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Accounting – Concepts and Balance Sheet
Dr. Nikunj Patel Assistant Professor Institute of Management, Nirma University, Ahmedabad
Accounting Concepts 1.
Money Measurement
2.
Entity
3.
Going Concern
4.
Cost
5.
Dual Aspect
6.
Accounting Period
7.
Conservatism
8.
Realization
9.
Matching
10. Consistency 11. Materiality
Balance Sheet Concepts
Statement of Profit and Loss Account Concepts
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Money Measurement • All transactions of the business are recorded in terms of money • It provides a common unit of measurement • Examples • Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts
Entity • The business and its owner(s) are two separate existence entity • Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business • Insurance premiums for the owner’s house • The owner’s property should not be included • Any payments for the owner’s personal expenses
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Going Concern • The business will continue in operational existence for the foreseeable future • Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so.
Cost • Assets should be shown on the balance sheet at the cost of purchase instead of current value • Example • The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. It included the invoice price of the assets, freight charges, insurance or installation costs, known as ACQUISITION COST.
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Dual‐Aspect • Assets = economic resources. • Equities = claims against assets. • Liabilities = claims of creditors (everyone other than owners). • Owners’ equity = claims of investors (Shareholders’ or stockholders’ equity for a corporation).
Balance Sheet
Assets = Liabilities + Owners’ equity Resources Sources of financing
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Balance Sheet Assets
=
Liabilities
Assets
+
Equity
Liabilities & Equity
Balance Sheet • Liabilities: Claims by creditors. • Accounts payable. • Long term Liabilities.
• Owners’ Equity: Claims by investors. • Amounts provided directly by equity investors (Paid‐in‐capital). • Amounts retained from earnings, i.e. profits (Retained earnings).
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Assets Cash Trade Receivable
Vehicles
Store Supplies
Resources owned or controlled by a company
Notes Receivable
Land
Buildings Equipment
Liabilities Trade Payable
Notes Payable
Creditors’ claims on assets Taxes Payable
Wages Payable
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Equity Owner Withdrawals
Owner Investments
Owner’s claims on assets Revenues
Expenses
Income Statement • Summaries results of operating activity over a period of time. • Revenues – Expenses = Net Income. • Net income (or net loss) is the amount added to (subtracted from) Retained earnings.
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Financial Statement Objectives • Is useful for investment decisions. (All financial statements). • Is comprehensible. (All financial statements). • Shows economic resources and claims on resources (Balance Sheet). • Shows financial performance during a period (Income Statement). • Shows cash flows (Statement of Cash Flows).
Accounting Equation Assets are resources with future benefits that are owned or
controlled by a company. Liabilities are what a company owes its creditors in future products or services. Equity refers to the claims of its owner(s). Forms of funds=Sources of funds What resources does the firm have? (Assets) = Where do those
resources come from? (Liabilities and Equity) A firm acquires assets by funds. Liabilities and equity are the sources of funds to acquire those assets.
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Fundamental Accounting Equation • Assets = Liabilities + Owners’ Equity. • Every accounting transaction maintains equality of equation. • Purchase Rs. 20,000 of equipment for cash. • Increase Equipment (asset) by Rs. 20,000 and decrease Cash (asset) by Rs. 20,000. No net change to assets.
• Purchase Rs. 20,000 of equipment on credit. • Increase Equipment (asset) by Rs. 20,000 and increase Payable (liability) by Rs. 20,000.
Transaction Analysis Transaction (1): Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2014, Ray Neal invests $15,000 cash in the business.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
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Transaction Analysis Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
Transaction Analysis Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
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Transaction Analysis Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
Transaction Analysis Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
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Transaction Analysis Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
Transaction Analysis Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
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Transaction Analysis Transaction (8): Softbyte pays its $250 Daily News bill in cash.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
Transaction Analysis Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel
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Transaction Analysis Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use.
Taken from Accounting Principles, 6th Edition, Weygandt, Kieso, Kimmel