LET US SUM UP

 6.5 LET US SUM UP

Summary is prepared at the end of an accounting period in the form of Profit and LOSS Account and Balance Sheet to ascertain the profit or loss and the financial position of the business. These are called final accounts. There are seven pmunting concepts I which are to be observed while preparing the final accounts. The going concern concept implies that the firm is a continuing unit. Hence expenditure on long term assets could be spread over a number of years. According to the Matching Concept, appropriate costs have to be matched against the appropriate revenues for the accounting period. The concept of conservatism implies that while calculating the profit of an accounting period, all possible losses should be taken into account while only those incomes should be included which have actually arisen and not just expected. According to consistency concept the accounting methods followed from period to period should be the same so as to ensure meaningful comparisons. The full disclosure and the materiality concepts signify that the financial statements should disclose all material infofmation so that the users can draw rational conclusions about the enterprise.

There are two bases of accounting viz., cash basis and accrual basis. The accrual basis is considered more logical because it takes into account a11 expenses incurred (whether paid or not) and all incomes earned (whether received or not) during tlme accounting period and thus ensures correct ascertainment of profit or loss.

It is also important to distinguish between capital and revenue otherwise the ascertainment of profit or loss and the financial position of the business will be incorrect. There are certain rules which guide us to determine whether a particular expenditure or receipt is of a capital nature or of a revenue nature.

6.6 KEY WORDS 

Accrual Accounting: Accounting based on accrual system which takes into account all expenses incurred (whether paid or not) and all inc~mes earned (whether received or not) during an accounting period.

Accounting Year: A period of twelve months at the end of which the financial results are generally ascertained. 

Balance Sheet: A statement prepared for ascertaining the financial position of the .business as at the end of the accounting period. 

Capital Expenditure: An expenditure which results in the acquisition of a fixed asset, or addition to a fixed asset, or an improvement in the earning capacity of the business.

Capital Receipt: Receipt in the form of additions to capital, liabilities or sale prqceeds of a bed asset. 

Deferred Revenue Expenditure: A revenue expenditure which involves a heavy I amount and the benefit of which is likely to spread over two-three years. 

Final Accounts: Financial statements prepared at the end of the accounting period for ascertaining the profit or loss and the financial position of the business. They include 1 Profit and Loss Account and the Balance Sheet. 

Revenue Expenditure: An expenditure the benefit of which is limited to one year. 

Revenue Receipt: Receipts on account of goods sold or services provided.

6.8 ANSWERS TO CHECK YOUR PROGRESS

A 5 i) costs ii) sold iii) prudence iv) utility v) material vi) cash B 1 i) profit or loss ii) Profit and Loss Account iii) capital iv) deferred revenue v) capital 2 i) False ii) True iii) False iv)Wse v) True vi) True vii) False viii) True

6.9 TERMINAL QUESTIONS/EXERCPSES