Realisation Principles in Accounting

Recognition proportionately over the performance of the contract According to this basis, revenue is recognised even in those cases where the work has not been completed in all respects. This is particularly true in case of long-term contracts which may take few years to complete. In case of such contracts, revenue is recognised on the basis of the work which has becn completed and approved by the contractee (technically known as work certified). This is done on the basis of certain accepted norms which are given below:

(i) When less than one-fourth ofthe contract is completed, no profit should be taken to the Profit and Loss Account,

(ii) When one-fourth or more but less than one-half of the contract is completed. one-third of the profit made to date should be taken to the Profit and Loss Account. This may, further, be reduced on the basis of cash received by the contractor from the coniractee. This is technically known as reducing profit on cash basis.

(iii) If half or more of the contract has been completed, two-third of the profit as reduced on cash basis maybe taken 10 the Profit and Loss account.

మంగళ హారతులు

Realisation Principles – when the production is completed

Recognition when the production is completed. It is generally recognised that income accrues only at the time of sale and gain should not be anticipated by reflecting assets at their current market prices. However, in case of certain industries where products have an immediate marketability at more or less fixed prices, the revenue may be recognised as soon as the production is completed, The amount of income earned is the excess of the estimated sale prices of the products completed over the costs oftheir production or extraction. However, any expenditure incurred in the disposal of these products should be charged to such income and should be disclosed fully in the financial statements. This is particularly true in case of precious metals such as gold and silver and extractive industries (e.g. oil) and agriculture. In case of these industries, the inventories are staled at sales prices.

శ్రీ త్రిపురసుందరీ మానసపూజా స్తోత్రం

Realisation Concept – Recognition at the time when sales value is collected

Recognition at the time when sales value is collected. Many concerns use the cash basis for reeognising revenue rather than the accrual basis. In case of accrual basis, as explained above, revenue is taken to be realised when the payment for goods or services becomes due to the business. For example, in case of trading business, revenue will be taken to have been realised when the goods have been sold though the payment might be received later on. This is because as the goods have been sold away, the business becomes entitled to receive payment for thetn. In case, cash basis is followed, the revenue will be taken to have been realised only when payment for goods or services has been actually received. This basis for recognising revenue is generally followed in case of-sale of goods on instalment system (i.e., a system where sales value is to be collected in agreed number of instalments). The basis is not very satisfactory because it fails to match cost with the revenue in those case cases where there is a considerable time Jag between sale of goods or rendering of services and receiving payment for them.

మానవ నేస్తాలు సూక్తులు

Accoutancy Class xi – Classification Of Receipts

CLASSIFICATION OF RECEIPTS

Receipts can be classified into two categories: Capital Receipts, and Revenue Receipts

(I) Capital receipts. Capital Receipts consist ofadditioiial payments made to the business either by shareholders of the company or by the proprietors ofthe business or receipts from sale of fixed assets ofa business. For example, the amount raised by the company by way of share capital isa capital receipt. Similarly, ifa flirn sells its machinery for a sum ofRs 10,000, the receipt is a capital receipt.

It should be noted that a capital receipt is different from a capital profit. Receipt denotes receiving payment in cash. Moreover, the whole of it may or may not be a capital profit. There maybe a capital loss too. For example, ifa plant costing Rs 10,000 is sold for Rs 12,000, there is a capital receipt ofRs 12,000, but there will be a capital profit of only Rs 2,000. Similarly, if the same plant had been sold only for Rs 8,000, there is a capital receipt ofRs 8,000 but there is a capital loss ofRs 2,000.

(ii) Revenue receipts. Any receipt which is not a capital receipt is a revenue receipt. In business most ofthe receipts are revenue receipts. However, a revenue receipt is also different from-n revenue profit or revenue income. Receipt denotes receiving of payment in cash. Moreover, the entire amount ofreceiptmay or may not be a revenue income. For example, if the goods costing Rs 20,000 are sold for Rs 25,000, there is a revenue receipt ofRs 25,000, hut revenue profit or income is only ofRs 5,000.

The distinction between capital and revenue is important both for income determination and taxation purposes. Various tçsts have been laid down from time to time for distinguishing between these two. Some ofthese are based on, economic considerations, some on accounting principles and some have been pronounced by the courts. However, difficulties still arise in making a clear cut distinction between these two. There have been cases which fall on the border line. In many cases, the policies ofthose incharge ofthe business will decide whether certain expenditure or income should be classified revenue or capital. However, the rules given in the preceding pages and the illustrations given in the following pages will to a great extent help a student in making a fairly reasonable distinction between capital and revenue.

define consignment account

The increasing size of the market is making more and more difficult forthe manufacturer or wholesalerto come in direct contact with customers living at far off distances. This has made imperative forhim to enter into an agreementwith areliable local trader who can sell goods on his behalf and athis (Principal) risk for an agreed amount of commission. Such a despatch of goods from one person to another person at a different place for the purpose of warehousing and ultimate sale is termed as consignment. Goods so sent are termed as ‘Goods sent on Consignment’,the sender is called”Consignor” and the recipient ‘Consignee.’

For example if A of Bombay sends 100 radio sets toBof Delhito sell on his (A’s) behalf and at his (A’s) risk, the transaction between A and B is a consignment transaction. A isthe consignor and B is the consignee.

It should be noted that in the above example, A continues to be the owner of the goods. B is simply an agent ofA. He has not purchased the goods. He has agreed to sell the goods ofA to the best of his ability and capacity. He will, therefore, be responsible to A for payment only when he has sold away the goods. Of course, he will be reimbursed by A for any expenses incurred by him in obtaining and selling the goods besides remuneration for selling the goods as per the agreed terms.

 

Distinction between Profit and Loss Account and Balance Sheet

The points of distinction between Profit and Loss Accoont and Balance Sheet are:

(i) A profit and loss account shows the profit or loss made by the business during a particular period. While a balance sheet shows the financial position of the business
on a particular date.

(ii) A profit and loss account incorporates those items which are of a revenue nature while a balance sheet incorporates those items which are of a capital nature.

(iii) Of course, both profit and loss account and the balance sheet are prepared from the Trial Balance. However, the accounts transferred to the profit and loss account are  finally closed while the accounts transferred to the balance sheet represent those accounts whose balances are to be carried forward to the next year.

Depreciation Accounting – Amortization

Amortization. The process of writing off intangible assets is termed as amortization. Some intangible assets like patents, copyrights, leaseholds have a limited useful life. Hence, their cost must be written off over such period.

The American Institute of Certified Public Accountants (AICPA) has put the difference between depreciation, depletion, and amortization in the following words.

“Depreciation can be distinguished from other terms with specialised meanings used by accountants to describe assets cost allocation procedures. Depreciation is concerned with charging the cost of man made fixed assets to operations (and not with determination of asset value for the balance sheet). Depletion refers to cost allocations for natural resources such as oil and mineral deposits. Amortization relates to cost allocation for intangible assets such as patent and leaseholds. Thc use of the term depreciation should alsobe avoided in connection with the valuation prOcedures for securities and investments”.

 

CBSE xi Accountancy – Profit and Loss Account Preparation

The Trading Account simply tells about the gross profit or loss made by a businessman on purchasing and selling of goods. Jt does not take into account the other operating expenses incurred by him during the course of running the business. For example, he has to maintain   an office for getting orders and executing them, taking policy decision and implementing them. All such expenses are charged to the Profit and Loss Account. Besides this, a businessman may have other sources of income. For example, he may receive rent from some of his business properties. He may have invested surplus funds of the business in some securities. He might be getting interest or dividends from such investments. In order to ascertain the true profit or loss which the business has made during a particular period, it is necessary that all such expenses and incomes should be considered.

Important points regarding Profit and Loss Account 

Gross Profit or Gross Loss. The figure of gross profit or gross loss is brought down from the Tading Account. Of course, there will be only one figure, i.e., either of gross profit or gross loss.

Salaries. Salaries payable to the employees for the services rendered by them in running the business being of indirect nature are charged to the Profit and Loss Account. In case of a partnership firm, salaries may be allowed to the partners. Such salaries will also be charged to the Profit and Loss Account.

Interest: Interest on loans whether short-term or long-term is an expense of an indirect nature and, therefore, is charged to the Profit and Loss Account. However, interest on loans advanced by a firm to third-parties is an item of income and, therefore, will be credited to the Profit and Loss Account.

Commission:  Commission may be both an item of income as well as an item of expense. Commission on business hroughtby agents is an item of expense while commission earned by the business for giving business to others is an item of income, Commission to agents is, therefore, debited to the Profit and Loss Account while commission received is credited to the Profit and Loss Account

Bad debts:  Bad Debts denotes, the amount lost from debtors to whom the goods were sold on credit. It is a loss and therefore, should be debited to the Profit and Loss Account

Importance of the Trading Account

Importance of the Trading Account

Trading Account provides the following information to a businessman regarding his business:

I. Gross Profit disclosed by the Trailing Account tells him the upper limit within which he should keep the operating expenses of the business besides saving something for himself. The cost of purchasing and the price at which he can sell the goods are governed largely by market factors over which he has no control. He can control only his operating expenses. For example, if the cost of purchasing an article is Rs 10 and it can be sold ii’ the market at Rs 10 per unit, the gross margin available on each article is Ps 5. In case a businessman proposes to sell 1,000 units of that article in a year, his gross profit or gross margin will be Rs 5,000. His other expenses should therefore be less than Rs 5,000 so that he can also save something for himself.

2. He can calculate his Gross Profit Ratio1 and compare his performance year after year. A fall in the Gross Profit Ratio means increase in the cost of purchasing the goods or decrease in the selling price of the goods or both. In order to maintain at least same figure of gross profit in absolute terms, he will have to push up the sales or make all out efforts to obtain goods at cheaper prices. Thus, he can prevent at least fall in the figure of his gross profit if can not bring any increase in it;

3. Comparison of stock figures of one period from another will help him in preventing unnecessary lock-up of funds in inventories.

4. In case of new products, the businessman can easily fix up the selling price of the products by adding to the cost of purchases, the percentage gross profit that he would like to maintain. For example, if the trader has been so far maintaining a mte of gross profit of 20% on sales and he introduces a new product in the market having a cost of Rs 100, he should lix the selling price at Its 125 in order to maintain the same nile of gross profit (i.e., 20% on sales).

Inventory cost

Inventory cost The term Inventory includes (I) Stock of raw materials, (ii) Stock of work-in-progress, and (iii) Stock of finished Goods. The computation of the cost of inventory is also a tedious process. The vaftiation of tbe stock of raw materials will depend upon the method of pricing materials issues followed by the business. Materials may be issued to production according to First In First Out ([FIFO) Method, Last In First Out (LIFO) Method, Weighted Average Price Method, etc. In each of these cases, the value of the inventory of raw materials may widuly differ. This will be clear with the help of the following example.

A business buys raw materials in two different lots. In the first lot 1,000 units are purchased @ Rs 10 per unit. In the second lot, 2,000 units are purchased @ Rs 12 per unit. In case the stock of raw materials at the cod of the accounting period is of 1,000 units, the value of the inventory according to each of the methods stated above will be as follows:

FIFO method:

1,000 Units @ Ps 12 per unit = Rs 12,000

(Since materials first purchased will be taken to have been issued to production first of all, the inventory of raw material will, therefore, consist of latest purchases).

LIFO method:

l,000UuiLs@RslOperunit=Rs 10,000

(Since materials purchased in the last will be taken to have been issued to production first of all, the inventory will, therefore, consist of the earliest purchases).

Weighted Average Price Method:

1,000 Units @ Ps 11.333 = Rs 11,333

(The total units purchased are 3,000 for a total cost of Es 34,000. This gives a

weighted average priceRs 11.333 per unit).

Inventory Systems

INVENTORY SYSTEMS

Records pertaining to quantity and value of inventory-in-hand can be maintained according

to any of the following two systems:

(I) Periodic Inventory system.

(ii) Perpetual Inventory system.

Periodic Inventory System

In case of this system the quantity and value of inventory is found out only at the end of the accounting period after having a physical verification of the units in hand. The system does not provide the infomiation regarding the quantity and value of materials in hand on a continuous basis. The cost of materials used is obtained by adding the total value of inventory purchased during the period to the value of inventory in hand iii the beginning of the period and subtracting the value of inventory at the end of the period. For example, if the inventory in the beginning was 1,000 units of Rs 10,000, purchases during the period were of 5,(XX) units of Ps 50,000 and the closing inventory 1,500 units of Rs 15,000, the cost of materials used will be taken as Its 45,000 (i.e., Rs 10,000 + Rs 50,000— P.s 15,000). It is, thus, assumed that materials not in stock have been used. No accounting is done for shrinkage, losses, theft and wastage.

Perpetual Inventory System

It is also known an Automatic Inventory System.

According to the Chartered Institute of Management Accountants London, it is “a system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balance.” The definition given by Wheldon is more exhaustive and explanatory. According to him, it is “a method of recording inventory balances after every receipt and issue, to facilitate regular checking and to obviate closing down for stocktaking”.’ In case of this system the stores ledger gives balance of raw materials, work-in-progress ledger gives the balance of work-in-progress and finished goods ledger gives the balance of finished goods in hand on a continuing basis. The basic objective of this system is to make available detailsabout the quantity and value of stock of each item at all times. The system, thus, provides a rigid control over stock of materials as physical stock can regularly be verified with the stock records kept in the stores and the cost office.