Definition It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.

It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. Accounting provides information on the (1) resources available to a firm, (2) the means employed to finance those resources, and (3) the results achieved through their use.

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Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction. Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.

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The Basic Principles Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.

Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter in exactly the same way all similar items that follow. Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status. Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company. Materiality concept: An item is considered material if its omission or misstatement will affect the decision making process of the users. Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.

An error that is too trivial to affect anyones understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.

Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc. (see convention of conservatism) Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable. Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation and going concern).

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Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.

as well as tax evasion. Insurance companies hire forensic accountants to detect insurance frauds such as arson, and law offices employ forensic accountants to identify marital assets in divorces. Forensic accountants often have FBI, IRS, or similar government experience. Accounting Assumptions: There are four accounting assumptions: the going concern assumption, the monetary unit assumption, the time period assumption, and the business entity assumption. The going-concern assumption means that accounting information reflects a presumption that the business will continue operating instead of being closed or sold. This implies, for example, that property is reported at cost instead of, say, liquidation values that assume closure. The monetary unit assumption means that we can express transactions and events in monetary, or money, units. Money is the common denominator in business. Examples of monetary units are the dollar in the United States, Canada, Australia, and Singapore; and the peso in Mexico, the Philippines, and Chile. The monetary unit a company uses in its accounting reports usually depends on the country where it operates, but many companies today are expressing reports in more than one monetary unit. The time period assumption presumes that the life of a company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods. The business entity assumption means that a business is accounted for separately from other business entities, including its owner. The reason for this assumption is that separate information about each business is necessary for good decisions. A business entity can take one of three legal forms: proprietorship, partnership, or corporation

FUNCTIONS OF FINANCIAL ACCOUNTING Accounting embraces of the following functions: 1. Recording Business transactions. The first function of accounting is to keep record of all business transactions. 2. Calculation of business Income and Ascertaining Financial position. In financial accounting, Profit and loss account is prepared for the calculation of business income and Balance Sheet is prepared for ascertaining financial position of business. Balance Sheet shows assets and liabilities of business. 3. Communication of Business Income and Position. The third function of accounting is to communicate the information of business income and financial position to interested parties like proprietors, investors, creditors, employees. 4. Stewardship Functions 5. Managerial Functions. Q7. Discuss the objectives of Financial Reporting. OBJECTIVES FINANCIAL ACCOUNTING The important objectives of financial accounting are as under: 1. Finding out various Balances. Systematic recording of business transactions in accounting provides vital information about various balances like cash balance, bank balance, etc. 2. Knowledge of Business Transactions. Systematic maintenance of books provides the detail of every transactions. 3. Net Profit or Loss. Summarization in form of Profit and Loss Account shows net profit or loss of business during a specified period. 4. Knowledge of Financial Position. Balance Sheet is prepared to depict financial position of business at a particular date. Position means what the business owns and what owes to others 5. Information to all Interested Users After analysis and interpretation, business results are communicated to the interested users 6. Fulfilling Legal Obligations. Vital accounting information helps in fulfilling legal obligations in time e.g., Sales tax, income tax etc. Q4. What are the two constraints of Accounting? Accounting Constraints There are two basic constraints on financial reporting. The materiality constraint prescribes that only information that would influence the decisions of a reasonable person need be disclosed. This constraint looks at both the importance and relative size of an amount. The cost-benefit constraint prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particulalrly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.The rules to be followed by accountants to maintain books of accounts which is comaprable, understandable, reliable and relevant as per the users internal or external. IFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards Forensic accounting uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. It is listed among the top 20 career paths of the future. The job of forensic accountants is to catch the perpetrators of the estimated Rs600 billion per year of theft and fraud occurring at U.S. companies. This includes tracing money-laundering and identity-theft activities

Q12. Business Entity Concept/ Assumption: In accounting, business is treated as separate entity from its owners Accounts are prepared to give information about the business and not about those who own it. a distinction is made between business transactions and personal transactions. Without such a distinction, the affairs of the business will be mixed up with the private affairs of the proprietor and the true picture of the firm will not be available. The 'Business' and 'owner' are taken as two separate entities. The accountant is interested to record transactions relating to business only. The private transactions of the owner will be recorded separately and will have no bearing on the business transactions. All the transactions of the business are recorded in the books of the business from the point of view of the business as an entity and even the proprietor is treated as a creditor to the extent of his capital. The concept of separate entity is applicable to all of business organizations. For example, in case of a sole proprietorship business or partnership business, though the sole proprietor or partners are not considered as separate entities in the eyes of law, but for accounting purposes they will be considered as separate entities. In the case of joint stock Company, the business has a separate legal entity than the shareholders The coming and going shareholders don not affect the entity of the business. Thus, the distinction between owner and the business unit has helped accounting in reporting profitability more objectively and fairly. It has also led to the development of 'responsibility accounting' which enables us to find out the profitability of even the different sub-units of the main business.

Going concern assumption An accounting guideline which allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments. In other words, the accountants believe that the company will not liquidate in the near future. This assumption also provides some justification for accountants to follow the cost principle.

Going Concern Concept/ Assumption: According to going concern concept it is assumed that the business will exist for a long time to come. Transactions are recorded in the books keeping in view the going concern aspect of the business unit. A firm is said to be going concern when there is neither the intention nor necessary to wind up its affairs In other words, it should continue to operate at its present scale in the future. On account of this concept the fixed assets are shown in the balance sheet at a diminishing balance method i.e., going concern value. There is no need to show assets at market value because these have been purchased for use in future and earn revenues and for sale purpose. If the business is not to continue then market value will have significance. Since business is to continue, fixed assets will be shown at cost less depreciation basis. It is due to the concept that the fixed assets are depreciated on the basis of their expected life than on the basis of market value. The concept also necessitates distinction between expenditure that will render

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benefit over a long period and that whose benefit will be exhausted quickly, say within one year. The going concern concept also implies that existing liabilities will be paid at maturity.

Money Measurement Concept/ Assumption: Accounting to records only those transactions which can be expressed in terms of money. Transactions or events which cannot be expressed in money do not find place in the books of accounts though they may be very useful for the business. For example, if a business has got a team of dedicated and trusted employees, it is definitely an asset to the business, but since their monetary measurement is not possible, they are not shown in the books of business. It should be remembered that money enables various things of diverse nature to be added up together and dealt with. The use of a building and the use of clerical service can be aggregated only through money values and not otherwise. Business Entity Assumption: Accounting treats business as distinct and separate from its owner. This is known as business entity assumption. Based on this assumption, proprietors personal transaction which have no relation with business are excluded from business books of accounts. Money Measurement Assumption: According to this assumption, transactions expressed in terms of money are recorded in the books of accounts with their monetary effect. Going Concern Assumption: Going Concern Assumptions assumes that a business will have an indefinite life unless it is likely to be sold or closed down in the near future. Periodicity Assumption: Transactions are recorded in the books of accounts on the assumptions that profits are to be ascertained for a specified period. This is known as Periodicity Assumption of Accounting. BUSINESS ENTITY ASSUMPTION In accounting, the entity of business is considered separate from the existence of its owner. Accounts are kept for the entity as distinct from owners Significance: (i) This assumption helps in ascertaining the true position of business. (ii) It guides accountants not to record owners personal transactions.

MONEY MEASUREMENT ASSUMPTION In accounting everything is recorded in terms of money. Events or transactions which cannot be expressed in terms of money are not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payments of expenses and receipt of income are monetary transactions which find place in accounting. Significance: (iii) This assumption guides accountants what to record and what not to record. (iv) It helps in recording business transactions uniformly. SIGNIFICANCE OF GOING CONCERN ASSUMPTION The following points show the significance of going concern assumption: (i) On the basis of this assumption financial statements are prepared. (ii) It ensures outsiders the continuity of business activities over an indefinite period of time. (iii) By viewing a business as an on-going concern, the fluctuating market value of the fixed assets is not taken into consideration. (iv) It is because of this assumption that a business is judged for its capacity to earn profits in future. NECESSITY OF ACCOUNTING ASSUMPTIONS Assumptions are fundamental to the accounting process. While recording business transactions, some problems arise. For example: (i) Which of the transactions are record able events? (ii) Should owners personal transactions be recorded in the books of business? (iii) When should business results be communicated? The solution of these problems is based on contain postulates i.e. basic assumptions about the environment. Postulates or assumptions guide the recording o business transactions in the books of accounts. These are foundations of accounting records. 8

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PERIODICITY ASSUMPTION Continuing its business or an indefinitely period of time usually profit is derived by taking the difference between the capital introduced and capital remaining ij the business at the closure or liquidation. But a businessman does not have patients to wait till liquidation to know his profits. According to this assumption, he wants to break the life of his business into small repetitive periods to find profits. Generally, this interval is taken as one year. Thus at the interval of one year, the businessmen measures his income and studies the financial position of his business. If the gap or interval is very big than it would not help in taking timely corrective steps. Significance: This assumption is very useful in taking many types of business decisions, e.g. (i) Is it profitable to continue the business? (ii) ]if the profits are encouraging, should the business be expanded? (iii) If the profits are less than the expectations, what timely corrective action should be taken so that expected profits are earned in future? 3.ACCOUNTING CONCEPTS 1.Meaning of Accounting Concepts. Accounting concepts are universally accepted rules for recording business transactions. 2.Important Accounting Concepts. The following are the important accounting concepts: --Matching Principle: --Accrual Concept. --Realization concept. --Dual Aspect Concept. (i) Matching Concept: Under matching concept, expenses for a period are matched with the revenues of the same period from proper determination of income. (ii) Accrual Concept: Accrual concept assumes that revenues are realized at the time of sale of goods or services irrespective of when cash is received. Accrual concept also assumes that expenses are recognized at the time the services are received and utilized in the generation of revenue irrespective of the payment made. (iii) Realization Concept: According to realization concept, a revenue is realized when the cash has been received or right to receive cash has been established. (iv) Dual Aspect Concept: Every transaction in accounting entails twofold effect and this is called dual (or double) aspect or duality of a transaction. The set of records based on this duality is called double entry system of bookkeeping. In other words, every transaction has an equal impact on assets and liabilities in such a way that assets are always equal to total liabilities. 3.Revenue: Revenue means source of inflow of assets like cash or receivables received in sale of goods and services rendered. 4.Expense: Expenses are outflows of cash or usage of assets for the purpose of generating revenue in a particular period. 5.Profit: Excess of revenue over expenses is called profit or income. 6.Loss: Excess of expenses over revenue is called loss. Meaning of Accounting Cycle An accounting cycle is a complete sequence of accounting process that begins with the recording of business transactions and ends with the preparation of final accounts. When a businessman starts his business activities, he records the day-to-day transactions in the Journal. From the journal the transactions move further to the ledger where accounts are written up. Here, the combined effect of debit and credit pertaining to each account is arrived at in the form of balances. To prove the accuracy of the work done, these balances are transferred to a statement called trial balance. Preparation of trading and profit and loss account is the next step. The balancing of profit and loss account gives the net result of the business transactions. To know the financial position of the business concern balance sheet is prepared at the end. These transactions which have completed the current accounting year, once again come to the starting point the journal and they move with new transactions of the next year. Thus, this cyclic movement of the transactions through the books of accounts (accounting cycle) is a continuous process.

Definition and Explanation of Accounting Equation Dual aspect may be stated as "for every debit, there is a credit." Every transaction should have twofold effect to the extent of the same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of equities. In other words, for every business enterprise, the sum of the rights to the properties is equal to the sum of the properties owned. The properties of the business are called "assets". The rights to the properties are called "equities". Equities may be sub-divided into two principle types: The rights of the creditors and the rights of the owners The equity of the creditors represents debts of the the business and are called liabilities. The equity of the owner is called capital, or proprietorship or owner's equity. Double Entry Bookkeeping Under the double-entry bookkeeping system, the full value of each transaction is recorded on the debit side of one or more accounts and also on the credit side of one or more accounts. Therefore, the combined debit balance of all accounts always equals the combined credit balance of all accounts. Under this system of accounting, every transaction in business involves atleast two accounts. That is why this system of accounting is called the ' Double Entry System'. Under this system every transaction has two aspects i.e. debit aspect and credit aspect. Under this system every transaction is entered into atleast two accounts in the Ledger. In one account the transaction is entered on the Left hand side i.e on the debit sideof the account and on the other account an entry for equal amount is made on the right side of the account i.e. the credit side of the account. . Definition of 'Comparative Statement' A statement which compares financial data from different periods of time. The comparative statement lines up a section of the income statement, balance sheet or cash flow statement with its corresponding section from a previous period. It can also be used to compare financial data from different companies over time, thus revealing the trend in the financials. Investopedia explains 'Comparative Statement' Analysts like comparative statements because they show the effect business decisions have on a company's bottom line. Analysts can identify trends and evaluate the performance of managers, new lines of business and new products on one statement instead of having to flip through individual financial statements from different periods of time. When comparing different companies, a comparative statement can show ho

Definition of 'Ratio Analysis' A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis

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Definition of Break Even point: Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation: [Break even sales = fixed cost + variable cost] The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent. Equation Method: The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows: Profit = (Sales Variable expenses) Fixed expenses Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis: Sales = Variable expenses + Fixed expenses + Profit According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero. Cost volume profit analysis (CVP analysis) is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interactions among the following five elements: 1. Prices of products 2. Volume or level of activity 3. Per unit variable cost 4. Total fixed cost 5. Mix of product sold Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire Accrual- vs. Cash-Basis Accounting What you will learn in this chapter is accrual-basis accounting. Under the accrual basis, companies record transactions that change a companys fi nancial statements in the periods in which the events occur. For example, using the accrual basis to determine net income means companies recognize revenues when earned (rather than when they receive cash). It also means recognizing expenses when incurred (rather than when paid). An alternative to the accrual basis is the cash basis. Under cash-basis accounting, companies record revenue when they receive cash. They record an expense when they pay out cash. The cash basis

seems appealing due to its simplicity, but it often produces misleading financial statements. It fails to record revenue that a company has earned but for which it has not received the cash. Also, it does not match expenses with earned revenues. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Individuals and some small companies do use cash-basis accounting. The cash basis is justified for small businesses because they often have few receivables an payables. Medium and large companies use accrual-basis accounting. Recognizing Revenues and Expenses It can be difficult to determine the amount of revenues and expenses to report in a given accounting period. Two principles help in this task: the revenue recognition principle and the expense recognition principle.

Definition of 'Sunk Cost' A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunks costs are independent of any event that may occur in the future. EXPENSE RECOGNITION PRINCIPLE Accountants follow a simple rule in recognizing expenses: Let the expenses follow the revenues. Thus, expense recognition is tied to revenue recognition. In the dry cleaning example, this means that Daves should report the salary expense incurred in performing the June 30 cleaning service in the same period in which it recognizes the service revenue. The critical issue in expense recognition is when the expense makes its contribution to revenue. This may or may not be the same period in which the expense is paid. If Daves does not pay the salary incurred on June 30 until July, it would report salaries payable on its June 30 balance sheet. This practice of expense recognition is referred to as the expense recognition principle (often referred to as the matching principle). It dictates that efforts (expenses) be matched with results (revenues). Illustration 3-1 (page 102) summarizes the revenue and expense recognition principles. REVENUE RECOGNITION PRINCIPLE The revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed. To illustrate, assume that Daves Dry Cleaning cleans clothing on June 30 but customers do not claim and pay for their clothes until the first week of July. Under the revenue recognition principle, Daves earns revenue in June when it performed the service, rather than in July when it received the cash. At June 30, Daves would report a receivable on its balance sheet and revenue in its income statement for the service performed. Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales. Example: Lets illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 211 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses A suspense account is an account used temporarily to carry doubtful receipts and disbursements or discrepancies pending their analysis and permanent classification. It can be a repository for monetary transactions (cash receipts, cash disbursements & journal entries) entered with invalid account numbers. The account specified may not exist, or it may be deleted/frozen. If one of these conditions exist, the transaction should be directed to a suspense account. In branchless banking (BB) - banking through mobile for unbanked - these accounts are used for 'money-in-transit'. For example, sender sends payment from US ACH account to a BB mobile number in Japan. The customer receives an

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alert on their mobile to withdraw this money from any BB agent. Until they withdraw, the remittance stays in the suspense account, earning the financial institute or the BB enabler float/interest on that money. When customer withdrawal completes, the money moves from suspense account to the agent's account who facilitated the cash withdrawal.A suspense account is an account in the general ledger in which amounts are temporarily recorded. The suspense account is used because the proper account could not be determined at the time that the transaction was recorded. When the proper account is determined, the amount will be moved from the suspense account to the proper account. Suspense accounts should be cleared at some point, because they are used for temporaraly use. Suspense accounts are a control risk Special Journals are designed to facilitate the process of journalizing and posting transactions. They are used for the most frequent transactions in a business. For example, in merchandising businesses, companies acquire merchandise from vendors, and then in turn sell the merchandise to individuals or other businesses. Sales and purchases are the most common transactions for the merchandising businesses. A business such as a retail store will record the following transactions many times a day for sales on account and cash sales. Description Debit Credit Accounts Receivable XXX Sales Sales Tax Payable Description Cash Sales Sales Tax Payable XXX XXX Debit Credit XXX XXX XXX

(iii) A trial balance is prepared with the balances of accounts at the end of a particular accounting period. A trial balance is prepared before preparation of financial statements at the end of accounting period. (iv) This statement contains all kinds of accounts, irrespective of their classifications, such as assets, liabilities, income-expenses accounts Objectives The objectives of preparing a trial balance are: i. To check the arithmetical accuracy of the ledger accounts. ii. To locate the errors iii. To facilitate the preparation of final accounts. iv. To provide information to the proper authority in time. v. To detect errors or mistakes in the process of accounts, if any.

Trial balance limitations A trial balance only checks the sum of debits against the sum of credits. That is why it does not guarantee that there are no errors. The following are the main classes of error that are not detected by the trial balance:

In order to save time for journalizing the entries, and posting the entries to the general ledgers and subledgers, Special Journals are used instead. An accountant can be specialized in a type of journal entry and several accountants can work each on 1 or more different types of journal entries only thereby using a better division of labour. A trial balance is a list of all the General ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit balance value. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance. The name comes from the purpose of a trial balance which is to prove that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a business's performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced. The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the doubleentry bookkeeping system and uses the classic 'T' account format for presenting values. Characteristics of Trial Balance: (i) Trial balance is neither an account nor a part of it. It is a statement or training all balances of ledger accounts. (ii) It is not recorded in any book of account. Trial balance is prepared in a separate sheet or paper.

An error of original entry is when both sides of a transaction include the wrong amount.[1] For example, if a purchase invoice for 21 is entered as 12, this will result in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account), both for 9 less, so the total of both columns will be 9 less, and will thus balance. An error of omission is when a transaction is completely omitted from the accounting records.[1] As the debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A variation of this error is omitting one of the ledger account totals from the trial balance.[2] An error of reversal is when entries are made to the correct amount, but with debits instead of credits, and vice versa.[1] For example, if a cash sale for 100 is debited to the Sales account, and credited to the Cash account. Such an error will not affect the totals. An error of commission is when the entries are made at the correct amount, and the appropriate side (debit or credit), but one or more entries are made to the wrong account of the correct type.[1] For example, if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect the totals. An error of principle is when the entries are made to the correct amount, and the appropriate side (debit or credit), as with an error of commission, but the wrong type of account is used.[1] For example, if fuel costs (an expense account), are debited to stock (an asset account). This will not affect the totals. Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but together cancel each other out.[1] A Transposition Error is an error caused by switching the position of two adjacent digits. Since the resulting error is always divisible by 9, accountants use this fact to locate the misentered number. For example, a total is off by 72, dividing it by 9 gives 8 which indicates that one of the switched digits is either more, or less, by 8 than the other digit. Hence the error was caused by switching the digits 8 and 0 or 1 and 9. This will also not affect the to

Adjusting entry 1. necessary entry at the end of the reporting period to record unrecognized revenue and expenses applicable to that period. It is required when a transaction is begun in one accounting period and concluded in a later one. An adjusting entry always involves an income statement account (revenue or expense) and a balance sheet account (asset or liability). The four basic types of adjusting entries relate to accrued expenses, accrued revenue, prepaid expenses, and unearned revenue.

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2. correcting entry required at the end of the accounting period due to a mistake made in the accounting records; also called correcting entry. For example, if during the same year land was charged instead of travel expense, the correcting entry is to debit travel expense and credit land. n financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement,[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow staThe cash flow statement was previously known as the flow of Cash statement.[2] The cash flow statement reflects a firm's liquidity.

find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank, and to test whether the How to Prepare a Bank Reconciliation Statement: To prepare the bank reconciliation statement, the following rules may be useful for the students: 1. 2. Check the cash book receipts and payments against the bank statement. Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement. Make a list of these items. Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book. Make a list of these items. Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book. Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways: (i) First method (Starting with the cash book balance) (ii) Second method (Starting with the bank statement balance) 1. Charges made by the bank $35 have not been recorded in the cash book, therefore, the balance in cash book is more. Add to bank statement balance also. Dividend and amount from customers received by the bank have not been recorded in the cash book. Therefore, in the cash book there is no entry of $930 (800 + 130). Deduct from the bank statement balance to adjust it according to cash book balance.

3. 4.

A suspense account is an account used temporarily to carry doubtful receipts and disbursements or discrepancies pending their analysis and permanent classification. It can be a repository for monetary transactions (cash receipts, cash disbursements & journal entries) entered with invalid account numbers. The account specified may not exist, or it may be deleted/frozen. If one of these conditions exist, the transaction should be directed to a suspense account. In branchless banking (BB) - banking through mobile for unbanked - these accounts are used for 'money-in-transit'. For example, sender sends payment from US ACH account to a BB mobile number in Japan. The customer receives an alert on their mobile to withdraw this money from any BB agent. Until they withdraw, the remittance stays in the suspense account, earning the financial institute or the BB enabler float/interest on that money. When customer withdrawal completes, the money moves from suspense account to the agent's account who facilitated the cash withdrawal. A suspense account is an account in the general ledger in which amounts are temporarily recorded. The suspense account is used because the proper account could not be determined at the time that the transaction was recorded. When the proper account is determined, the amount will be moved from the suspense account to the proper account. Suspense accounts should be cleared at some point, because they are used for temporaraly use. Suspense accounts are a control risk

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Depreciation. A company typically owns a variety of assets that have long lives, such as buildings, equipment, and motor vehicles. The period of service is referred to as the useful life of the asset. Because a building is expected to provide service for many years, it is recorded as an asset, rather than an expense, on the date it is acquired. As explained in Chapter 1, companies record such assets at cost, as required by the cost principle. To follow the expense recognition principle, companies allocate a portion of this cost as an expense during each period of the assets useful life. Depreciation is the process of allocating the cost of an asset to expense over its useful life Definition: Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for two reasons:

Definition and Explanation: 1. From time to time the balance shown by the bank and cash column of the cash book required to be checked. The balance shown by the cash column of the cash book must agree with amount of cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The balance shown by the bank column of the cash book should always agree with the balance shown by the bank statement, because the bank statement is a copy of the customer's account in the banks ledger. But the bank balance as shown by the cash book and bank balance as shown by the bank statement seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation statement to

Wear and tear. For example, an auto will decrease in value because of the mileage, wear on tires, and other factors related to the use of the vehicle. Obsolescence. Assets also decrease in value as they are replaced by newer models. Last year's car model is less valuable because there is a newer model in the marketplace.

Depreciation is calculated as follows:

The original cost of the asset, including costs of acquiring the asset, transporting it, and setting it up Less the salvage value (the "scrap" value)

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Divided over the years of useful life of the asset

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improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows

Characteristics of Depreciation: Depreciation has the following characteristics: 1. Depreciation is charged in case of fixed assets only. e.g., building, plant and machinery, furniture etc. There is no question of depreciation in case of current assets - such as stock, debtors, bills receivable etc. Depreciation causes perpetual, gradual and continual fall in the value of assets. Depreciation occurs till the last day of the estimated working life of the asset. Depreciation occurs on account of use of asset. In certain cases, however, depreciation may occur even if the assets are not used, e.g., leasehold, property, patent, copyright etc. Depreciation is a charge against revenue of an accounting period. Depreciation does not depend on fluctuations in market value of assets (see difference between depreciation and fluctuation page). The amount of depreciation of an accounting year cannot be determined precisely - it has to be estimated. In certain cases, however, it may be ascertained exactly, e.g., leasehold property, patent right, copyright etc. Total depr The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.[5] The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments.

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n financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement,[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. People and groups interested in cash flow statements include:

efinition of 'Generally Accepted Accounting Principles - GAAP' The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. Investopedia explains 'Generally Accepted Accounting Principles - GAAP' GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary! That said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still need to scrutinize its financial statements.

Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses Potential lenders or creditors, who want a clear picture of a company's ability to repay Potential investors, who need to judge whether the company is financially sound Potential employees or contractors, who need to know whether the company will be able to afford compensation Shareholders of the business.

The cash flow statement was previously known as the flow of Cash statement.[2] The cash flow statement reflects a firm's liquidity. The cash flow statement is intended to[4] 1. 2. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities and equity improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows

Investopedia explains 'Ratio Analysis' There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.

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The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.

The cash flow statement is intended to[4] 1. 2. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities and equity

The cash flow statement organizes and reports the cash generated and used in the following categories:

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1.

Operating activities

quantity and availability is updated on a continuous basis as a function of doing business. Generally this is accomplished by connecting the inventory system with converts the order entry and in retail the point of sale system. In this case, book inventory items would be exactly reported on the same as, or almost the same, as the real inventory. the income statement In earlier periods, non-continuous, or periodic inventory systems were more from the prevalent. Starting in the 1970s digital computers made possible the ability to accrual implement basis a perpetual inventory system. This has been facilitated by bar coding andof lately radio frequency identification (RFID) labeling which allows computer accounting systems to quickly read and process inventory information as part of transaction to cash. processing.

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Investing activities

reports the purchase Perpetual inventory systems can still be vulnerable to errors due to and sale of (phantom inventory) or understatements (missing inventory) that overstatements canlong-term occur as a result of theft, breakage, scanning errors or untracked inventory investments movements, leading to systematic errors in replenishment.[ and property, Definition of 'Periodic Inventory' plant and equipment. A method inventory valuation for reports of the financial reporting issuance and purposes where a physical count repurchase of the inventory is performed of the at specific intervals. This accounting method for inventory valuation company's only keeps track of the inventory at the own bonds beginning of and stock a period, the purchases made andand the the sales during the same period and is recorded under payment of the asset section of the balance sheet. dividends. Investopedia explains 'Periodic reports the Inventory' exchange of significant With this that valuation method, it is much items harder track which individual items were did to not destroyed or stolen, but a cross-reference involve cash canand be made with the sales revenue to get a reports rough theestimate amount of what was sold versus what not. Many see this method as ofwas income being inferior taxes paid to the perpetual inventory method, which and interest keeps track of inventory at the paid. point of sale. This system is typically used by small businesses that can't afford or don't need an electronic tracking system (i.e. the bar code system).

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Financing activities

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Supplemental information

Definition of 'Inventory'

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

Definition of 'Off Balance Sheet OBS' An asset or debt that does not appear on a company's balance sheet. Items that are considered off balance sheet are generally ones in which the company does not have legal claim or responsibility for. For example, loans issued by a bank are typically kept on the bank's books. If those loans are securitized and sold off as investments, however, the securitized debt is not kept on the bank's books. One of the most common off-balance sheet items is an operating lease. Investopedia explains 'Off Balance

explains 'Inventory' Possessing a high amount of inventory for long periods of time is not usually good for a business because of inventory storage, obsolescence and spoilage costs. However, possessing too little inventory isn't good either, because the business runs the risk of losing out on potential sales and potential market share as well. Inventory management forecasts and strategies, such as a just-in-time inventory system, can help minimize inventory costs because goods are created or received as inventory only when needed.

In business and accounting/accountancy, perpetual inventory or continuous inventory describes systems of inventory where information on inventory

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Sheet - OBS' Off balance sheet items are of particular interest to investors trying to determine the financial health of a company. These items are harder to track, and can become hidden liabilities. Collateralized debt obligations, for instance, may become a toxic asset before investors realize a company's exposure.

Revenue Recognition Principle Expense Recognition Principle Full disclosure principle Cost-benefit relationship Materiality constraint Industry Practices Constraint Conservatism Constraint
Basic Accounting Principle

The principle prescribing that revenue is recognized when earned.

Also known as matching, Expenses should be recognized in the same period that the related revenues are recognized. Ensures that all relevant financial information is reported. the cost of providing the info against the benefits that can be derived from using it This rule says that an immaterial item need not be given strict accounting treatment. If amount involved is when compared to revenues and expenses it is material and Gaap should be followed. States that peculiar nature of some industries and business require departure from what normally be considered good accounting practice. Dictates that in matters of doubt and uncertainty the accountant should choose the safest option.

Accounting assumptions, principles and constraints 2-4

What It Means in Relationship to a Financial Statement

Both Sid 1. Economic Entity Assumption The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities. Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.

Economic entity assumption

2. Monetary Unit Assumption

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Terms

Definitions

Economic entity assumption Going concern assumption Monetary Unit assumption Periodicity assumption Historical cost principle

an assumption that requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities the assumption that the company will continue in operation for the foreseeable future An assumption that requires that only those things that can be expressed in money are included in the accounting records. a company can divide its economic activities into artificial time periods (monthly, quarterly, yearly) GAAP requirement that companies account for and report most assets & liabilities on the basis of acquisition price

Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2012 transaction. 3. Time Period This accounting principle assumes that it is possible to report the Assumption complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2012, or the 5 weeks ended May 1, 2012. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2011, the amount is known; but for the income statement for the three months ended March 31, 2012, the amount was not known and an estimate had to be used.

4. Cost Principle

It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enoughthe reader needs to know if the statement covers the one week ended December 31, 2011 the month ended December 31, 2011 the three months ended December 31, 2011 or the year ended December 31, 2011. From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or

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thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. 8. Revenue Recognition Principle

5. Full Disclosure Principle

Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statementsyou need to look elsewhere, perhaps to a third-party appraiser. If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.

(To learn more about adjusting entries go to Explanation of Adjusting Entries and Drills for Adjusting Entries.) Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.

9. Materiality

For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is doneit does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt. Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial.

As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.

6. Going Concern Principle

A company usually lists its significant accounting policies as the first note to its financial statements. This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment. 10. Conservatism The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods. This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2012 revenues as a bonus on January 15, 2013, the company should report the bonus as an expense in 2012 and the amount unpaid at December 31, 2012 as a liability. (The expense is occurring as the sales are occurring.)

An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the fiveyear period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.

7. Matching Principle

Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company. If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.

The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost. The monetary unit assumption is that in the long run, the dollar is stableit does not lose its purchasing power. This assumption allows the accountant to add the cost of a parcel of land purchased in 2006 to the cost of land purchased in 1956. For example, if a two-acre parcel cost the company $20,000 in 1956 and in 2006 a two-acre parcel adjacent to the original parcel is purchased for a cost of $800,000, the accountant will add the $800,000 to the land account and will report the land accounts balance of $820,000 on the companys balance sheet.

Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.

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To say that the purchasing power of the dollar has not changed significantly from 1956 to 2006 is quite a stretch. However, the assumption is that the purchasing power of the dollar has not changed. Part of the monetary unit assumption is that accountants report assets as dollar amounts, rather than reporting in detail all of the specific assets. If an asset cannot be expressed as a dollar amount, it cannot be entered in the general ledger. For example, the management team of a very successful corporation is by far its most valuable asset. However, the accountant is not able to objectively convert those talented people into a dollar or monetary amount. Hence, the team will not be included in the amounts reported on the balance sheet. Q9. What is Forensic Accounting? Answer: Forensic Accounting

Depreciable cost The cost of a plant asset less its salvage value. Depreciation: The term depreciation is used with reference to tangible fixed assets because the permanent continuing and gradual fall in book value is possible only in the case of fixed asset. Depletion: The term depletion is used for the depreciation of wasting assets such as mines, oil wells, timber trees etc. Amortization The term amortization is used in respect of intangible assets like patents, copyrights, leasehold and goodwill which are recorded at cost. Some intangible assets have limited useful life and are, therefore, written off. The process of their writing off is called amortization.

Q.4 Explain current and non-current assets. Give two examples of each (100-150 Words). Ans. Assets are broadly classified into two categories: a) Current Assets. Current Assets are those assets which are held for short time generally a years time only. The balance of these assets usually, keeps on changing. For example, the balance of cash in hand may change so many times during the day. Example. Cash in hand and Cash at Bank. b) Non-current Assets. Non-current assets are those assets which are acquired for long term use in the business. These assets increase the profit earning capacity of the business. Expenditure on these assets is not regular in nature. Examples. Building, Furniture, Machinery etc.

Meaning of Accounting Cycle An accounting cycle is a complete sequence of accounting process that begins with the recording of business transactions and ends with the preparation of final accounts. When a businessman starts his business activities, he records the dayto-day transactions in the Journal. From the journal the transactions move further to the ledger where accounts are written up. Here, the combined effect of debit and credit pertaining to each account is arrived at in the form of balances. To prove the accuracy of the work done, these balances are transferred to a statement called trial balance. Preparation of trading and profit and loss account is the next step. The balancing of profit and loss account gives the net result of the business transactions. To know the financial position of the business concern balance sheet is prepared at the end. These transactions which have completed the current accounting year, once again come to the starting point the journal and they move with new transactions of the next year. Thus, this cyclic movement of the transactions through the books of accounts (accounting cycle) is a continuous process.

1. Modern Classification of Account: According to the objective and the principle of accounting equation accounts call be classified into types: (1) Assets Account (2) Liability Account (3) Equity Account (4) Expense Account (5) Revenue Account (1) Asset Account: The account kept in classifying the transactions for which the assets increase or decrease is called asset account. For example, cash account, building account, furniture account etc. (2) Liability Account: The account kept classifying the transactions for which liability increases or decreases is called liability account. For example, credit Rs account, loan account bills payable account, capital account etc. (3) Equity Account: This account is kept for Capital.If the business can earn revenue it will increase equity and if it incurs expense, it will reduce equity. Drawing also reduces equity. (4) Expense Account: The account kept under different heads classifying the various expenditures of a business or institution is called expenditure account. For example, salary account, wage account, purchases account. (5) Revenue Account: The accounts, kept under different heads having classified the transactions relating to income properly, are called income account. For example, sale account, interest received account, rent received account etc

(1) Golden Rules: Identifying the two accounts of a transaction, it is to be determined to which classes they do belong. There after debit and credit of each account are to be determined according to the following rules: a. Personal account: The Person or institution who receives benefits is to be debited and the Personal or institution who gives benefit is to be credited. b. Asset account: The asset that comes to the organization through a transaction is to be debited and the asset that goes out to business through a transaction is to be credited. c. Nominal or income-expenditure account: Accounts relating to expenses and losses are to be debited and accounts relating to income are to be credited. Reversing entry Some accountants prefer to reverse certain adjusting entries by making a reversing entry at the beginning of the next accounting period. A reversing entry is the exact opposite of the adjusting entry made in the previous period. Use of reversing entries is an optional bookkeeping procedure; it is not a required step in the accounting cycle. A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. In British Englishincluding United Kingdom company lawa financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial

Accelerated-depreciation method : Depreciation method that produces higher depreciation expense in the early years than in the later years. Additions and improvements: Costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset. Amortization : The allocation of the cost of an intangible asset to expense over its useful life in a systematic and rational manner. Asset turnover ratio: A measure of how efficiently a company uses its assets to generate sales; calculated as net sales divided by average total assets. Capital expenditures: that increase the companys investment in productive facilities . Copyrights : Exclusive grant from the federal government that allows the owner to reproduce and sell an artistic or published work. Declining-balance method : Depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the useful life of the asset. Depletion: The allocation of the cost of a natural resource to expense in a rational and systematic manner over the resources useful life. Depreciation: The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.

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statements. They typically include four basic financial statements, accompanied by a management discussion and analysis:[1] 1. Statement of Financial Position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. Statement of Changes in Equity: explains the changes of the company's equity throughout the reporting period Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

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Comparison of two or more year's financial data is known as horizontal analysis, or trend analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and percentage form. Click here to read full article. Trend Percentage: Horizontal analysis of financial statements can also be carried out by computing trend percentages. Trend percentage states several years' financial data in terms of a base year. The base year equals 100%, with all other years stated in some percentage of this base. Click here to read full article. Vertical Analysis: Vertical analysis is the procedure of preparing and presenting common size statements. Common size statement is one that shows the items appearing on it in percentage form as well as in dollar form. Each item is stated as a percentage of some total of which that item is a part. Key financial changes and trends can be highlighted by the use of common size

For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements[2] and explanation of financial policies and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cas

ELEMENTS OF FINANCIAL STATEMENTS The elements which are directly related to the measurement of financial position are assets, liabilities and equity. The elements which are directly related to the measurement of profit are income and expenses. Asset: An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Liability: A liability is a present obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. There is a distinction between a present obligation and future commitment. A decision by the management of an enterprise to acquire assets in future does not of itself give the rise to a present obligation. Equity: In a corporate enterprise equity is classified in the Balance Sheet as Share Capital and Reserve and Surplus. Normally Equity is shown at its paid up value. Income and Expenses: Income is increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or decrease of liability that result in increase of equity. Whereas expenses are decreases in economic benefits during the accounting period in the form of' outflows or depletion of assets or increases in liabilities that result in decrease in equity other than those relating to distribution to equity participants. Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis. Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

Tools and Techniques of Financial Statement Analysis: Following are the most important tools and techniques of financial statement analysis: 1. Horizontal and Vertical Analysis 2. Ratios Analysis 1. Horizontal and Vertical Analysis: Horizontal Analysis or Trend Analysis: