During the month, he transferred goods from his main office to his new outlet. Income is not measured from the start-up of business up to its dissolution, but is rather reported every accounting period. The length of the accounting period can either be: 1.
Weekly 2. Monthly 3. Quarterly 4. Semi-annually 5. Under the accrual method, income are recorded in the accounting period they are earned regardless of when they are collected whereas expenses are recorded in the period incurred regardless of when they are paid. The accrual basis or method of reporting income or expense has the following terms: a.
Accrued income — an income that is already earned but is not yet collected b. Accrued expense — an expense that is already incurred but not yet paid c. Deferred income — an income that is already received but not yet earned d. The rental will be paid by the client in James Enterprise pays employee salaries on the 3rd and 18th day of the month. James Enterprise shall pay Php30, salaries on July 3 next month. Lessor reports financial statements annually using the calendar accounting period.
He received Php, advanced rental from a lessee for one year covering October 1, to September 30, Only Php30, shall be recognized as rental income in Year The Php90, portion of the advanced income shall be considered as a liability or debt unearned income because it is not yet earned. At December 31, , the Php15, payment must be analyzed for its expired expense and unexpired component.
Only the Php6, expired portion of the Php15, pre-paid expense is an expense in The unexpired balance of Php8, is still an asset prepaid insurance in Non-financial information is not recorded but information relevant to users of financial statements is noted via a memo entry in the books. Please note: Only transactions or events that pertains to the business entity is recorded.
The business paid Php10, for business licenses. The business the executed a contract to lease a commercial space for Php20, a month.
Two days later the business paid Php40, advanced rental deposit. Only the following monetary transactions shall be recorded: a. Payment of Php10, business expense, not the completion of business registration b. Realization concept 2. Matching concept 3. Income is said to be realized when one of the contracting party performed his obligation on the contract, thus have established a right to demand from the other party.
Realization of income from sale of goods Income from the sale of goods is realized when ownership to the goods passes to the customer. The ownership to the goods transfers to the customer depending on the following shipping terms: a. FOB shipping point — ownership of the goods transfers to the buyer at the moment the goods leaves the premises of the seller b. Income from the sale of services is realized when services are rendered based on the extent of completion.
It postulates that expenditure shall be expensed in the accounting period the benefits of the expenditure are realized by the entity. An expenditure is an outflow of resources or an obligation requiring future outflow of resources. Capital expenditures — these are expenditures that benefits future accounting periods. These are recorded in accounting as assets.
Period expenditures — these are expenditures that benefits only the current accounting period. These are recorded as expense. Examples of capital expenditures: a. Supplies b. Inventory c. Equipment d. Land e. Building f. Salaries b. Utilities c. Rent d. Interest e. Direct association or matching of cost against revenues or cause and effect association b. Systematic and rational allocation c. Examples: 1.
Systematic and rational allocation. The equipment is expected to serve the company for 5 years after which it can be sold at scrap value of Php10, Supplies worth Php8, was used in while the rest was used in Open navigation menu.
Close suggestions Search Search. User Settings. Skip carousel. Carousel Previous. Carousel Next. What is Scribd? Explore Ebooks. Bestsellers Editors' Picks All Ebooks. Explore Audiobooks. Bestsellers Editors' Picks All audiobooks. Explore Magazines. Editors' Picks All magazines. Explore Podcasts All podcasts. The ultimate aim of the management is to increase profitability and losses.
In order to achieve the objectives of the concern as a whole, it is essential to prepare the accounting statements in accordance with the generally accepted principles and procedures. The term principles refers to the rule of action or conduct to be applied in accounting. Accounting principles may be defined as "those rules of conduct or procedure which are adopted by the accountants universally, while recording the accounting transactions. Accounting Concepts. Accounting Conventions.
Accounting Concepts Accounting concepts mean and include necessary assumptions or postulates or ideas which are used to accounting practice and preparation of financial statements. Accounting Conventions Accounting Convention implies that those customs, methods and practices to be followed as a guideline for preparation of accounting statements.
The accounting conventions can be classified as follows: 1 Convention of Disclosure. Accounting Concepts 1 Entity Concept: Separate entity concept implies that business unit or a company is a body corporate and having a separate legal entity distinct from its proprietors.
The proprietors or members are not liable for the acts of the company. But in the case of the partnership business or sole trader business no separate legal entity from its proprietors. Here proprietors or members are liable for the acts of the firm. As per the separate entity concept of accounting it applies to all forms of business to determine the scope of what is to be recorded or what is to be excluded from the business books. For example, if the proprietor of the business invests Rs.
On withdrawal of any amount it will be debited in cash account and credited in proprietor's capital account. In conclusion, this separate entity concept applies much larger in body corporate sectors than sole traders and partnership firms. The dual aspect concept is the basis of the double entry book keeping.
Accordingly for every debit there is an equal and corresponding credit. On the other hand, the term liability denotes the funds provided by the creditors and debenture holders against the assets of the business.
The term assets represents the resources owned by the business. For example, Mr. Thomas Starts business with cash of Rs. In other words, the business acquires assets of Rs.
Being a business in continuous affairs for an indefinite period of time, the proprietors, the shareholders and outsiders want to know the financial position of the concern, periodically. Thus, the accounting period is normally adopted for one year. At the end of the each accounting period an income statement and balance sheet are prepared. This concept is simply intended for a periodical ascertainment and reporting the true and fair financial position of the concern as a whole.
This concept assumes that business concern will continue for a long period to exit. In other w. This assumption implies that while valuing the assets of the business on the basis of productivity and not on the basis of their realizable value or the present market value, at cost less depreciation till date for the purpose of balance sheet. It is useful in valuation of assets and liabilities, depreciation of fixed assets and treatment of prepaid expenses.
And this cost is the basis for subsequent accounting for the asset. For accounting purpose the market value of assets are not taken into account either for valuation or charging depreciation of such assets. Cost Concept has the advantage of bringing objectivity in the preparation and presentation of financial statements. In the absence of cost concept, figures shown in accounting records would be subjective and questionable. But due to inflationary tendencies, the preparation of financial statements on the basis of cost concept has become irrelevant for judging the true financial position of the business.
This concept excludes those transactions or events which cannot be expressed in terms of money. For example, factors such as the skill of the supervisor, product policies, planning, employer-employee relationship cannot be recorded in accounts in spite of their importance to the business.
This makes the financial statements incomplete. The chief aim of the business concern is to ascertain the profit periodically. To measure the profit for a particular period it is essential to match accurately the costs associated with the revenue. Thus, matching of costs and revenues related to a particular period is called as Matching Concept.
According to this concept, revenue is the gross inflow of cash, receivables or other considerations arising in the course of an enterprise from the sale of goods or rendering of services from the holding of assets. If no sale takes place, no revenue is considered. However, there are certain exceptions to this concept. According to this concept, revenue recognition depends on its realization and not accrual receipt. Likewise cost are recognized when they are incurred and not when paid.
The accrual concept ensures that the profit or loss shown is on the basis of full fact relating to all expenses and incomes. In fact, due to inflationary pressures, the value of rupee will be declining.
Under this situations financial statements are prepared on the basis of historical costs not considering the declining value of rupee. Similarly depreciation is also charged on the basis of cost price.
Thus, this concept results in underestimation of depreciation and overestimation of assets in the balance sheet and hence will not reflect the true position of the business. Accounting Conventions 1 Convention of Disclosure: The disclosure of all material information is one of the important accounting conventions.
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