Final Accounts : Accounting Basics Day 7

Introduction

The Stakeholders of a company will be interested in knowing whether the business has resulted in profit or loss and what the financial position of the company is at a given period. The company can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance. In this chapter we are going to learn in detail about the preparation of Final accounts

What are Final Accounts?

The businessman is interested in knowing whether the business has resulted in profit or loss and what the financial position of the business is at a given period. In short, he wants to know the profitability and the financial soundness of the business. The trader can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance. Hence the trial balance is said to be the connecting link between the ledger accounts and the final accounts.
The final Accounts generally include two statements known as balance sheet and income statement which are required for external reporting and also for internal needs of the management like planning, decision-making and control.

Trading and Profit and Loss Accounts (Income statement):

The profit and loss account is the accounting report which summarizes the revenues and expenses and ascertains the profit/loss for a specified accounting period. It also represents the changes in the owner’s equity between two successive periods

Balance Sheet:

The purpose of balance sheet is to show its resources and obligations for acquiring its resources i.e., assets and liabilities. According to American Institute of Public Accountants, balance sheet is “a tabular statement of summary of balances (debits and credits) carried forward after an actual and constructive closing of books of accounts and kept according to principles of Financial Statements of a Company accounting”. Balance sheet is the statement prepared on a particular date and shows classified properties and assets on the right hand side and obligations or liabilities on the left hand side

Assets

Real accounts and Personal accounts (which we have learnt about in the previous chapters) are capable of being called assets. Any element (account) that is capable of being liquidated (that is capable of being converted to cash by giving it away) indicates an asset. Machinery, Furniture, Cash, etc are real accounts that can be called assets. Debtors represent the persons and organizations who owe to the organization. They would clear their dues by paying out either in cash or in some other form. Thus Debtors get liquidated and as such can be called assets.

Liabilities

All elements representing liabilities are Personal accounts. An element that is capable of being cleared by paying out indicates a liability.
Creditors represent the persons and organization to whom the organization owes. The organization would clear its due by paying them either in cash or in some other form. Thus creditors are cleared by paying out and as such can be called liabilities.

How to enter the entries into Balance sheet and Income statements?

Before learning to enter the accounts into the Income Statement let us first distinguish the entries and learn to enter them into the financial statements.
As we know that the ledger accounts maintained within an organizational accounting system are classified into three as Personal, Real and Nominal.

Nominal Accounts

Nominal accounts are related to expenses, losses, incomes and gains. Since ascertaining profits or losses involves dealing with incomes, gains, expenses and losses we can conclude that all the nominal accounts together would give us the information relating to the profits or losses made by the organization.

Real Accounts

Real accounts are related to tangible aspects. In general we can identify that all asset accounts are real accounts.

Personal Accounts

Personal accounts are related to persons and organizations. These are persons/organization which owe the organization or to whom the organization owes. In effect they either form creditors (liabilities) or debtors (assets).

Since all the nominal accounts have been dealt with in deriving the information relating to profits and we are left with only the real and personal accounts which represent either assets or liabilities we can conclude that all the real and personal accounts together give us the information relating to the position of the organization.

• Trading Account
• Profit and Loss Account
• Balance Sheet

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ORA-06530: Reference to uninitialized composite

CREATE OR REPLACE TYPE XX_QP_PRICE_MOD_OBJ_TYPE
IS
  OBJECT
  (
    modifier_name        VARCHAR2 (240),
    modifier_description VARCHAR2 (240),
    adjustment_amount    NUMBER );

CREATE OR REPLACE TYPE xx_qp_price_mod_tbl_type IS VARRAY (1000) OF XX_QP_PRICE_MOD_OBJ_TYPE ;


SET SERVEROUTPUT ON
DECLARE
  v_mod_tbl xx_qp_price_mod_tbl_type := xx_qp_price_mod_tbl_type();
  i         NUMBER                           :=1;
  V_MOD_IDX NUMBER                           := 1;
BEGIN
  LOOP
    v_mod_tbl.extend();
    v_mod_tbl(v_mod_idx).adjustment_amount := 100;
    v_mod_tbl(v_mod_idx).modifier_name     := 200;
    v_mod_idx                              := v_mod_idx + 1;
    EXIT
  WHEN i=5;
    i  := i + 1;
  END LOOP;
EXCEPTION
WHEN OTHERS THEN
  DBMS_OUTPUT.PUT_LINE(SQLERRM);
END;


Output :
anonymous block completed
ORA-06530: Reference to uninitialized composite




Solution:

SET SERVEROUTPUT ON
DECLARE
  v_mod_tbl xx_qp_price_mod_tbl_type := xx_qp_price_mod_tbl_type();
  i         NUMBER                           :=1;
  V_MOD_IDX NUMBER                           := 1;
BEGIN
  LOOP
    v_mod_tbl.extend();
    v_mod_tbl(v_mod_idx).adjustment_amount := 100;
    v_mod_tbl(v_mod_idx).modifier_name     := 200;
    v_mod_tbl(v_mod_tbl.last) := XX_QP_PRICE_MOD_OBJ_TYPE(NULL,NULL,NULL);
    v_mod_idx                              := v_mod_idx + 1;
    EXIT
  WHEN i=5;
    i  := i + 1;
  END LOOP;
EXCEPTION
WHEN OTHERS THEN
  DBMS_OUTPUT.PUT_LINE(SQLERRM);
END;

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Profit or Loss on sale of asset

Some times, a business may dispose an asset when it is worn out. In that case, it is advisable to find the profit or loss on sale of asset. This is done by comparing the selling price with the book value of the asset.

Book value = Cost Price - Total Depreciation provided till the date of sale,

If the selling price is more than the book value, then it is Profit on Sale. If the selling price is less than the book value, it is Loss on Sale.

Let Us now solve a problem to find out the profit or Loss on sale of machinery. Ram manufacturing company purchased on 1st April 2007, Machinery for Rs.2, 00,000. After having used it for three years it was sold for Rs. 160,000. Depreciation is to be provided every year at the rate of 10% per annum on the fixed instalment method. Books are closed on 31st March every year.

Book value on the date of sale is Rs. 140,000 As book value is less than selling price the difference is Profit.
= 160,000-140,000
Profit on sale of machinery = Rs. 20,000.

Illustration:

Srinivas & Co. purchased machinery on 1st April 2007 for Rs.75, 000. After having used it for three years it was sold for Rs.35, 000. Depreciation is to be provided every year at the rate of 10% per annum on Diminishing balance method. Accounts are closed on 31st March every year. Find out the profit or loss on sale of machinery.

Book value on the date of sale = Rs.54,675.
As book value is greater than selling price the difference is loss.
= 54,675 – 35,000
Loss on sale of Machinery = Rs.19, 675.

Click here to go back to Depreciation: Day 6

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Recording Depreciation

Depreciation is directly charged against the asset by debiting Depreciation account and crediting the Asset account. Depreciation account is closed by transferring to Profit and Loss account at the end of the year. The entries will be as under:

1) For the amount of depreciation to be provided at the end of the Year:
                        Depreciation A/c….. Dr.
                        To Asset A/c.

2) For transferring the amount of depreciation at the end of the year.
                        Profit and Loss A/c….. Dr.
                        To Depreciation A/c.

Asset Account will be shown at cost less depreciation i.e., written down value at the end of the year in the Balance sheet

Now Let Us look at an example and learn about passing journal entries and preparing fixed asset account and depreciation account for three years.

Ram & sons purchased a fixed asset on 1.4.2006 for Rs.3, 00, 000. Depreciation is to be provided at 10% annually according to the Straight line method. The books are closed on 31st March every year.

Amount of Depreciation = 300,000 * (10/100)
                                          = 30,000

In the Books of Rajesh & Co. Journal Entries
Date	Particulars	L.F.	Debit	Credit
1-Apr-06	Fixed asset A/c Dr		3,00,000
	To Bank A/c			3,00,000
31-Mar-07	Depreciation A/c Dr		3,00,000
	To Fixed asset A/c			3,00,000
	(Depreciation provided)
31-Mar-07	Profit & Loss A/c Dr		3,00,000
	To Depreciation A/c			3,00,000
	(Depreciation transferred
	to Profit & Loss A/c)
31-Mar-08	Depreciation A/c Dr		3,00,000
	To Fixed asset A/c			3,00,000
	(Depreciation provided)
31-Mar-08	Profit & Loss A/c Dr		3,00,000
	To Depreciation A/c			3,00,000
	(Depreciation transferred
	to Profit & Loss account)
31-Mar-09	Depreciation A/c Dr		3,00,000
	To Fixed asset A/c			3,00,000
	(Depreciation provided)
31-Mar-09	Profits & Loss A/c Dr
	To Depreciation A/c
	(Depreciation transferred
	to Profit & Loss A/c)

Ledger Account Fixed Asset Account
Date.	Particulars	Rs.	Date	Particulars	Rs
1-Apr-06	To Bank A/c	3,00,000	31-Mar-07	By Depreciation A/c	30,000
				By Balance c/d	2,70,000
		3,00,000			3,00,000
1-Apr-07	To Balance b/d	2,70,000	31-Mar-08	By Depreciation A/c	30,000
				By Balance c/d	2,40,000
		2,70,000			270,000
1-Apr-08	To Balance b/d	2,40,000	31-Mar-09	By Depreciation A/c	30,000
				By Balance c/d	2,10,000
		2,40,000			2,40,000
				By Depreciation A/c	30,000
1-Apr-09	To Balance b/d	2,10,000		By Balance c/d	2,10,000

Depreciation A/c
Date.	Particulars	Rs.	Date	Particulars	Rs
31-Mar-07	To Fixed Asset A/c	30000	31-Mar-07	By Profit & Loss A/c	30,000
		30000			30000
31-Mar-08	To Fixed Asset A/c	30000	31-Mar-08	By Profit & Loss A/c	30000
		30000			30000
31-Mar-09	To Fixed Asset A/c	30000	31-Mar-08	By Profit & Loss A/c	30000
		30000			30000

Click here to go back to Depreciation: Day 6

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ORACLE NOSQL DATABASE, 12CR1 VERSION 3.0, ENTERPRISE EDITION

Architecture 

Oracle NoSQL Database is built upon the proven Oracle Berkeley DB Java Edition high-availability storage engine, which is in widespread use in enterprises across industries. In addition to that it adds a layer of services for use in distributed environments. The resulting solution provides distributed, highly available key/value storage that is well suited to large-volume, latency-sensitive applications.

High Availability and No-Single Point of Failure 

Oracle NoSQL Database provides single-master, multi-replica database replication. Transactional data is delivered to all replica nodes with flexible durability policies per transaction.
In the event the master replica node fails, a PAXOS-based automated fail-over election process minimizes downtime. This allows for scalability, fail-over, and hot-standby.

Transparent Load Balancing 

Oracle NoSQL Database Driver partitions the data in real time and evenly distributes it across the storage nodes. It is network topology and latency-aware, routing read and write operations to the most appropriate storage node in order to optimize load distribution and performance.

JSON Data Format

Oracle NoSQL Database has support for the Avro data serialization, which provides an extremely compact, schema-based binary data format. Avro allows you to define a schema (using JSON) for the data contained in a record's value and it also supports schema evolution.

Configurable Smart Topology

System administrators indicate how much capacity is available on a given storage node, allowing more capable storage nodes to host multiple replication nodes. Once the system knows about the capacity for the storage nodes in a configuration, it automatically allocates replication nodes intelligently. This results better load balancing for the system, better use of system resources and minimizing system impact in the event of storage node failure. Smart Topology also supports Data Centres, ensuring that a full set of replicas is initially allocated to each data centre.

Elastic Configuration

Oracle NoSQL Database includes a topology planning feature, with which an administrator can now modify the configuration of a NoSQL database, while the database is still online. This allows the administrator to:
Increase Data Distribution: by increasing number of shards in the cluster, which increases write throughput.
Increase Replication Factor: by assigning additional replication nodes to each shard, which increases read throughput and system availability.
Rebalance Data Store: by modifying the capacity of a storage node(s), the system can be rebalanced, re-allocating replication nodes to the available storage nodes, as appropriate. The topology rebalance command allows the administrator to move replication nodes and/or partitions from over utilized nodes onto underutilized storage nodes or vice versa.

Easy Administration and Enhanced System Monitoring

Oracle NoSQL Database provides an administration service, which can be accessed either from a web console or a command-line interface (CLI). This service supports core functionality such as the ability to configure, start, stop and monitor a storage node, without requiring manual effort with configuration files, shell scripts, or explicit database operations.

In addition it also allows Java Management Extensions (JMX) or Simple Network Management Protocol (SNMP) agents to be available for monitoring. This allows management clients to poll information about the status, performance metrics and operational parameters of the storage node and its managed services.

Table Data Model

Release 3.0 introduces tabular data structure, which simplifies application data modelling by leveraging existing schema design core concepts. Table model is layered on top of the distributed key-value structure, inheriting all its advantages and simplifying application design even further by enabling seamless integration with familiar SQL-based applications.

Secondary Index

Primary key only based indexing limits number of low latency access paths. Sometime application needs a few non-primary-key based paths to support the whole solution for the real-time system. Being able to define secondary index on any value field dramatically improves performance for queries.

APIs

Oracle NoSQL Database includes Java and C APIs. These simple APIs allow the application developer to perform CRUD operations on Oracle NoSQL Database. These libraries also include Avro support, so that developers can serialize key-value records and de-serialize key-value records interchangeably between C and Java applications.

Large Object Support

Stream based APIs are provided in the product to read and write Large Objects (LOBs) such as audio and video files, without having to materialize the value in its entirety in memory. This permits low latency operations across mixed workloads of objects of varying sizes.

Apache Hadoop Integration

KVAvroInputFormat and KVInputFormat classes are available to read data from Oracle NoSQL Database natively into Hadoop Map/Reduce jobs. One use for this class is to read NoSQL Database records into Oracle Loader for Hadoop.

Oracle Database Integration via External Tables (EE Only)

Support for external table allows fetching Oracle NoSQL data from Oracle database using SQL statements such as Select, Select Count(*) etc. Once NoSQL data is exposed through external tables, one can access the data via standard JDBC drivers and/or visualize it through enterprise Business Intelligence tools.

Integration with Other Oracle Products (EE Only)

Oracle Event Processing (OEP) provides read access to Oracle NoSQL Database via the NoSQL Database cartridge. Once the cartridge is configured, CQL queries can be used to query the data.

Oracle Semantic Graph has developed a Jena Adapter for Oracle NoSQL Database to store large volumes of RDF data (as triplets/quadruplets). This adapter enables fast access to graph data stored in Oracle NoSQL Database via SPARQL queries.

An integration with Oracle Coherence has been provided that allows Oracle NoSQL Database to be used as a cache for Oracle Coherence applications, also allowing applications to directly access cached data from Oracle NoSQL Database.

High Performance 

Network topology and latency aware Oracle NoSQL Database Driver working in conjunction with highly scalable, fault tolerant, high throughput storage engine enables a more granular distribution of resources and processing, which reduces the incidence of hot spots and provides greater performance on commodity based hardware.

Online Rolling Upgrade 

Upgrade and patching is an important part of any software support cycle. Oracle NoSQL
Database provides facilities to perform a rolling upgrade, allowing a system administrator to upgrade all of the nodes in the NoSQL Database cluster while the database continues to remain online and available to clients.

Multi Zone Deployment

Oracle NoSQL Database supports the definition of multiple zones from within the topology deployment planner. It leverages the definition of these zones internally to intelligently allocate replication of processes and data, ensuring optimal reliability during hardware, network & power related failure scenarios.

There are two types of Zones: Primary zones contain nodes that can be served as masters or replicas and are typically connected by fast interconnects. Secondary zones contain nodes which can only be served as replicas. Secondary zones can be used to provide low latency read access to data at a distant location, or to offload read-only workloads, like analytics, report generation, and data exchange for improved workload management.

Enterprise Security (EE)

OS-independent, cluster-wide password-based user authentication and Oracle Wallet integration, enables greater protection from unauthorized access to sensitive data. Additionally, session-level Secure Sockets Layer (SSL) encryption and network port restrictions deliver greater protection from network intrusion.

Commercial Grade Software and Support

Oracle NoSQL Database overcomes a significant limitation faced by many enterprises considering the implementation of NoSQL databases—the need for full supportability. Because it is a commercial product fully supported by Oracle, this solution gives organizations the confidence and limited risk they need to deploy Oracle NoSQL Database in the production environments they depend on to manage their business-critical data.

For more information visit oracle.com

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Buckets in Oracle Pricing Modifiers

Buckets

Pricing buckets control how discounts and other benefits are calculated across phases. Grouping discounts and benefits into buckets helps determine the net selling price across all pricing phases.
Null Bucket.

Modifiers that are assigned to a Null bucket are applied last and always adjust from the list price. Order level modifiers must be in the Null bucket. The pricing engine uses the following steps when calculating the selling price for Null buckets:

1. Calculates percent discounts using the list price.
2. Sums all bucket modifier values to create a bucket subtotal.
3. Applies the subtotal after the last numbered bucket.

Suppose that the following buckets are set up, each with a different adjustment:

• Null bucket: a 50% discount is assigned to the Null bucket.
• Bucket 1: a 10% discount is assigned.
• Bucket 2: a 10% surcharge is assigned.

The buckets are used to calculate the price for an SP ATO Model with a list price of $55. The following table shows how the final price is calculated:


The below are the steps to assign modifiers to different buckets in Oracle Apps R12.

Update Profile Option

Goto:  System Administrator -> Profile Options

Name: QP: Allow Buckets For Manual Modifiers
Value: Yes

Update Pricing Modifier Setup to add buckets

Modifier Name: One-Time Discount

Bucket: 4

Once the buckets are assigned, the modifiers are applied on the priority basis.

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Written Down Value Method of Depreciation

This method is also called as Diminishing Balance Method. In this method depreciation is charged at a fixed percentage each year on the reducing balance (i.e., cost less depreciation) of asset. The amount of depreciation goes on decreasing every year.
For example, If the asset is purchased for Rs.2, 00,000 and depreciation is to be charged at 10% p.a. on reducing balance method, then

Depreciation for the 1st year      = 10% on Rs.2, 00,000, i.e., Rs.20,000
Depreciation for the 2nd year    = 10% on Rs.1, 80,000 (Rs.2, 00,000 –– Rs.20, 000)
                                                       = Rs. 18,000
Depreciation for the 3rd year    = 10% on Rs.162, 000 (Rs.180, 000 - Rs.18, 000)
                                                      = Rs.16, 200 and so on.

Merits

In earlier years the amount of depreciation is more and the amount of repairs and renewals is less whereas in later years the amount of depreciation is less and the amount of repairs and renewals is more therefore the total charge (i.e., depreciation plus repairs and renewals) remains almost uniform year after year, since,
This method is recognized by the Income Tax authorities
It is a logical method as the depreciation is calculated on the diminished balance every year.

Demerits

It is very difficult to determine the rate by which the value of asset could be written down to zero.

Click here to go back to Depreciation: Day 6

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Straight Line Method for Calculating Depreciation

This method is also called as Fixed Instalment Method .In this method the same amount of depreciation is charged every year throughout the life of the asset. The amount and rate of depreciation is calculated as under.

Amount of depreciation = ( Total cost – Scrap value ) / Estimated Life

Rate of depreciation = ( Amount of Depreciation / Original Cost ) * 100

Let us now look at a simple example to calculate amount of depreciation and Rate of depreciation, given a company purchased Machinery for Rs.2, 00,000. Its installation costs amounted to Rs.10, 000. Its estimated life is 5 years and the scrap value is Rs.10, 000. Calculate the amount and rate of depreciation
Total cost = Purchase Price + Installation Charges
= Rs.2, 00,000 + Rs.10, 000
= Rs. 2, 10,000

Amount of depreciation = ( Total cost – Scrap value ) / Estimated Life

                                          = ( Rs.2, 10,000 – Rs.10, 000 ) / 5
                                          = Rs. 40,000

Rate of depreciation = ( Amount of depreciation/Original cost ) * 100

                                   = ( Rs 40,000/Rs. 210,000 ) * 100
                                   = 19.04%

Under straight line method, for each of the five years, the amount of depreciation to be charged will be Rs.40, 000

Merits:

• It is very simple and easy to understand.
• The amount and rate of depreciation is easy to calculate
• Under this method, the book value of the asset becomes zero or equal to its scrap value at the expiry of its useful life.

Demerits

The amount of depreciation is same in all the years, although the usefulness of the machine to the business is more in the initial years than in the later years

Click here to go back to Depreciation: Day 6

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Depreciation : Accounting Basics Day 6

Introduction

Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years. In common, depreciation is the reduction in the value of an asset used for business purposes during certain amount of time due to usage, passage of time .In this chapter we are going to learn about depreciation in detail and also about the methods to calculate depreciation.

Learning Objectives 

After studying this Chapter, you will be able to:

• Understand the meaning and definition of depreciation. 
• Recognize the reasons and causes for providing depreciation. 
• Identify various methods of depreciation. 
• Determine the profit or loss at the time of sale of asset.

Depreciation

All assets whose benefits are derived for a long period of time, usually more than one year period are called as Fixed Assets. These assets decrease in value year after year due to wear and tear or as time passes by. This reduction in value of Fixed Assets is called Depreciation.
For instance, a factory owner owns machinery worth Rs.5, 00,000, may estimate the life of the machinery as ten years. This means that the value of the asset is reducing every year. Hence, it is necessary to spread the cost over five years during which the benefit of the asset is derived. Thus depreciation Rs.50,000 (Rs.5, 00,000 /10 years) is to be treated as an expense, which is debited to Profit and Loss account.
In the words of Spicer and Pegler, “Depreciation is the measure of the exhaustion of the effective life of an asset from any cause during a given period”.

Causes of Depreciation

The causes of depreciation may be internal or external. The internal causes arise from properties inherent in the asset itself. External causes arise from forces outside the business. These are being discussed below:

Internal Causes 

• Wear and tear: Wear and tear means decrease in assets value, arising from its use in business operations
• Disuse: When a machine is kept continuously idle, it becomes potentially less useful.
• Maintenance: when the machine is not maintained properly its condition deteriorates
• Depletion: depletion physical reduction of natural resources by exhaustion e.g., mines, quarries, oil wells etc.

External Causes

• Obsolescence:  Decrease in value of property as the result of technological advancement.
• Effluxion of time: When assets are exposed to forces of nature, like weather, wind, rain, etc., the value of such assets may decrease even if they are not put into any use.
• Time Factor: Lease, copy-right, patents are acquired for a fixed period of time. On the expiry of the fixed period of time, the assets cease to exist.

Methods of Calculating Depreciation

• Straight line method or fixed instalment method.
• Written down value method or diminishing balance method
• Recording Depreciation in Books
• Profit and Loss on Sale of Assets

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Accounting Principles : Accounting Basics Day 5

Introduction

The accounting principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. In this chapter we are going to learn about these accounting procedures which form the guidelines to prepare the financial statements.

Learning Objectives

By the time you finish Day 3 you would have learnt about

• Basic accounting conventions. 
• Concepts. 
• Assumption

Why Accounting Principles?

Imagine that you are a business owner, and you take copies of your financial records to six different accountants. You ask each one to calculate your profit for the year. A fortnight later they each provide you with their answers. There are six different profit figures, with very wide variations between them. What impression do you now have of the accounting profession?
To avoid this kind of situation arising various rules, or accepted ways of going about things have evolved. These rules are known as 'concepts' and 'conventions' To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.

Assumptions

The basic assumptions of accounting are like the foundation pillars on which the structure of accounting is based. The four basic assumptions are as follows:

Business Entity Assumption

The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). Similarly, when the owner withdraws any money from the business for his personal expenses (drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business.

Money Measurement Assumption

The concept of money measurement states that only those transactions and happenings in an organization which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. All such transactions or happenings which cannot be expressed in monetary terms, for example, the appointment of a manager, capabilities of its human resources or creativity of its research department or image of the organization among people in general do not find a place in the accounting records of a firm.

Accounting Period Assumption

The users of financial statements need periodical reports to know the operational result and the financial position of the business concern. Hence it becomes necessary to close the accounts at regular intervals. Usually a period 52 weeks or 1 year is considered as the accounting period.

Going Concern Assumption

As per this assumption, the business is assumed to continue for a never ending period and therefore transactions are recorded from this point of view. There is neither the intention nor the necessity to wind up the business in the foreseeable future.

Basic Concepts of Accounting

These concepts guide how business transactions are reported. On the basis of the above four assumptions the following concepts (principles) of accounting have been developed.

Dual Aspect Concept

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction. This can be explained with the help of an example. Ram started business by investing in a sum of Rs. 50, 00,000 the amount of money brought in by Ram will result in an increase in the assets (cash) of business by Rs. 50, 00,000. At the same time, the owner’s equity or capital will also increase by an equal amount. It may be seen that the two items that got affected by this transaction are cash and capital account.All business transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of benefit).

Realization Concept

The concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realized. Here arise two questions in mind. First, is termed as revenue and the other, when the revenue is realized. Let us take the first one first. Revenue is the gross inflow of cash arising from (i) the sale of goods and services by an enterprise; and (ii) use by others of the enterprise’s resources yielding interest, royalties and dividends. Secondly, revenue is assumed to be realized when a legal right to receive it arises, i.e. the point of time when goods have been sold or service has been rendered. Thus, credit sales are treated as revenue on the day sales are made and not when money is received from the buyer. As for the income such as rent, commission, interest, etc. these are recognized on a time basis. For example, rent for the month of March 2005, even if received in April 2005, will be taken into the profit and loss account of the financial year ending March 31, 2005 and not into financial year beginning with April 2005. Similarly, if interest for April 2005 is received in advance in March 2005, it will be taken to the profit and loss account of the financial year ending March 2006.

Historical Cost Concept

Under this concept, assets are recorded at the price paid to acquire them, which includes cost of acquisition, transportation, installation and making the asset ready to use . For example, if a piece of land is purchased for Rs.50,00,000 and its market value is Rs.70,00,000 at the time of preparing final accounts the land value is recorded only for Rs.50,00,000. Thus, the balance sheet does not indicate the price at which the asset could be sold for.

Matching Concept

The earnings and expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting period. The matching concept requires that expenses should be matched to the revenues of the appropriate accounting period.
Profit is an excess of revenue over expenditure therefore it becomes necessary to bring together all revenues and expenses relating to the period under review so we must determine the revenue earned during a particular accounting period and the expenses incurred to earn these revenues

Verifiable and Objective Evidence Concept

The concept of objectivity requires that accounting transaction should be recorded in an objective manner, free from the bias of accountants and others. This can be possible when each of the transaction is supported by verifiable documents or vouchers. For example, the transaction for the purchase of materials may be supported by the cash receipt for the money paid, if the same is purchased on cash or copy of invoice and delivery challan, if the same is purchased on credit. Similarly, receipt for the amount paid for purchase of a machine becomes the documentary evidence for the cost of machine and provides an objective basis for verifying this transaction.

Conventions

To make the accounting information useful to various interested parties, the basic assumptions and concepts discussed earlier have been modified. These modifying principles are as under.

Convention of Full Disclosure

The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes. This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.

Convention of Materiality

The materiality principle requires all relatively relevant information should be disclosed in the financial statements. Unimportant and immaterial information are either left out or merged with other items.
For example, money spent on creation of additional capacity of a theatre would be a material fact as it is going to increase the future earning capacity of the enterprise. Similarly, information about any change in the method of depreciation adopted or any liability which is likely to arise in the near future would be significant information. All such information about material facts should be disclosed through the financial statements and the accompanying notes so that users can take informed decisions.

Convention of Consistency

The aim of consistency principle is to preserve the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously observed and applied year after year. Comparisons of financial results of the business among different accounting period can be significant and meaningful only when consistent practices were followed in ascertaining them.
To illustrate, an investor wants to know the financial performance of an enterprise in the current year as compared to that in the previous year. He may compare this year’s net profit with that in the last year. But, if the accounting policies adopted, say with respect to depreciation in the two years are different, the profit figures will not be comparable. Because the method adopted for the valuation of stock in the past two years is inconsistent. It is, therefore, important that the concept of consistency is followed in preparation of financial statements so that the results of two accounting periods are comparable.

Convention of Conservatism

The concept of conservatism requires that profits should not to be recorded until realized but all losses, even those which may have a remote possibility, are to be provided for in the books of account. This principle takes into consideration all prospective losses but leaves all prospective profits. The essence of this principle is “anticipate no profit and provide for all possible losses”. For example, while valuing stock in trade, market price or cost price whichever is less is considered.


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