Question

11:21 vil : 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-C+L 8) Current liabilities 9) Fixed assets 10) Current assets 11) Gross assets 12) Historic cost

Answer 1

Answers :-

1. Accountancy:- It is a systematic knowledge of accounting. It explains how to deal with various aspects of accounting. It educates us how to maintain the books of accounts and how to summarise the accounting information and communicate it to the users. In other words accountancy is a systematic knowledge of accounting.

2. Entity concept:- An Entity means an economic unit which performs economic activities. The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners and other businesses. The separation of accounting entities is important because it helps with proper tax accounting and financial reporting. For Example The owner of a company lends loan to his company. It would be strictly recorded as company’s liability and that has to be paid back to the owner.

3. Balance Sheet:- A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity. The balance sheet is one of the three (income statement and statement of cash flows being the other two) core financial statements used to evaluate a business.

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:- 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:- The Trade Cycle shows how long the cash is tied up in the trade cycle before coming back out as cash again. To calculate the Net Trade Cycle, we start with the number of days, on average, money is held in each of accounts receivable (AR), inventory, and accounts payable (AP).

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. A= C+L:- Here, the term A= C+L means Assets= Capital+Liabilities

An Accounting Equation is a mathematical expression which shows that the asset and liabilities of a firm are equal. An accounting Equation is based on the dual aspect concept of accounting meaning, every transaction has two aspects-debit and credit. It holds that for every debit there is a credit of equal amount and vice versa. It means total claims will always equal the total assets of the firm.

8. Current liabilities:- In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer.Current liabilities are typically settled using current assets, which are assets that are used up within one year. Examples of current liabilities include accounts payable, short-term debt, dividends, and notes payable as well as income taxes owed.

9. Fixed assets:-Fixed assets, also known as tangible assets or property, plant and equipment, is a term used in accounting for assets and property that cannot easily be converted into cash. Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets. If a business creates a company parking lot, the parking lot is a fixed asset.

10. Current assets:- In accounting, a current asset is any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial 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:- The Gross Asset Value is the sum of value of property a company owns. Besides the Net asset value, the GAV is a common Key Performance Indicators (KPI) for property funds to measure the success of the fund manager.

12. Historic cost:- In accounting, an economic item's historical cost is the original nominal monetary value of that item. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values.For example, the historical cost of an office building was Rs.10 crores when it was purchased 20 years ago, but its current market value is three times that figure but still the gross value of the building is taken as Rs. 10 crore in balance sheet.