidity. Therefore, important economic decisions can be made by evaluating these cash flow statements.

    Cash Flow statements are categorized into

    • Operating Activities: These activities refer to the main activities of the business during an accounting period. They involve revenue-generating activities. As per the indirect method, profit before tax is taken as the starting point and all non-cash expenses are added while non-cash incomes are deducted. Whereas in direct method, cash receipts and cash expenses are added and subtracted respectively. Eg: sale of goods.
    • Investing Activities: These activities involve the sale and purchase of non-current assets and investments. Eg: cash payment for machinery.
    • Financing Activities: These activities result in a change in capital or borrowings. Eg: cash proceeds from the issue of equity shares.

    Importance of Cash Flow

    A cash flow statement gives us knowledge about the liquidity and solvency of the company. These are necessary for the survival and expansion of the company. It also helps in predicting future cash flows by using information from previous cash flows. It also helps in comparison between companies which shows the actual cash profits.

    See less
    • 0
Aadil
AadilCurious
In: >

  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time. General reserve is a reseRead more

    A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time.

    General reserve is a reserve created by taking a portion of the profits for future requirements.

    TREATMENT OF GENERAL RESERVE

    As per the indirect method, Since there is no actual flow of cash, any addition to reserves is added back to net profit for calculation of net profit before tax and extraordinary items. This net profit before tax will appear under cash flow from operating activities. If there is a reduction in reserve, then they are subtracted from net profit.

    As per the Direct method, an increase or decrease in general reserve will not affect the cash flow statement since non-cash items are not recorded. Only cash receipts and payments that come under operating activities are recorded. So, net profit is not shown in the direct method and hence neither is general reserve.

    General reserve does not fall under the head investing activities as investing activities involve the acquisition or disposal of long-term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.

    EXAMPLE

    If the balance in general reserve for the period of March was Rs 4,000 and in April the balance was Rs 7,000, then its treatment in cash flow would be:

     

    See less
    • 0
Simerpreet
SimerpreetHelpful
In: >

  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Introduction   Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets. In both cases, they are real accounts. Hence, the golden rule of accounting will be the same. But, when it coRead more

    Introduction

     

    Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets.

    In both cases, they are real accounts. Hence, the golden rule of accounting will be the same.

    But, when it comes to journal entries, Furniture A/c will appear only when it is treated as a fixed asset.

    No journal entries are passed in the stock-in-trade account except for some balance transferring entries.

    Journal Entries on taking Furniture as a fixed asset

    Taking furniture as a fixed asset, we can pass various entries related to it. Since furniture is an asset, any increase is debited and the decrease is credited.

    Also, furniture is a real account which means the golden rule of accounting  applicable is, “Debit what comes in and credit what goes out”.

    Following are the basic entries related to furniture.

    Purchase of furniture

    The most common entry related to furniture is the purchase of furniture:

    Furniture A/c                                            Dr. Amt
    To Cash / Bank A/c Amt

    Here Furniture A/c is increased, hence debited.
    Cash or Bank being reduced is credited.

    Sale of furniture

     

    Cash / Bank A/c                                       Dr. Amt
    Profit and Loss A/c *                               Dr. Amt
    To Furniture A/c Amt
    To Profit and Loss A/c  ** Amt

     *In case of loss

    **In case of profit

     On the sale of furniture, its balance gets reduced, hence credited.
    Cash or Bank is debited as cash comes in hand or into the bank.

    Also, profit or loss may arise due to the difference in sale value and the carrying amount of the furniture A/c.

    The difference is debited to Profit and Loss A/c in case of loss and credited in case of profit.

     

    Depreciation on Furniture

    Depreciation A/c                                         Dr. Amt
    To Furniture A/c Amt

    Here, furniture is credited as it is decreased by the amount of depreciation.

    Depreciation being a non-cash expense, is debited.

    Journal Entries on taking Furniture as stock in trade

    When furniture is stock of trade of a business, the journal entries will be like normal purchase and sales entries as below:

     

    Purchase A/c                                               Dr. Amt
    To Cash / Bank A/c Amt

     

     

    Cash / Bank A/c                                          Dr. Amt
    To Sales A/c Amt

    There will be no furniture account.

    See less
    • 0
Anushka Lalwani
Anushka Lalwani
In: >

  2. ShreyaSharma none
    This answer was edited.

    Introduction & Definition Firstly, let's see what the term 'petty cash book' means. The word ‘petty’ means small. A petty cash book is identical to a cash book, maintained to record the small expenses of a business like stationery, postage, stamps, carriage, etc. The cash received by a petty casRead more

    Introduction & Definition

    Firstly, let’s see what the term ‘petty cash book’ means. The word ‘petty’ means small. A petty cash book is identical to a cash book, maintained to record the small expenses of a business like stationery, postage, stamps, carriage, etc. The cash received by a petty cashier is recorded on the debit/ receipt side whereas, the money he pays is recorded on the credit/ payment side. The difference between the sum of the debit and credit items represents the balance of the petty cash in hand.

    The reason the petty cash book is maintained is that it records small expenses that are inconvenient or too small to be registered in the cash book. This is also called a simple petty cash book. Just like a cash book is maintained by the accountant, the petty cash book is maintained by a petty cashier.

    When it comes to the format, there are two types of petty cash book formats. They are-

    1. Simple Petty Cash Book
    2. Analytical Petty Cash Book

    We have been discussing the simple petty cash book so far. Thus,

    Format of Simple Petty Cash Book

     

     

    Analytical Petty Cash Book

    The analytical petty cash book has numerous columns for the recording of monetary transactions. In the analytical petty cash book, there are pre-existing columns for the usual expenses that are recorded frequently in the business which makes it easier for a business that has daily expenses for food, stationery, postage, etc. They’ll be having individual columns. It has numerous columns in it for the recording of expenses in it.

    The key advantages of an analytical petty cash book are-

    • One of the major key advantages is that the analytical petty cash book due to its format and structure saves time.
    • The other advantage is that it helps the business in easy comparisons.
    • It requires lesser time in recording.

     

    Format of Analytical Petty Cash Book

     

     

     

     

     

     

    See less
    • 0

Most Helping Users

Astha

Astha

Leader
Simerpreet

Simerpreet

Helpful
AbhishekBatabyal

AbhishekBatabyal

Helpful