Money Measurement Concept, Cost Concept & Dual Aspect Concept

 

Money Measurement Concept:

Does a business value everything it has in the accounts? Hopefully, you will have a greater understanding after reading this lecture.

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog for accounting students so that they can learn about accounting.

 You should first know that there is a group of rules of accounting. They are well known and referred to by many as accounting concepts. These concepts and rules are essential when preparing the final accounts of an entity. Even to some extent the accounting concepts also assist to make the final accounts relevant and trustworthy to its users. In all, there are ten main accounting concepts, of which we will look at the money measurement concept. The money measurement concept illustrates that all items should be expressed in monetary terms.

 In some cases, where items cannot be given a monetary value will not be included in the final accounts. This still applies even if the items are responsible for a business's performance.

For example, strong management, market share of industry, and good customer relations cannot be included in the trading profit and loss account or balance sheet because they cannot be given an objective value.

 Let’s give an example to illustrate the concept.

 Yoyo Ltd is a well-established children’s toy retailer. Recently the business has restructured and appointed new management, due to this, the business has performed significantly above expectations. Therefore, some in the business want to record the new management in monetary terms because of their noteworthy influence on the business performance. How should the new management be recorded in the accounts?

 When applying for the money measurement concept, the new management should not be recorded in monetary terms in the accounts of the business even if the performance was improved.

 This is because the concept states that items such as good management and a skilled workforce cannot be included in the accounts as it cannot be given an objective value in monetary terms, even if they benefit the business. So that was the definition of the money measurement concept.

 The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, the local currency monetary unit of measure.

Cost Concept:

At what cost do businesses record assets and liabilities in their accounts? Hopefully, you will know after reading this article.

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

 To begin with, there are a set of concepts or rules of accounting. They are referred to, by many, as accounting concepts. These concepts and rules are fundamental in preparing the final accounts of an entity. And it can be said that to an extent the accounting concepts help to make the final accounts relevant and reliable to its users.

Overall, there are ten accounting concepts, of which the one that we will look at in this article is the cost concept.

 The cost concept expresses that assets and liabilities are initially recorded in the final accounts at the “at cost price”. In other terms, it is the actual amount paid when the asset or liability was originally acquired by a business. This approach of recording the assets and liabilities is regarded as the most objective way of valuing these items in the accounts. This is because those who are valuing or recording the assets or liabilities in the accounts are not dependent on trying to estimate what the value of the asset or liability might be if it were to be sold.

 Let’s give an example to illustrate the concept.

James has been a farmer for more than 10 years. When he started farming, he bought a custom-made tractor for Rs.40,000 which can plough and plant more crops in less time than any other tractors available. James has been thinking of selling the custom-made tractor to fund an up-to-date one. He has done some research and found that his old custom-made tractor has an expected market value today of Rs.70,000. James is now thinking of recording the tractor cost price in the balance sheet at Rs.70,000 because the value of assets will be higher. What should he do?

When following the cost concept James should not record the tractor at Rs.70,000 because the concept expresses that assets and liabilities are initially recorded in the final accounts at the “at cost price”. Therefore, James should keep the cost value of the tractor at Rs.40,000 in the balance sheet and not Rs.70,000 because the Rs.40,000 is the actual amount paid when the tractor was originally purchased. Additionally, if James was to record the tractor cost at Rs.70,000 this would overstate the assets and balance sheet values and this would not follow the prudence concept.

So that is the definition of the cost concept.

The cost principle is part of the generally accepted accounting principles in accounting. Assets should always be recorded at their cost when the asset was new, and also for the life of the asset.

Dual Aspect Concept:

How many times in the accounts should a business transaction be recorded? Hopefully, the dual aspect concept will give you a better understanding!

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

Today I’m going to discuss that, what is the dual aspect concept?

To start with, there are a few concepts or rules of accounting. They are well known and referred to by many as accounting concepts. These concepts and rules are fundamental in preparing the final accounts of an entity. Also, to an extent, the concepts assist in making the final accounts relevant and trustworthy to its users.

The dual aspect concept states that each business transaction is recorded by means of two opposing accounting entries. In other words, there are two aspects of accounting for a transaction of a business. One can be represented by the assets of the business and the other by the claims against them. It is very important to note that the two opposing entries or aspects are of equal value i.e., the same amount.

 The dual aspect concept is compared as an alternative form of the accounting equation of Assets = Capital + Liabilities. Whereby if one side of the equation is affected by an amount then the opposite is also affected by the same amount. The double-entry of the bookkeeping system is a great example of the dual aspect concept in practice.

It shows that for every transaction, two things are affected in other terms there will be a debit and credit entry.

Let’s now have a look at an example to demonstrate the concept.

 Carl has recently started his own cleaning business. He decided to buy a new van for the business to transport his cleaning equipment and to get from customer to customer. Carl bought the van for Rs.40,000 and paid by cheque. Will Carl need to apply the dual aspect concept and how will this record in the accounts?

Carl will apply the dual aspect concept because the purchase of the van can be identified as a business transaction.

And the dual aspect concept states that each business transaction is recorded by means of two opposing accounting entries i.e., a debit and credit entry. Therefore, the purchase of the van of Rs.40,000 will cause an increase or debit entry of Rs.40,000 in the value of motor vehicles in the fixed assets and the opposing entry will cause there to be a decrease or credit entry of Rs.40,000 in the value of bank in the current assets.

So that is the definition of the dual aspect concept

Every transaction of a firm is recorded in two different accounts. Every transaction has a dual impact on the accounting records. Accounting systems are set up to record both of these aspects of a transaction; this is why accounting is called a double-entry system.

Separate Entity Concept & Going Concern Concept

 

Separate Entity or Business Entity Concept:

Do you know what the separate entity/business entity concept means? Hopefully, you will have a better understanding after reading this article.

 I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

Today’s we are going to discuss what is the business entity or separate entity concept.

First of all, there are a number of concepts or rules of accounting. They are well known and referred to by many as accounting concepts. These concepts and rules are fundamental in preparing the final accounts of an entity. And even to a certain extent, the accounting concepts help to make the final accounts relevant and reliable to its users.

The business entity concept expresses from an accounting perspective that, the business is regarded as being separate from the owner or owners. Or in other words, the business has a totally separate identity from its owners. The concept is applied to the accounts of a business. More specifically, the concept can refer to the process of recording and reporting the final accounts.

Additionally, the business entity concept also distinguishes that the finals accounts of a business should only include the activities and transactions of the business. It also states that the accounts do not include the personal activities, transactions, or even the personal assets and liabilities of individuals who own or run the business. However, there is one exception to this rule. The accounting records of a business will only be affected by the owner or owners when they introduce new capital to the business or take drawings out of the business.

Let’s give an example to illustrate the concept.

Mick the owner of a grocery shop took some flour and milk from the shop stock for his wife to make some cakes. Initially, we have to identify who is the owner or owners and who is the business. In this case, Mick is the owner of the shop and the grocery shop is the business. Now we have to identify what has happened and, if we need to, how to treat it in the accounts. So, Mick has taken some stock from the business for personal use. Therefore, because the owner has withdrawn stock from the business for personal use, in the business accounts, the stock will decrease and drawings of the owner or Mick will increase. Therefore, by applying the business entity concept, the business and owner have been treated as separate entities. So that is the explanation of the business entity concept.

The Separate entity concept states that we should always separately record the transactions of a business and its owners. An owner cannot extend funds to a business without recording it as either a loan or a stock purchase. For example in the case of a sole proprietorship or partnership business, though the sole proprietor or partners are not considered as separate in the eyes of law, for accounting purposes they will be considered as separate entities.

Going Concern Concept:

Do you know what the going concern concept means? Hopefully you will have a better understanding after reading this article.

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

Today’s we are going to discuss what is the going concern concept.

You should first know that there are several concepts or rules of accounting. They are well known to many as the accounting concepts. These concepts and rules are essential when preparing the final accounts of an entity. The accounting concepts also assist to make the final accounts relevant and reliable to its users.

The going concern concept illustrates that, in general, it should be assumed that the business of the prepared final accounts is in a healthy and stable condition. The concept also presumes that the business will continue to trade and be active in the foreseeable future. In other words, the concept presumes that the accounts are made because there is a high probability that the business is still going to trade in the next few years or business periods. It is also assumed that the business has no intention to significantly reduce the size of the business itself or to liquidate in the short term. In some cases, however, if a business was not a going concern, this would mean that the assets of the business maybe worth a lot less. In more depth, the market value of the assets maybe worth considerably lower compared to their value in the accounts and financial statements. Due to this, the business will need to make a statement in the accounts stating the situation.

Let’s give an example to demonstrate the concept.

Bill plc is about to released its annual final accounts. Although Bill plc has made a profit for the trading period, the balance sheet of the business has debts that are significantly higher compared to the assets and other possessions it has. What statement should the business make in the accounts about the going concern?

Bill plc should follow and apply the going concern concept. Due to the current situation Bill plc will need to make a statement in the final accounts stating that the business may not be a going concern. This is because the business may find it extremely difficult to pay the debts in the short term. Therefore, it could be said that the business could find it hard to trade in the foreseeable future, especially if it had to pay back short-term debts. This is mainly due to the business debts being greater than the business assets.

 So that is the definition of the going concern concept.

A Going Concern is a business that is assumed will meet is financial obligations when they fall due. It functions without the threat of liquidation for the forseeable future, which is usually regarded as atleast the next 12 months for the specified accounting period:

Watch the video for detailed discussion:

Cash Basis of Accounting Vs Accrual Basis of Accounting

 

Cash Basis of Accounting vs. Accrual Basis of Accounting

We are going to cover another topic that's often a reason for the confusion: Cash and Accrual accounting.

Two very different accounting methods.

We are going to take a look at both and see how each one could affect a business in different ways. We will also see why income and cash can be two very different things.

The difference between these two concepts is in the timing of when revenue and expenses are recorded in your accounts. So just to be clear, over time both systems will get the same results, but at a certain point in time, there may be differences. And that's something that's important to understand, especially when it comes to the analysis of financial statements.

 Let's start with the easier part, cash accounting.

Cash-based accounting is a very intuitive system. It recognizes transactions only when cash is actually exchanged. So revenue is reported on the income statement only when cash is received, and expenses are only recorded when cash leaves your account. So under this method, it doesn't matter in which month you did the work for your client or you sent an invoice to your customer. The only thing that matters is when they actually paid you. Same thing for expenses. Even when you purchase all kinds of stuff on credit for your business, it won't show in your income statement until you pay for it. So this can be your accounting method of choice because, well one, it's intuitive and it's simple to understand. Two is that, as a business owner, cash is the most important topic to be on top of and cash accounting helps you do that. Number three, you might even be able to do your own bookkeeping in Excel. Meaning, it's much cheaper than having to pay for specialized accounting software or for someone to do the bookkeeping for you. Number four, it's an accepted accounting method in most countries, also for tax purposes. The rules vary by country, but generally, cash accounting can be applied if the business stays below a certain revenue threshold or it doesn't maintain a lot of inventory. So it's a great option for small simple and mainly cash-based businesses.

 An accrual accounting system on the other hand is based on when the transaction happens rather than when cash changes hands. In other words, revenue is reported when it's earned and expenses are recorded when they are incurred.

So for example, if your company sells goods in January but isn't paid until February, then the revenue isn't recorded until February under the cash accounting method. But it would be reported in January under the accrual accounting method. Let's better understand the difference between cash and accrual accounting, especially because it seems cash accounting is much easier.

 Why do we even need accrual accounting?

Let's try to answer that. Remember Claudio and his Italian beach business?

Like any other day, Claudio today goes to his trusted manufacturer of tourist souvenirs to buy his supply of plates. This time though, the manufacturer tells Claudio that he wants to optimize his processes and he was to avoid the daily cash transactions. He would like to bring out the cash register only just once per week, and because Claudio has been a great customer for him, he'd be willing to give him credit. So they agree to settle the purchases for the week always on Fridays. For Claudio, this is a great deal, because he doesn't have to pay right away. He's working with somebody else's money. This way we can even expand his souvenir business and buy another item to sell from another manufacturer with his initial 100 euros. In business, we call this the leverage effect. So Claudio decides to go ahead with this idea and invests is 100 euros in another item, and buys 50 hats in cash. He pays two euros for each hat and plans to sell them for 10 euros to the tourists. Now, at the beach, he has 100 plates and 50 hats to sell.

His friend, let's call him Mario, comes along and sees the new hats Claudio is selling and he really likes them. He tells Claudio that he wants to buy 30 hats for this event he's going to in the evening, but he can only pay for them tomorrow after he sold them at the event. Claudio agrees and hands over the 30 hats to Mario. He stays at the beach and sells the rest of his souvenirs and then goes home. He counts the money in his pocket as usual, and it turns out to be 700 euros. He deducts an initial investment of 100 euros that he left the house with, and this gets him to a profit of 600 euros. Is this correct?

The answer is, it depends, It depends if Claudio's applying the cash accounting method or accrual accounting.

 As we've learned, the difference between the two lies in the timing of when sales and purchases are recorded in your accounts.

So let's apply cash accounting to create Claudio's income statement. His revenue consists of the 20 hats and 100 plates he sold at the beach. The 30 hats for Mario are not accounted for because he didn't get paid for it yet. Likewise, for his expenses, only the 100 euros for the hats are recorded, because of the plates, he didn't pay for. Basically, this gives us exactly the profit Claudio is calculating by using his usual method of counting the cash in his pocket. And really, this is what it is. Only transactions that have an impact on cash are considered. And we can already see the problem with that. It doesn't provide a complete picture of what happened during the day. In reality, he sold all of his inventory, but in the income statement, we don't see the full revenue. Another problem is that we show revenue for the 100 plates, but no corresponding cost of the goods sold. In other words, the costs don't follow the revenue, which can present quite a misleading picture of the company's profitability.

 Now let's take a look at accrual accounting. With this method revenue is considered when earned, but what does that mean exactly?

This can be quite a complicated topic. But in a nutshell, revenue is earned when the products were delivered to the customer or services were provided, and it's reasonable to expect that cash will be received from the customer. The recognition of expenses follows the matching principle, which means that they are recognized in the period in which the related revenue is recognized.

 Let's see how that looks like for Claudio. His revenue will include all products he sold during the day, meaning, also the revenue for the 30 hats he sold to Mario and didn't receive cash for.

 Why? Because he handed over the hats, he fulfilled his part of the deal, and Claudio doesn't have any reason to expect Mario is not going to pay him. Therefore, Claudio's revenue is 300 euros higher than under the cash accounting.

 What about his costs?

By applying the matching principle, the expenses should be recognized in the same period as the revenues they helped to generate. Therefore, we need to report the cost of goods sold for the entire revenue, which results in COGS of 200. This way, the income statement reports revenue of 1,000 and a net profit of 800 for the day. Quite different than what we would report under cash accounting. In addition, in the balance sheet, we would have to report accounts receivable, the 300 Euros Mario still owes Claudio, and accounts payable. The 100 Euros Claudio owes the manufacturer of the plates. Both methods have their advantages and disadvantages.

 The cash accounting method provides an accurate picture of how much cash a business has. It's simple to apply, and since the transactions aren't recorded until the cash is received or paid, the income of the business is not taxed until it's in the bank. On the other hand, it doesn't provide a full picture, and because it doesn't report receivables or payables, it doesn't show outstanding invoices that haven't been paid yet.

The accrual method on the other hand gives a more accurate picture of the business. If the company has to report under GAAP or IFRS, then that's the accepted method. But it means more complex processes in accounting. And its purpose is not to track cash flow. So the key point here is that reported income and cash can be two very different things. Therefore, under accrual accounting, don't just look at the income statement or the balance sheet. Focus on the cash flow statement as well to see if the business is able to generate cash, which is the lifeblood of any business.

 I hope this will helpful for you to get familiar with these two accounting methods

We will look at both methods in detail in the following video lecture:

 

Types and Forms of Business

 

Types of Business:

There are three main types of business:

(1) Service Business:

A service type of business provides intangible products. Service type firms offers professional expertise, skills, advice and other similar products.

(2) Trading/Merchandising Business:

This type of business buys the products at wholesales prices and sells the same as retail prices. They are known as "buy and sales" businesses. They make profit by selling the products at prices higher than their purchasing costs.

(3) Manufacturing Business:

Unlike a merchandising business, a mnaufacturing business buys products with the intention of using them as raw materials in making a new product.

Forms of Business:

These are the basic forms of business organizations:

(1) Single or Sole Proprietorship:

A sole proprietorship is a business owned by only one person. It is easy to setup and is the least costly among all forms of ownership.

(2) Partnership:

A partnership business owned by two or more persons who contributes resources into the entity and divide the profits of the business among themselves.

(3) Joint Stock Company:

A joint stock company is a business organization that has a separate legal personality form its ownership. Ownership is a stock corporation is represented by shares of stock.

Watch the following video for detail understanding:

 

Branches of Accounting

 

In order to meet the ever-increasing demands made on accounting by different interested parties (such as owners, management, creditors, taxation authorities, etc.) the various branches of accounting have come into existence.

Today we are going to study branches of accounting. Different branches of accounting came into existence keeping in view various types of accounting information needed by a different class of people viz owners, shareholders, management, suppliers, creditors and various government agencies etc., There are three main branches of accounting which include “Financial accounting, Cost accounting, and Management accounting”.

 Financial Accounting

 ·         Financial Accounting is based on a systematic method of recording transactions of any business according to the accounting principles.

·         It is the original form of the accounting process, the main purpose of financial accounting is to calculate the profit or loss of a business during a period and to provide an accurate picture of the financial position of the business as on a particular date.

·        The Trial balances, Profit and Loss accounts and Balance Sheets of a company are based on an application of financial accounting these are used by creditors, banks, and financial institutions to assess the financial status of the company further taxation authorities are able to calculate the tax based on these records only.

 Cost Accounting

 ·         Cost accounting deals with evaluating the cost of a product or service offered.

·         It calculates the cost by considering all factors that contribute to the production of the output both manufacturing and administrative factors.

·         The objective of cost accounting is to help the management in fixing the prices and controlling the cost of production it also pinpoints any wastages leakage and defects during manufacturing and marketing processes.

 Management Accounting

 ·         This branch of accounting provides information to management, for better administration of the business, it helps in making important decisions and controlling of various activities of the business.

·         The management is able to take decisions efficiently with the help of various management information systems such as budgets projected cash flow, and fund flow statements variants analysis reports cost-volume-profit analysis reports break-even point calculation etc.

·         Management accounting and Financial Accounting are not to be confused with each other both are different.

·         Management accounting serves the needs of the management in decision makings regarding minimization of the cost factor and enhancing of profit-making.

·         Financial accounting serves the needs of shareholders creditors and financial institutions for ascertaining the financial position of the company.

·         Management accounting records are kept secret for the use of management only they are not made public.

Besides the above-mentioned three branches of accounting there are many other branches. 

Auditing it is a branch of accounting where an external certified public accountant known as an auditor inspects and certifies the accounts of a business for their accuracy and consistency.

Tax accounting its functions include preparation and filing of various tax returns and dealing with their legal implications, tax accountants aid in minimizing tax payments and also help financial accountants in preparing financials.

Fund accounting deals with keeping records for funds of nonprofit business entities, a separate fund accounts are maintained for separate works like welfare schemes of different nature to ensure proper utilization of funds.

 Government accounting is done for central government and state government budget allocations and utilizations.

 Forensic accounting is also known as legal accounting enables calculating damages or settling disputes in legal matters.

 Fiduciary accounting is the accounting and evaluation of a third party's business and property maintained under the guardianship of another person.

For detailed discussion watch the following video:

It should be remembered that in these lectures, we are concerned only with financial accounting. Financial accounting is the oldest and the other branches have developed from it.

Book-Keeping Versus Accounting

 

What is bookkeeping?

 Bookkeeping usually involves only the recording of economic events of a business the task of bookkeeping is to record the transactions primarily in the book of accounts and to classify the transactions recorded.

 What is the difference between bookkeeping and accounting?

 It is assumed that book keeping and accounting are the same and that there is no difference between them truly but there is a huge difference between them because of the accounting work starts where the bookkeeping work ends.

 The difference between bookkeeping and accounting are as follows:

 1. Bookkeeping is the recording step of accounting where accounting is a practical system

 2. The task of bookkeeping is to record the transactions primarily in the book of accounts and to classify the transactions recorded where the main task of accounting is to prepare an accounting statement from the transactions recorded in the book of accounts and to analyze and interpret the recorded accounts and provide the information obtained from it to the concerned user or party.

 3. The bookkeeping process involves the application of 2 steps of the accounting cycle, journalizing and ledger posting where the work of accounting begins where the bookkeeping work ends.

 4. Bookkeeping is carried out by junior staff where accounting is done by senior staff with skill of analysis and interpretation.

 5. Bookkeeping is the basic level of accounting where accounting is the language of business.

 6. Output of bookkeeping is an input for accounting where the output of accounting permits informed judgments and decisions by the users of accounting information.

 Many efforts go into gathering and processing information about a concern before the facts end up in an accounting report. Much of the work required is clerical in nature and can be performed by office workers, machines, and computers. The function of Book-Keeping is to properly record the financial transactions in the books of accounts.

Watch the following video for more detail with an example:

Thus we can conclude that Book-Keepers perform the routine, repetitive tasks of collecting and processsing financial information. Accountants are responsible for designing the systems within which Book-Keepers work.

What is Accounting?

 

You probable have some idea already of what the term accounting means. It is frequently used in every day conversation to mean "answering for responsibility." Managers of business concerns are answerable to owners, creditors, labour unions and Government agencies etc. Managers of government units are answerable to chief exeutives, boards, taxpayers and others, In fact, accounting was developed by people, who are seeking better ways to gether and report useful information about organisations.

It is tempting to accpet the narrow definition of accountingthat apperars in many textbooks. According to this definition, Accounting is simply the process of identifying, measuring, reporting and communicating information to permit informed judgements and decisions by users of the information.

It probably makes sense to begin by being clear about what we mean by the term. At a very broad level, accounting can be defined as a prcoess of collecting, summarizing, anlaysing and communicating information to enable users of that information to make informed decisions.

Now watch the following video for detailed discussion:

TRANSACTIONS ARE PROCESSED IN THREE DIFFERENT STAGES:

(1) Recording:

In first stage the transactions are recorded chronologically in the books of accounts.

(2) Classifying:

In the second stage the transactions of the same or similar nature are classified and recorded separately.

(3) Summarising:

In the third stage all necessary data and information are summarised on the basis of classified record of transactions and communicated to the management and other interested persons.

(4) Interpretation:

In order to ascertain the true position of a concern all accounting data and information relating to it are analysed and interpreted.

All above functions are performed on the basis of certain well-defined and well-coordinated rules and principles. An accountant must be familiar with all these rules and principles. In accounting we will study all these rules and principles.

Need, Importance and Objective of Accounting

We live in a world where people need things from the day they are born to the day that they die. Some of these needs are physical needs. a need for goods of various sorts, food, clothing, shelter, and so on. Some of them are emotional wants, a need for education, entertainment or recreation. In satisfying such needs businessman perform useful services to their fellow humans. In return they expect to earn a reasonable reward for their efforts in the form of profits.

But the necessity of economy is undeniable, where goods or services are not available free of cost and their supply is limited.

A proper and fair planning of expenditures helps to ensure proper use of our income. Of course, it is true that the quantity of goods or money cannot be increased by making a proper planning. But certainly we can ensure most economic use of goods or money at our disposal.

Most of us do maintain some kind of a written record of our income and expenditure. The idea behind maintaining such record is to know the correct position regarding income and expenditure. The need for keeping a recordof income and expenditure in aclear and systematic manner has given rise to the subject of "book-keeping".

Watch the following Video lecture for better understanding.

It is all the more necessary for an organization or a concern to keep proper accounts. But it is only possible, if proper books of accounts are maintained in the business concern. So, the importance of book-keeping to business in the same as that of fresh air to the a man to exist. Without book-keeping records a business would meat death, though not instantly, but in a shirt time.