\ ts m7 he AeCOUNARE While Valuing th f sale vale of toe, tet a wastes does not take Into account forced other expected lives rahe te CHMRES deprecation cn pane accu sis wT should be nonce Cat aa would be noted that the ‘g NE concer ide contiautnes of ths een nem concept’ does not imply permanent ide aeration Tong enough te ehey “MM PESumes that the emerprine pe permanent Porat operation long enough t eh, against income, th Opriate py concept, tc cost of fixed assets over their over appr costs which have been deferred ‘riod othe der © met the contractual nan” we Cay liabilities when they become due and 8 8 whole. When an enna nents. Moreover, the eoncept ample ee ss as a whole. When an enterprise liquidan Joe once applies to the busines moumicnet @ branch or one segment of its operations, 88 @ going concer is normally not impaired, Considered as a going concern when it has gone insolvent. OF course, the receiver or the liquidator SS operations for some period pending arrangement suver for the sale of the business as a going concem, at or il ea OF CP SoBe wll ‘stand terminated fhocs aa eR eT ween tment o will be at least regarded! ea siachael Pending the results of his efforts he enterprise to continue The enterprise will not be into liquidation er it has become may endeavour to carry on busine: with the creditors or the final Money Measurement Concept. Accounting records only monetary transactions, ose ce transactions which cannot be expressed in money do nor fag place in the books of accounts though they may be very wsefil fir the Buainese: Foe example, ira usiness has got a team of dedicated and trusted employees, i i definitely an not shown’ ;Pusiness but since their monetary measurement is not possible, they are not shown in the books of the business Measurement of business eve affairs of nit in money helps in understanding the state of ne business in a much better way. For example, if a business owns Rs 10.000 of cash, 600 kg of raw materials, two trucks, 1/000 square feet of building Stace . Full disclosure. According to this convention account FEPOMTS should dsclag sand fry the information they purport to represent. They should be honesty THE wwred and sufficiently disclose information which is of material Kael Present and potential e rane eon mot of big busineses are run by joint stock companies where = fs divorced from manage an Ace ment. The Companies Act, 1956 not only requires tht Inne accounting sty rans omtary Must give a tue and fir view of te wag ait of pact arenes he Pesctibed Forms in which hese sttemene ens | i r i tr to integra applicable law Statement and Balance SI of full disclosure jonslsteney: According to this convention, accounting unchanged from one period to another. For example, market price whichever is less’ Similar i depreciation is charged The flowing on fixed ts according a = ‘method, it should be done: ‘Year after year. This 2 ere a a = lowe, eomaseny des not mee a A material det COUN WilAccouwme Pancwtss // 1 (© Contracts for contingent consideration in a business com exemption applies only to the acquirer. ( Insurance contracts since a separate Accounting Standard on Insurance Contracts, which is being formulated, will sepcify the requirements relating, to insurance contracts, (©) Financial instruments, contracts and obligations under share-based payment transactions. mn. This SYSTEMS OF BOOK-KEEPING - as explained earlier, is the art of recording pecuniary or business transactions in a regular and systematic manner. This recording of transactions may be done according to any of the following two systems: |. Single entry system. An incomplete double entry system can be termed as a entry system, According to Kohler, ~ it is a system of book-keeping in which as rule only records of cash and personal accounts are maintained, it is always incomplete double entry. varying with circumstances”. This system has been developed by some business houses, who for their convenience, keep only some essential records. records are not kept, the system is not reliable and can be used only by: working of this system has been discussed in detail later in a ; 2. Double entry system. The system of ‘double entr to have originated with the Venetian merchants of the ofrecording the two-fold aspect of the transaction, while discussing the ‘dual aspect concept’ earlier that every transaction has a two-fold effect. If so some other person must have given it, or the first or some service etc. must have been rendered) Accounting Equation The double entry system of book- “accounting equation” given below: Assets ‘The properties owned by business are called “Equities’. Equities may be sub-d creditors and the rights of the owners. The business and are called “liabilities”. The or owner's equity. Thus:Chapter 3 (0) Flettows asset, (inl 3 TE in the books of CCOUNTING TERMS in ek sat Aiscount alowed ons) () Wasting cxtts BASIC / ‘themselves i the good Tae 1 sch asses, The term LEARNING OBJECT chapter you should be able to: mao Th tt | Ato studying svpasie terms used ih Re and ee 3 identity the tn toy t0o0utng om. 3p 2 er moaning of coral KEY mB ACCOUNTING TERMS () Crvert loll gees vet familiarised with certain basic terms. which net 1k will be appropriate 10 Be cling with the technique of recording of business tra aah in accounting before proce go through these basie terms and understand ye (i) Fie iat is wees en comet fhe To UNNI te g— ah a Jeary, since it will be then con R © 10 follow: fof the chapters which are to % ired by a busines fom, Be mn Pad “ase nee the resources acquired by 8 business fog MMSE BN FA) 1 Aset. The etariiy. bo Cvnee a nL “urabeie 3 CT sar sie rights owned by an enterprise and carrying probable future bene residual ov imangible rights owned by ‘Owners’ Equity, in other-words, property of all kinds ovwned by a business comes within the cates, Gfup used 1 6@ of the term “assets Capital may be yy be classified into the following categories; Assets examples of such assets are land, buildings, plant, (id Current assets. These are assets which are hem into cash during the normal busir They include * consumed in the production of goods or rendering of business”? The essential difference between the current assets are held essentially for a short period io cash, Examples of such assets are eashy in ‘work-in-progress and finished goods), bills receivab also termed as “Floating” or ‘Circulating® Assets, (i) Liguid assets. These are assets which are sara teh Iss. AS a matter of fic all cuRenN and inventories are included in the definition of liquid ‘counting. Terminology issu . “I by Institute of Charteredee Basse Accenreroa Tas 1149 (ie) Fictitious assets. These are eee ‘assets which have no real value but are shown accounts only for technical ret be books of Sein reasons, Examples of such assets are prlininay expe red in connection with the establishment of a business or discount allowed on issue of shares by a company, ete (©) Wasting assets. These are the m These are the assets which are exhausted with, or which lose themselves in the goods they produce, themelyes nthe goods they produce, Mines and quae are common examples of such abssts The ‘erm is albo used for deserbing such assets which get exhausted : pse of time, e.g., copyrights, patents, trademark, ete 2. Liabilities, The term “Libis used © dente amounts which a business owes and has to retum or account for. They are present obligations whose amounts can be ascertained with substantial accuracy. They can be divided into bo categorie () Current liabilities, ‘The term ‘Current Liabilities’ is used to denote tiabilities will be due within a short time (usually one year or less) and that are to be paid out of current assets or by creation of other current liabilities. Creditors for goods, bills payable, outstanding expenses are some of the examples of current liabilities, (id Fixed liabilires. Liabilities that will not be due for a comparatively long time (usually more than one year) are termed as “Fixed Liabilities’ or ‘Long-term Liabilities’, These liabilities would continue to be treated as Fixed Liabilities if they are renewed rather than paid at maturity. 3. Capital. The term ‘Capital’ is used to denote the owners’ equity in the business. Iris a residual claim against the assets of the business after the total liabilities are Cwners* Equity, Proprietorship and Net-Worth are some of the other terms which are also used to denote Capital. x - aah dB ost Capital may be classified into the following categories; (® Fixed Capital, It is the capital invested in or ix (i Circulating Capital. 1tis the capital in the form of ¢ (iii) Working Capital. It is the excess of Current Assets ¢ 4. Contingent Asset: An asset, the existence, ownership value or determined only on the occurrence or non-occurren of on ‘events. It usually arises from unexpected events that give of economic benefits to the business enterprise, For is pursuing the outcome of which is uncertain, is ‘A contingent asset is not recognised in the bo not require any disclosure in the financial continuously and when it becomes virtually economic benefits to the enterprise, the asset and in the financial statements of the firm in 5. Contingent Liability: It is an obligation which may arise in future depending upon the ‘or more uncertain future events. It is a arise depending upon the situation. whi Use tions,Wa, 1.50 // Accouxt GOERS Process no Pancins& yes of contingent liabilities: ree verpise not acknowledged as debt are the exat nst the enterpt ! pi on shares partly Paid: eo. eed Ba uumulative dividends. i nea fixed ct arrears of TS Mf eontacts remaining fo Be executed on cap } sad wi ‘4 Esimated amo i ! ovided for. ‘ 7 : not provide erecognise a contingent Liability. However, it mayb 7 on Anenterprise spot iy statements. Such liabilities are assessed on g as a note fo the Hither an outflow of economic resources has become (coi bay basis to determi vor the probable amount, the liability will have to be i ie tod a provision will have to be created. ig in s and a 2 it sd-by Way of providing for ; wision: An amount written off or retained ‘ ting f . 6 Howton in value of assets of for providing any known liability, the sit Ta i of which cannot determined with substantial accuracy. Examples +of a «ky provision fr bad and doubtful debts, a provision for discount on debtor, Diterene between a Contingent Liability, a Provision and a Liability: Thi. (©) Clositg tr be understood with the following example: ‘A lawsuit has been filed against a firm claiming damages of Rs 1,00, firm feels that the case against the firm may or may not be dist Such a liability is a contingent Tiability and may be disc the financial statements. However, if the firm feels that the damages of around Rs 20,000 in the suit in all pro the extent of Rs 20,000 for the lawsuit will be cteated, F the damages payable of Rs 25,000 against the firms, a Ti be recognised in the books of the firm. ~035505 Basic Accoutso Tens // 1.51 3, Brent are (a) Profit of Rs 20,000, computed as under Rs Sales 90,000 Cost of Purchases 0.000 {uld: Godown Rent “10.000 70,000. (Cash 1,00,000 Add: 90,000 1,90,000 Less (© Closits UNI ated as under: Goods Purchased (5# 80,000 Less: Cost of Goods Sold 60,000 121,104 2000 (2 Capital of Rs 120,000 compet nada Initial capital introduce i 1,00,000 1U HYD CAMPUS KRE 35505 R000 ‘Hinton 120000, 8. Revenue. The term ‘Revenue’ means income SP4M2uM ing wawure from any source. The source may be sale of goods, performance of services for a customer or a client, the rental of a property, the lending of money and any other business or professional carried on for the purpose of earning income. Add: Profit made activ 9. Expenditure. The term includes incurring a liability disbursement of cases or transfer of property for the purpose of obtaining assets goods or services. It may be of three types: () Capital expenditure. An expenditure incurred for obtaining a long-term advantage for the business. (i). Revenue expenditure, An expenditure where benefits expire within a year or which. has been incurred merely to maintain the business or keep the assets in good condition, waht (iii) Deferred expenditure. An expenditure or liability for which payment has been fr incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. This is also referred to as deferred revenue expenditure. “eigen as 10. Expense. The term “Expense? denotes the cost of services and things used for generating revenue,ov”. nos rece e0zé60 a= ad from a Loss. An Expense is sy pulse brings 10 benefit 10 the firme above have been explained in detail late g a 4 seuss ab0¥ is > ait a oe Capital and A jo? means the property in which the busines, @ term “Goods oe resale. For example, if furniture “ Import-ex} Foe so prise ll ome within the det iad rae ee ihe fimiture has been purchased by a furniture qt a wi bine, sich furtire will come withinthe definition op gi Fined Asses \ x Lo pation The peron who owes money 10 the business HSéalled a “Debi = ‘son who has a claim for money against the’ business ig Crt. person was i Crear - at so 14, Bll of Exchange, Its a document-in writing direeting a certain person 4 eran sam of money to the order ofa Géttain person or to the bearer of the i for example, if 4, a creditor by a document in writing asks his debtor 2 sum of Rs 10,000 (owed by B on account of purchase of certain moths, such a document is termed as “Bill of Exchange’, The document willbe termed as “Bill Receivable’ for A (ie, the per teh th Payment) and a “Bll Payable’ for B (ie., the person who is | the money under the document) a ©) Quanity ciscoune it On making bait A deducto : sais bulk purchases fn alowed “) Cash discoy m as ed as Cash MA discount al 1 3h Discouny? * lowed to @ ade opnile Basic Accom Tests // 1.83 2) Brokers and bankers, ) Property dealers for helping in renting out or purchase or sale of properties. (4) Import-export agent in foreign trade, 19. Merchandise Cost. It is the same as cost of goods sold. It is computed as follows: Opening Inventory Add; Net Purchases (4e., purchases less returns) Direct Expenses (ie,, expenses incurred for ‘acquiring the goods and making them fit for sale) Less: Closing Inventory Cost of goods sold 20. Gross Profit. Itis the excess of the selling price over the cost of goods sold (without deducting any expenses incurred in selling the goods). 21. Net Profit/Income. It is the profit left after deducting all business expenses from the Gross Profit made by the business. rs Mlustration 3.1, Find out merchandise cost, gross profit and net income from the following transactions: Purchases (3,000 articles) Freight Local Taxes Salaries Shop Rent Godown Rent Electric Charges Municipal Taxes Stationery Furniture (Estimated life 5 years) Sales (2,700 articles) Solution: (Merchandise Cost Purchases Freight Local Taxes Cost of 3,000 articles Less: Closing Inventory (300 te (ii) Gross Profit: a Sales — Merchandise Cost —_ ) ne her EXP -_ Mt ¢ : Gross Profit = I Rs 750 00 » Furniture and all other expen, tion on 6,980" Rs + depres es 240 Jes RS includes F goods oF cash fiom the busin i i rhe withdrawal of 200 8 ty 9 t 22. Drawings, The within os > is called ¥ ‘ one onal se | = a mansaction in any Book oF accoune j i 4 G Pong anc penon vio is atin 2 position tO Pay hls dey co Te 2 as er uch a person are more than his. aggagg sa that the liabilitie vs pelen Gp hea a | 25, Sol A persor : i OA pen - a debtor on account of hig 26. Bad Debts. The amount lost from 2 pes aioe book value of assets (other th, Ce 27. Net Assets, The excess of the book value an a Pe ofan enterprise over its liabilites. This is also referred to as Net Wort gt (oy Te € Funds 28. Working Capital. The funds available for day-to-day operations of {iso represented by the excess of current assets over current liabilities inclg’® term loans gf | KEY TERMS |. CltAssetsay tan gible object or an intangible ric qrerptse and canying probable fue bene 8 1 ciblta: Owners equity in the iness, 5 Copital Expenditure: aj i lift: