Question

5:56 Introduction to accounting Final Exa... Exercise 3: Review your understanding of the following concepts and terms by writing a short explanation of each of them 1) Accountancy 2) Entity concept 3) Balance sheet 4) Realization concept 5) Trade credit 6) Trading cycle and credit transactions 7) A-CL *) Current liabilities 9) Fixed assets 10) Current assets 11) 12) Historie cost

Answer 1

1) ACCOUNTANCY :

Accountancy is the practice of recording, classifying, and reporting on business transactions for a business. It provides feedback to management regarding the financial results and status of an organization.

2) ENTITY CONCEPT :

The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of a single business.

There are many types of business entities, such as sole proprietorships, partnerships, corporations, and government entities.

3) BALANCE SHEET :

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

4) REALIZATION CONCEPT :

The realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned.

5) TRADE CREDIT :

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit.

6) TRADING CYCLE AND CREDIT TRANSACTIONS :

Trading Cycle :

* Trading is the process of buying the security of a company. The investor takes a decision of investing in a particular company based on its past performance and future potential.

Indian share market has a complex mechanism that ensures investors receive the shares they bought or the money they made by selling the same. The process by which the shares are settled in the Indian stock market is called the trading cycle.

The trading cycle includes performing three basic tasks:

(1)Trading (2)Clearing (3) Settlement

Credit transactions :

Credit transaction means any transaction by the terms of which the repayment of money loaned or loan commitment made, or payment for goods, services, or properties sold or leased, is to be made at a future date or dates.

7) ASSETS = CAPITAL + LIABILITIES

From the large, multi-national corporation down to the corner beauty salon, every business transaction will have an effect on a company's financial position. The financial position of a company is measured by the following items:

Assets (what it owns)

Liabilities (what it owes to others)

Owner's Equity (the difference between assets and liabilities)

The accounting equation is as follow

CAPITAL = ASSETS - LIABILITIES

ASSETS = CAPITAL + LIABILITIES

8) CURRENT LIABILITIES :

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory and convert it to cash from sales. An example of a current liability is money owed to suppliers in the form of accounts payable.

9) FIXED ASSETS :

A fixed asset is a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income. Fixed assets are not expected to be consumed or converted into cash within a year. Fixed assets most commonly appear on the balance sheet as property, plant, and equipment (PP&E). They are also referred to as capital assets.

10) CURRENT ASSETS :

Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, used, or exhausted through standard business operations with one year. Current assets appear on a company's balance sheet, one of the required financial statements that must be completed each year.

Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. Current assets may also be called current accounts.

11) GROSS ASSETS :

Gross Assets means (i) the gross book value of the assets of the Company until such time as the Board has established a net asset value of the Company’s assets and (ii) after the Board has established a net asset value of the Company’s assets, the gross asset value of the assets of the Company based on such net asset value determination. The Gross Assets of the Company will be determined on a quarterly basis. For avoidance of doubt, under (i) or (ii), gross book value or gross asset value (as applicable) shall be determined based on the Company’s pro rata ownership interest in the underlying real estate and other assets and liabilities, without regard to GAAP consolidation or equity method accounting principles.

12) HISTORIC COST :

A historical cost is a measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company. The historical cost method is used for fixed assets in the United States under generally accepted accounting principles (GAAP).