Accounting system
Mr Kamal Prasad is the proprietor of M/s Krishan Enterprise, which is manufacturing the auto components. Since, the inception of the business Mr Kamal neither estimated its results nor the position of his business. One day he decided to find out the actual results of the business and the financial position.
He found that at the time of inception he started with ` 5,00,000 cash and gradually bought a small land for establishing a manufacturing unit, tools and equipments and other ernecessary resources were made available. He estimated a loss figure when he subtracted the amount of money spent from the revenue generated.
Further, he come to know that it is not an easy exercies to attain the financial results and knowing financial position. He get disappointed and the consulted a professional accountant. Mr Shyam Das to provide the solution of this problem. Mr Shyam asked him to provide necessary detalis and documents. After few days, Mr Shyam explained the situation to Mr Kamal as under:
(i) In accounting all the transactions of monetary nature are considered as per money measurement concept and as a result of that all nonmonetary transactions should be ignored.
(ii) Business is assumed to continue for an indefinite period as per going concern assumption and consequently, this becomes the basis of classification of current assets and non-current assets.
(iii) All assets of long-term nature have to be recorded on historical cost basis as per cost principle.
(iv) The indefinite life of an entity must be divided into intervals of definite time period at the end of which the results may be computed as per the accounting period concept.
(v) According to accrual and matching concepts; all transactions must be recorded on an accrual basis and the expenses incurred must be matched with the revenue generated within the same accounting period.
(vi) Accordingly there are many circumstances where personal judgements in the form of materiality, consistency and conservatism are required to be taken to arrive at the final results.
Mr Shyam explained that every business has a strong need of proper accounting system form the very beginning of the business and moreover, it is a technical exercise to find out the operational results and financial position of the business.
Thus, understanding of accounting concepts, conventions and assumptions become necessary, which are followed in the compilation of books of accounts of the business. The financial results and position will be come out only when due care and attention have been given while doing accounting functions.
0 Comments