COST CONCEPT

COST CONCEPT:
       According to this concept fixed assets are recorded at the price at which they are acquired. This price is termed as 'Cost'. In balance sheet, however, these assets do not appear always at cost price every year, but systematically it is reduced by the amount of  annual depreciation and thus they appear at the amount which is cost less depreciation. This value is called book value. Under cost concept, all such events are ignored which affects the business but have no cost. For example, the most active, important and influencial directordies, then the earning capacity and position of the business will be affected, but this event has no cost hence it will not be recorded in accounts books.
Effects of this Concepts:

• Due to cost concept, market price is ignored and balance sheet indicates financial position on cost and expired cost basis.
• This concept is mainly for fixed assets, current assets are not affected by it. They appear in balance sheet at cost or market price, whichever is lower, though they two are acquired at cost price.

MONEY MEASUREMENT CONCEPT

MONEY MEASUREMENT CONCEPT:
       Only those transactions are recorded in books of account which can be expressed in money. Those transactions which cannot be expressed in money fall beyond the scope of accounting. One serious shortcoming of this concept is that the money value of that date is recorded on which transaction  has taken place and later on due to inflation when changes in money value take place, these changes are not considered.
Effects of this concept:
1.In the absence of this concept, it would have not been possible to add various possessions. For example a proprietor has 400 chairs, 10 machines,500 acre of land and 200 tables. He cannot add them, but by finding out their values in money, total amount of all these possessions can easily be found out.
2.Ability of the boards of directors, quality of the articles produced and efficiency of workers cannot be recorded as these are not expressed in money. Thus, this concept has both merits and demerits.

DUAL ASPECT CONCEPT

DUAL ASPECT CONCEPT:
           Accounting concept is that every transaction affects two accounts. This is why double entry system of book-keeping came into existence. All business transactions are recorded on the basis of this concept. No transaction is complete without double aspect. This concept is the foundation on which the entire system of book-keeping and accountancy is based.
Effects of this concept:

• If one aspect of transaction is recorded and other is ignored, the accountancy record will not indicate true position, hence this concept is of great help in indicating true position of the business.
• During recent period when production has become very fast due to technological advances and complicated affair in large-scale industries, this concept is of utmost use.
• This concept helps in detecting the errors of employees and in having strict control over them.

ADVANTAGES OF DUAL ASPECT CONCEPT:
1.The most advantageous feature is that you can draw a Trial Balance of your ledger accounts as and when required and know your position of business up-to-date. 
2.This system gives you the most accurate and reliable position of your accounts.
3.It facilitates you to compare the business performance of a period with figures of a previous period or with last year corresponding period figures.
DISADVANTAGES OF DUAL ASPECT CONCEPT:
1.The accounts can depict the wrong picture when an accountant is not well versed in accounting and debits wrong head of account or entirely reverses a transaction while posting in the ledger accounts.
2.This system requires a number of books to be maintained as compared to the single entry system of book keeping.

But, on the whole, this double entry system of book-keeping is the most popular and the most commonly used system of accounting all over the world.

GOING CONCERN CONCEPT

GOING CONCERN CONCEPT:
       This concept relates with the indefinite long economical life of the business. The assumption is that business will continue to exist for unlimited period unless of course it is dissolved due to some reason or the other. This is why in balance sheet, market price of fixed assets is not considered. When final accounts are prepared, record is made for outstanding expenses and prepaid expenses because of the assumption that business will continue. If the condition of business is depreciated to such an extent that it is to be closed down, even then accountant's concept is that business is to continue and he records all big and small transactions, he never stops making record on the possibility of closing down of business.
This is the best quality of accountant which is based on this concept of going concern.
In other words, According to this concept it is assumed that business will continue for an indefinite period of time.
Effects of this concept:

• Working life of asset is taken into consideration for writing off depreciation because of this concept.
• Whatever bad position of the business may be, it does not affect on the accounting aspect of the business.
• Accountant always remains hopeful about continuity of business and he does not stop writing transactions even though the condition of business deteriorating.

ACCOUNT PAYABLE AND ACCOUNT RECEIVABLE

ACCOUNT PAYABLE & ACCOUNT RECEIVABLE:

The two major elements of working capital of a company are current assets and current liabilities. The assets which are readily converted into cash are considered as Current Assets while Current liabilities are those debts which fall due for payment within a short duration. Account receivable is a current asset account, which represents the money to be received by the company, against the goods delivered or services rendered to the customers.

On the other hand, accounts payable is a current liability account, indicating the money owed by the company to the suppliers, and appeas as a liability in the company’s Balance Sheet. Many accounting students get confused amidst these two terms, but there is a fine line of difference between account receivable and account payable.

Definition of Accounts Receivable

Accounts Receivable refers to the amount to be received by the entity in the future specified date for selling goods to the customers on credit. It reflects the money owed by the customers towards the company. It appears on the assets side of the Balance Sheet, under the head current assets. Bills Receivables and Debtors constitute the Account Receivables.

Every company sells goods on credit to other entities, to have better customer relations, holding an advantageous position in the market and increasing turnover as well. Although all the debtors do not prove to be good, default in payment is also made by some debtors which lead to Bad Debts. Due to this reason, a provision is always created by the company to cope up with the bad debts. The provision is known as Provision for Doubtful Debts. Few points are considered before allowing goods on credit to any customer. They are:

• Credit Policy: This includes decisions regarding credit period, discount rate, early payment, etc.
• Credit Analysis: This includes decisions regarding whether a particular customer is allowed extended credit period or not. The techniques used in this regard are the evaluation of credit ratings, past credit history, etc.
• Collection Policy: The Timely collection of receivables enables the reduced risk of losses.
• Control on Receivables: This includes follow-up of debtors and faster collection of debts.

Definition of Accounts Payable

A short-term obligation, need to be discharged in the future, arising out of the purchase of goods or services received or expenses made is known as Accounts Payable. It includes trade payable i.e. bills payable and creditors, and expenses payable like an advertisement expense, electricity expense or expenses on supplies, etc. It represents the money owed by the company towards suppliers and creditors. Accounts Payable appears on the liabilities side of the Balance Sheet, under the head current liabilities.

It is quite natural that the entities on credit buy goods. They are one of the major sources of finance for the company which arises very often, in the normal course of business. It is the duty of the company to pay the creditors in time because slow payment of debts will hamper the whole supply cycle, which in turn spoil the working capital cycle of the company. This will also have an ill effect on the reputation of the company.

Comparison Chart

BASIS FOR COMPARISON	ACCOUNTS RECEIVABLE	ACCOUNTS PAYABLE
Meaning	Money expected to be received by the company in the future for the goods sold and services rendered to the customers on credit.	Money expected to be by the company in the future for the goods bought and services received from the suppliers on credit.
Status	Assets	Liabilities
Concept	Amount owned by the entity towards debtors.	Amount owed by the company towards creditors.
Represents	Money to be collected	A debt to be discharged
Outcome of	Credit Sales	Credit Purchases
Results in	Cash inflows	Cash outflows
Components	Bills Receivable and Debtors.	Bills Payable and Creditors.

BALANCE SHEET

DEFINITION:

Balance sheet is a list of the accounts having debit balance or credit balance in the ledger. On one side it shows the accounts that have a debit balance and on the other side the accounts that have a credit balance. The purpose of a balance sheet is to show a true and fair financial position of a business at a particular date. Every business prepares a balance sheet at the end of the account year. A balance sheet may be defined as:

1. "It is a statement of assets, liabilities and owner's equity (capital) on a particular date".
2. "It is a statement of what a business concern owns and what it owes on a particular date".  What is owns are called assets and what it owes are called liabilities.
3. "It is a statement which discloses total assets, total liabilities and total capital (owner's equity) of a concern on a particular date".
4. "It is a statement where all the ledger account balances which remain open after the preparation of trading and profit and loss account, find place".

Balance sheet is so called because it is prepared with the closing balance of ledger accounts at the end of the year. It has two sides - assets side or left hand side and liabilities side or right hand side. The accounts have a debit balance are shown on the asset side and those have a credit balance are shown on the liabilities side and the total of the two sides will agree.

Assets means all the things and properties under the ownership of the business i.e. building, plant, furniture, machinery, stock, cash etc. Assets also include anything against which money or service will be received i.e. creditors accrued income, prepaid expenses etc.

Liabilities means our dues to others or anything against which we are to pay money or render service, i.e. creditors, outstanding expenses, amount payable to the owner of the business (capital) etc.

Asset side of the balance sheet indicates the different types of assets owned by a concern, while liabilities side discloses the various sources through which funds have been obtained in order to acquire those assets. Balance sheet reveals the financial position of the firm on a particular date at a point of time, so it is also called "position statement". It is prepared on the last day of the accounting year and discloses concern for the whole year cannot be determined through the balance sheet because financial position is ever changing. The is why the heading of the balance sheet is given as under:

Balance Sheet as at 31st December, 2005(If accounting year ends on 31 Dec. 2005)

Features of Balance Sheet:

Balance sheet has the following features:

1. It is the last stage of final accounts
2. It is prepared on the last day of an accounting year.
3. It is not an account under the double entry system - it is a statement only.
4. It has two sides - left hand side known as asset side and right hand side known as liabilities side.
5. The total of both sides are always equal.
6. The balances of all asset accounts and liability accounts are shown in it. No expense accounts and revenue accounts are shown here.
7. It discloses the financial position and solvency of the business.
8. It is prepared after the preparation of trading and profit and loss account because the net profit or net loss of a concern is included in it through capital account.

Method of Preparation of Balance Sheet:

All the information necessary for the preparation of balance sheet is available from trial balance and from some other ledger accounts. After transferring accounts relating to expenses and revenues to trading and profit and loss account, the trail balance contains only the accounts of assets, liabilities, and capital. All assets have debit balances and all liabilities and capital have credit balances. The asses are shown on the asset side of the balance sheet and liabilities and capital are shown on the liabilities side of the balance sheet after arranging them properly.
As the balance sheet is prepared on the last day of an accounting year, so its heading and format will  be:

Balance Sheet
as at 31st December, 2005

Asset	$	Liabilities and Capital	$.

Classification of Assets:

Assets may be classified as follows:

Real Assets:

Assets which have some market value are called real assets, e.g. building, machinery, stock, debtors, cash, goodwill, etc. Real assets are further divided into two types according to their permanence:

Fixed Assets: Assets which have long life and which are bought for use for a long period of time are called "fixed assets". These are not bought for selling purposes, e.g. land, building, plant, machinery, furniture etc. Fixed assets are again sub-divided into two:

1. Tangible Assets: Assets which have physical existence and which can be seen, touched and felt are called "tangible assets", e.g. building, plant, machinery, furniture etc.
2. Intangible Assets: Assets which have no physical existence and which cannot be seen, touched or felt are called "intangible assets", e.g. goodwill, patent right, trade mark etc.

Current Assets: Assets which are short-lived and which can be converted into cash quickly to meet short term liabilities are called "current assets", e.g. stock debtors, cash etc. Such assets change their form repeatedly and so, they are also known as circulating or floating assets. For example, on purchase of goods cash is converted into stock and on sale of goods, stock is converted into debtors, on collection from debtors, debtors take the form of cash etc.

Out of current assets those which can be converted into cash very quickly or which are already in the form of cash are called liquid or quick assets e.g. debtors, cash in hand, cash at bank etc.

Fictitious Assets: Assets which have no market value are called fictitious assets. examples of fictitious assets include preliminary expenses, loss on issue of shares etc. They are also known as nominal assets.

Besides these, there is another type of assets whose value gradually reduce on account of use and finally exhaust completely. This type of assets is called wasting assets e.g. mine, forest etc.

Classification of Liabilities:

Internal Liabilities:

The total amount of debts payable by a business to its owner is called internal liability e.g. Owner's equity (capital), reserve etc. From practical view point internal liabilities should not be regarded as liabilities, since there is no question of meeting such liabilities al long as the business continues.

External Liabilities:

All debts payable by a business to the outsiders (other than the owner) are called external liabilities e.g. creditors, debentures, bills payable, bank overdraft, etc. External liabilities are further divided into two.

Fixed or Long Tern Liabilities: The liabilities which are payable after a long period of time are called fixed or long term liabilities e.g. debentures, loan on mortgage etc.

Current or Short Term Liabilities: The debts which are repayable within a short period of time are called current or short-term liabilities e.g. creditors, bills payable, bank overdraft etc. Current liabilities may again be divided into two:

1. Deferred Liabilities: Debts which are repayable in the course of less than one year but more than one month are called deferred liabilities e.g. Short term loan etc.
2. Liquid or Quick Liabilities: Debts are repayable in the course of a month are called liquid or quick liabilities e.g. bank overdraft, outstanding expenses, creditors etc.

Besides the above, there is another type of liability which is known as contingent liability. It is one which is not a liability at present, but which may or may not become a liability in in future. It depends upon certain future event. For example, suppose, the buyer of goods filed a suit in the court against the seller claiming damage of $10,000 for breach of contract. This will be regarded as a contingent liability to the seller until the receipt of the court's order. To the buyer, this is a contingent asset. Both contingent liability and contingent asset are not recorded in the balance sheet. They are generally mentioned in the balance sheet as a note.

Grouping and Marshaling of Assets and Liabilities in Balance Sheet:

As we have discussed that the main purpose of balance sheet is to disclose a true and fair financial position of a business on a particular date. So, the assets and liabilities must be shown in such a manner that the financial position of the business can be assessed through it easily and quickly. Thus an arrangement is made in which assets and liabilities are shown in the balance sheet. Such an arrangement is called marshaling of assets and liabilities. There are three methods of marshaling:

1. Permanency Preference Method
2. Liquidity Preference Method
3. Mixed Method

These methods of preparing a balance sheet are briefly explained below:

Permanency Preference Method:

Under this method, the assets and liabilities are shown in balance sheet in the order of their permanence. In other words, the more permanent the assets and liabilities, the earlier are they shown. This method is adopted by joint stock companies and under this method the balance sheet will take the following form:

Balance Sheet as at.....

Assets	$	Liabilities	$
Fixed Assets:     Good will      Patent      Land      Building      Plant & Machinery      Furniture & Fixtures Current Assets:      Investment      Stock      Sundry debtors      Bills receivable      Prepaid expenses Liquid Assets:      Cash at bank      Cash in hand		Fixed Liabilities:     Capital      Reserves      Long term loans Current Liabilities:      Sundry creditors      Bills payable      Bank overdraft      Outstanding expenses

Liquidity Preference Method:

Under this method, assets and liabilities are shown in order of their liquidity. The more liquid the assets, the earlier are they shown. The sooner the liabilities are to be paid off, the earlier are they shown. This method is adopted by sole proprietorship and partner ship business. Under this method the form of balance sheet is:

Balance Sheet as at.....

Assets	$	Liabilities	$
Liquid Assets:     Cash at bank      Cash in hand Current Assets:      Investment      Stock      Sundry debtors      Bills receivable      Prepaid expenses Fixed Assets:      Good will      Patent      Land      Building      Plant & Machinery      Furniture & Fixtures		Current Liabilities:     Sundry creditors      Bills payable      Bank overdraft      Outstanding expenses Fixed Liabilities:      Capital      Reserves      Long term loans

PETTY CASH BOOK

MEANING OF PETTY CASH BOOK:
A petty cash book is one in which all petty or small payments made through petty cash fund are recorded systematically. Petty cash book is maintained by the petty cashier. Petty cash book can be maintained either in a simple or in analytical way.

Importance And Advantages Of Petty Cash Book
Business performing a large number of petty transactions usually maintain a separate petty cash book. The following points highlight the importance and advantages of petty cash book which can be taken as its objectives as well.

* Petty cash book maintains records of all petty payments systematically.

* Petty cash book supplies information regarding petty payments made on different heads more easily and quickly.

* Petty cash book makes possible for making comparison of the petty expenses between two periods and helps in controlling such petty expenses more effectively.

* Petty cash reduces the burden of head cashier as he is not required to handle petty transactions. Hence, the head cashier will have enough time to manage and control major cash transactions more effectively.

System Of Petty Cash Accounting :

1. Open System:

Under this system the Petty Cashier at first receives from the Chief Cashier a fixed sum of money for meeting petty expenses. As soon as the said amount is spent, the Chief Cashier again pays the required sum to the Petty Cashier.

2. Fixed Advance System:

Under this system the Petty Cashier receives from the Chief Cashier a fixed Slim of money for a fixed period of time i.e. $200 per month. The Chief Cashier will pay $200 to the Petty Cashier every month irrespective of this that whether the Petty Cashier has spent the total sum or not.

3. Imprest System :

This system is generally followed by most of the business concerns. Under this system, the total petty expenses for a particular period are estimated and that amount is advanced by the Chief Cashier to the Petty Cashier. This amount is called Imprest Cash. On the expiry of the fixed period the Petty Cashier prepares a statement of his expenses and submits it to the Chief Cashier. This statement is known as Statement of Petty, Expenses. The Chief Cashier examines the statement and if he finds it correct, hands over the Petty Cashier an amount equal to the amount actually spent. This amount plus the amount lying unspent with the Petty Cashier will be equal to the Imprest Cash.

In this way the Petty Cashier will start every time with an amount equal to Imprest Cash. In other words, the amount lying with the Petty Cashier will never exceed Imprest Cash. Generally a columnar Petty Cash Book is used in which different columns are provided for different petty expenses.

The balance of the Petty Cash Book will be shown on the asset side of balance sheet as "Cash in hand" at the end of the year.

Example:

From the following particulars prepare a Petty Cash Book under Imprest System. 2005

Jan. 1. Received from the Chief Cashier as imprest cash $400.Jan. 2. Paid Taxi hire $20. Jan. 3. Paid postage $28 and stationery $60. Jan. 4. Purchased stationery $48. Jan. 5. Paid telegram charges $28 and bus fare $4. Jan. 6. Bought postage stamps $96. Jan. 7. Paid $72 for repairs of typewriter.

Solution:

Petty Cash Book

Amount Received $	Date	Particulars	V. No.	Total $	Traveling Expenses $	Postages $	Stationery $	Office Expenses $	Misc. Expenses $
400	2005	Cash Received
	Jun. 1
	Jun. 2	Taxi hire A/c		20	20
	Jun. 3	Postage A/c		28		28
	Jun. 3	Stationery A/c		60			60
	Jun. 4	Stationery A/c		48			48
	Jun. 5	Telegram A/c		28		28
	Jun. 5	Bus fare A/c		4	4
	Jun. 6	Postage A/c		96		96
	Jun. 7	Repairs A/c		72				72
				356	24	152	108	72
		Balance c/d		44
400				400
44	Jun. 8	Balance b/d
356		Cash received

BANK PASS BOOK

MEANING OF BANK PASS BOOK:
         Passbook or Bank Statement is a copy of the account of the customer as it appears in the bank’s books. When a customer deposits money and cheques into his bank account or withdraws money, he records these transactions in the bank column of his cashbook immediately.

Correspondingly, the bank records them in the customer’s account maintained in its books. Then they are copied in a passbook and given to the customer. With the computerization of banking operations, bank statements (in lieu of passbook) are issued to the customers periodically.

Thus passbook is a record of the banking transactions of a customer with a bank. All entries made by a customer in his cashbook (bank column) must be entered by the bank in the passbook.

Hence, the balances as per bank column of the cashbook must agree with the balance as per passbook. Of course the balances will be equal and opposite in nature. For example, if the cash book shows a debit balance of Rs.5000, then the passbook must show a credit balance of Rs.5000 and vice versa. But in most cases, these two balances may disagree on account of various reasons.

Format of a Bank Passbook or Bank Statement:

Name of the bank__________

Address of the bank____________

Account No._________________

Customer Name:_______________

Address of the customer.___________

Causes for Disagreement:

The major cause for the disagreement is that certain items have been entered in one book only (i.e., cash book or pass book only). In other words certain debits or credits made in one book (say in cashbook) are omitted to be entered in the other book (say in passbook) and vice versa.

Such items may be listed as follows:

1. Cheques sent for collection or deposited into the bank but not yet collected. When a customer deposits cheques into bank, he makes entries (debit bank account) immediately in his cashbook.

But the bank will credit the customer account in the passbook only when the cheques are realized. In that case the balances will disagree and cashbook balance will be more than the passbook balance.

2. Cheques issued by the customer but not presented to the bank for payment. When a customer issues cheques to his suppliers/creditors, he will enter the transaction (credit bank account) immediately in his cashbook.

But the banker will debit customer account only when the suppliers/creditors present the cheques for payment. Due to this gap, the two balances will disagree and cashbook balance will be more than the passbook balance.

3. Bank charges and interest on overdraft are first debited in the passbook and recorded in the cashbook afterwards. This will cause for the disagreement and cashbook balance will be more than the passbook balance.

4. Interest on bank credit balance and interest on investment, dividends, etc., and bills collected by the bank on behalf of the customer are first credited in the passbook and recorded in the cashbook later on.

This makes the two balances to disagree and cashbook balance will be less than the passbook balance.

5. Items like direct payments made by the bank as per standing instructions of the customer and dishonor of a bill discounted with the bank, etc., are first debited in the passbook and recorded in the cashbook later on.

This will make the two balances to disagree and cashbook balance will be more than the passbook balance.

6. Commitment of errors such as errors of omission or commission or in casting, carry forward, balancing, etc either in the passbook or cashbook or in both will cause for the disagreement in these two balances.