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Business Entity Concept/Accounting Entity Concept According to this concept, the business is considered as a separate business entity from its owner(s). Thus the financial information of the business will be recorded and reported separately from its owners personal financial information. Going Concern For accounting purposes, it is assumed that the business will operate for an indefinite period of time and thus considered as going concern. For this reason, the realizable value of the property owned by business will not be relevant. Money Measurement Only those transactions will be recorded in the financial books which can be measured in terms of money. Anything which cannot be measured in monetary terms will not be considered as a part of the accounting data. Historical Cost All assets will be recorded at their cost price. This means that machinery purchased years ago will be recorded at its original cost of purchase even though its value is lower now. The reason for doing so is because the business is considered as a going concern and we need not be worried about the saleable value of the asset. Accounting Period The life a business is considered to be indefinite. But for accounting purposes, the life of the business is divided into specified periods of time. The period may be a month, a half year, a full year or any length of time. Accrual Concept Accrual concept states that revenue is recognized when it is earned and expenses when they are incurred. Any income or revenue generated must be recorded in the books of accounts whether the payment for it is received or not. Similarly, any expense done by the business should be recorded irrespective of the fact that the business has paid for it or not. Objectivity Any transaction which is recorded in the accounting books should be verifiable. In other words, the transaction should backed by some proof in the form of a receipt, invoice, cheque, voucher etc. Consistency According to this concept, the same accounting method should be applied in each accounting period when preparing financial reports. This makes it easy to compare results of one period with another period and the stakeholders can get a more realistic idea about the performance of the business. Prudence It involves being cautious while reporting accounting information. The assets should not be overstated and the liabilities should not be understated. This is why closing stock is always valued at the lower of cost or market value so that the profits are not overstated.
Matching Principle This principle is based on accrual concept of accounting. It states that revenue earned during a specific period has to be matched with the expenses incurred with earning that revenue. The following point should be considered: If an item of revenue is shown in the Profit and Loss account, all expenses incurred on it, whether paid or not, should be shown as expenses in the Profit and Loss account. An expense will be recorded in the books of accounts if the revenue associated with it has not been realized. Incomes received in advance should not be shown in Profit and Loss account. All the cost and expenses incurred on good remaining unsold at end of the year must be carried forward to next year as these goods will be sold in the next accounting period. What are Non Profit Organizations? Sole trader, Partnership and Limited companies have Profit as their main objective. However, Clubs, societies and associations does not only exist to make profit. They may be formed to promote cultural and recreational interest. Thus their final accounts are different from those organizations which solely exist to earn profit. The final accounts of a non-profit organization includes of Trading Accounts (only if there is a restaurant or canteen) Receipts and Payments Accounts Income and Expenditure Account Balance Sheet
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Cash (beginning) + all cash receipts (revenue receipts and capital receipts) - All Cash payments (revenue expenditure and capital expenditure) Cash (end)
Features
Similar to Cash Book Cash receipts are on Debit side and Cash payments are on Credit side All cash receipts and payments are recorded irrespective of their relation to current year. There is an opening balance and a closing balance
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5. If the Income side is more than the expenditure side then we get a SURPLUS. 6. If the Expenditure side is more than the income side we get a DEFICIT.
Note
Only revenue receipts and expense are posted in this account Only incomes and expenses pertaining that particular year are recorded. Incomes and expenses pertaining to previous year or future year are adjusted for.
You can also make a separate Subscription Account and then post the final subscription amount in the Income and Expenditure Account
Subscription Account Amount Cr. Amount Subscription received in advance b/d (collected during previous year) Total Cash received as subscription during the current year XXXX
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Subscription in arrears (b/d) (not collected during the previous year) Subscription received during current year (from Income & Expenditure
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Account) Subscription in advance c/d (collected for subsequent year) XXXX Subscription in arrears b/d XXXX Subscription in advance b/d XXXX Subscription in arrears c/d (not yet collected for current year) XXXX XXXX XXXX
What are the reasons for difference in Bank Statement and Cash Book? These can be summarized as follows: Cheque issued by the trader but the customer has not yet presented it to the bank for encashment. This will show a less bank balance in the traders Cash book as he has already issued the cheque, but the bank will not reduce the amount till the cheque is presented to it. Cheque received by the trader was deposited into the bank for collection but the bank did not realize the funds and did not credit the Traders account. Trader deposited a cheque into bank but it was dishonored by the bank. The reason may be the customer does not have sufficient cash in his bank account. Bank pays interest to the trader on his deposit but the trader will not come to know this till he receives the Bank statement and thus his cash book will show less balance as compared to bank statement. Bank might receive direct payment of interest or dividends on behalf of the trader for any investments made by the trader. The trader will not come to know the details till he gets a bank statement and thus his Cash book will be understated. Bank might charge transaction fees or Bank charges or interest on any overdraft which the trader will only know when he receives the bank statement. A customer or debtor might directly pay into the traders bank account and the trader might not be aware of this. A Bank may pay bills, insurance premiums or some payment based on the standing instruction of the trader. The details of these transactions will only be available to the trader once he receives the bank statement. A bank reconciliation statement can be prepared by taking the balance either as per cash book or as per pass book as a starting point. If the statement is started with the balance as per bank column of the cash book, the answer arrived at the end will be balance as per pass book. Alternatively, if the statement is started with the balance as per pass book, the answer arrived at in the end will be the balance as per cash book. A debit balance as per cash book shows the amount of the money in the bank, whereas, a credit balance means that the business has taken an overdraft. In the same way, a credit balance as per pass book shows a positive bank balance whereas debit balance as per pass book shows an Overdraft.
Source
Trial Balance at close of previous period Sales Journal Cash Book General Journal General Journal Cash book Cash Book Returns Inwards journal General Journal
Sources
What to do?
The Debtors control Account will have both the debit and credit balances brought down. Same procedure will take place for Creditors Control Account. Through this the true financial position is shown i.e. the exact amount owing by debtors as well as the amount owing to them.
Trial Balance
Trial Balance is a statement prepared with the debit and credit balances of ledger accounts to verify the arithmetical accuracy of the book.
The Trial Balance checks the equality of debits and credits in the ledger by listing each account along with its ending balance.
Errors of omission
These are errors where the transactions are totally omitted. They are neither recorded in the Journal or Ledge and thus do not appear in the Trial Balance.
Errors of commission
This means that a wrong amount is entered from the very starting in the Journal or Ledger and thus a Trial Balance based on this amount may not show any mistake at all.
Errors of principle
These errors occur when the classification of accounts is wrongly done. For example revenue expenditure may be considered as capital expenditure. Repairs of machinery $200 was debited to Machinery account whereas it should have been debited to Repairs of machinery account.
Compensating errors
These errors are those which cancel themselves because the same error is committed on both sides. For example, Purchases were debited by $100 more and at the same time Sales were also credited by $100. This will neutralize the effect of both the entries.
Accounting equation
Assets = Owners Equity + Liabilities
The above accounting equation expresses the fact that everything the business owns has been supplied by the owner (owners equity) and by external source (liabilities).
Assets
Assets are items of value owned by the business. Examples include Building Machinery Motor vehicle Cash at bank Cash in hand Stock Debtors (people who own money to the business)
Liabilities
These denote the amounts which the business owes to others. Examples include Creditors (people to whom the business owes money) Bills payable Bank overdraft Bank loan
Owners equity
The funds of a business provided for by its owners. Owners equity = Assets Liabilities
What is an Account
Each account is shown on a different page.
Page is divided vertically into two halves. Left side is Debit side; right side is Credit side
American System
This system classifies accounts into five categories:
Assets account
Debit the increase in assets; Credit the decrease in assets
Liabilities account
Debit the decrease in liabilities; Credit the increase in liabilities
Capital account
Debit the decrease in Capital; Credit the increase in Capital
Revenue account
Debit the decrease in income; Credit the increase in income
English system
Classification of Accounts
Personal Accounts
Personal accounts are those which are opened under the NAME of individuals, firms, company, institution etc. For example Johns account, dineshs account, Coca-Cola ltd account, bank account etc. Rule Debit the Receiver Credit the Giver
Real Accounts
All the assets owned by the business can be classified in this account. These can be categorized as Tangible real accounts All those which can be seen, touched and measured such as Building Land Cash account Stock account Furniture account
Nominal Accounts
These include all those accounts which are related with incomes/gains and expenses/losses of the business. Incomes/gains Expenses/losses
Commission received account Rent paid account Discount received account Interest received account Dividends received account Salary paid account Commission paid account Discount allowed account Loss due to theft account Loss due to fire account
Rule Debit all expense and losses Credit all incomes and gains