Financial Accounting explaintion

  Shares:     The  share capital of a company is divided into small units called shares.    Shares are offered to the public for subscription. The person who purchases a time is called share holder. The share capital of the company's meant for long term requirements because it need not be paid during life time of the company. Defination:     Share is defined by sec.2(46) of the companies Act as a share in the share capital of a company and includes stock except where a distinction is expressed or implied."     Share carries with it certain rights and liabilities. It secures to its owner the right to receive a proportionate part of the profits and a proportionate part of the profits and a proportionate part of the assets of and obligations.    A share is evidenced by a share certificate. Each share in a company having share capital is distinguished by its number. Different types of shares:    Types of shares:     Companies secure most of their capital by issuing shares to the p

    Good will:-     Good will is an intangible asset but not fictitious. Although it is not tangible asset like plant and machinery, Buildings etc, nevertheless it contributes to the profit earnings capacity of the business.    Goodwill is valuable asset if the business concern is profitable, but if the business is suffering from continuous, it is valueless. Good will is defined as an element arising in which enables it to earn greater profits than the return normally to be expected in the capital represented by the net tangible assets employed in the business.    According to Kohler's " goodwill is the current value of expected future income in excess of a normal return on investment in net tangible assets".    It is treated as an intangible asset in accounts .   It is sometimes described as a momentum or a push that keeps the business going without further effort like the momentum of a boby continues its motion against a retarding force till it comes to rest gradually.

  Companies Act 1956:-     The companies Act 1956   made it compulsory for every company to keep proper set of books 📚 for Recording financial transactions and to prepare its annual statements in the prescribed form at the proper time.     The Amendment Act, 1988  has  made it obligatory on all companies to maintain accounts on accural basis and according to the Double Entry System of accounting.    The provisions governing the keeping of books 📚 and publication of final accounts dealt under laid down under secs. 209 to 223, The brief provisions are as follows: 1. Preparation of final Statements :    Under sec. 210 it has been made compulsory to present the Balance Sheet and profit and loss account, at every annual general meeting. For every financial year one annual general meeting must be held.    Between two agm 's it shall not exceed fifteen months, however that it may be to eighteen months with special permission with Registrar extended of companies.    The responsibility fo

  Methods of valuation of inventories first in first out ( commonly called fifo):       Under this method material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores.   In other words, materials received first are issued first. The units in the opening stock of materials are treated as if they are issued first, the units from the first purchase issued next, and so on until the units left in the closing stock of materials are valued at the latest cost of purchases.    It follows that unit costs are apportioned to cost of production according to their chronological order of receipts in the store.    This method is most suitable in times of falling prices because the issue price of materials to jobs or works orders will be high ( materials issued from the earliest consignments which were purchased at a higher rate ) while the cost of replacement of materials will be low.   But in case of rising prices this method

     According to Kohler's Dictionary for Accountants, inventory is defined as " Raw materials and supplies, goods finished and in process of manufacture and merchandise on hand, in transit and owned, in storage or consigned to other at the end of an accounting period.   Inventory forms a significant portion of the total assets  of many enterprises and a lot of working capital is invested in this item.   Inventories generally constitute the second largest item after fixed assets, in the financial statements, particularly of manufacturing concerns.  This is why valuation of inventories has assumed significance in recent years.   The values attached to inventories can materially affect the operating results as shown by trading and profit and loss account and the financial position of a business firm because closing inventory (stock in trade) is shown on the credit side of the trading account and this amount is also shown as current asset in the Balance Sheet.  The closing invent

  Different methods of calculating provision for depreciation are mainly Accounting customs which may be used by different concerns taking into consideration thier individual peculiarities.    The following are the main methods of providing Depreciation: Fixed instalment ( or fixed percentage on original cost or straight line) method: Under this method a fixed percentage of the original value of the asset is written off every year so as to reduce the asset account to nil or to its scrap value at the end of the estimated life of the asset.   To ascertain the annual charge under this method all that is necessary is to divide the original value of the asset ( minus it's residual value, if any ) by the number of years of its estimated life i.e.,     The amount of depreciation charged during each period of the assets like is constant.    If the charge of depreciation is plotted annually on a graph paper and the points joined together, then the gap will reveal a straight line, that is wh

  To know the true profits:-     We have seen that depreciation is an expense and becomes an important element of the cost of production.    Though it is not visible like other expenses and never paid to the outside party yet it is desirable to charge depreciation on fixed assets as these are used for earning purposes.   So their depreciation must be deducted out of the income earned from their use in order to calculate true net profit or loss. To show true financial position:-  Financial position can be studied from the balance sheet and for the preparation of the Balance Sheet fixed assets are required to be shown at their true value.    If Assets are shown in the Balance Sheet without any charge made for their use or depreciation, then their value must have been overstated in the Balance Sheet and will not reflect the true financial position of the business.   So for the purpose of reflecting true financial position, it is necessary that depreciation must be deducted from the Assets

  Depreciation:-     The concept of depreciation refers to the process of allocating the initial or restated input valuation ( cost or other basis ) of fixed assets to the several periods expected to benefit from their acquisition and use.   The main emphasis of the depreciation process is generally on the computation of the periodic charge to expense or the cost of the product to be matched with the revenues reported in each period.   Thus the Concept occupies a significant place in the determination of income and in the measurement of service potential of the assets.     Depreciation is a permanent continuing and gradual shrinkage in the book 📚 value of a fixed asset. Depreciation is charged on the fixed assets only.     Current assets are never depreciated rather these are valued. Depreciation is charged on the Book 📚 value ( as shown in the books 📚 after charge of depreciation) only, it reduces the value of the asset permanently .  Depreciation is charged on a continuous basis.

  Capital Expenditure:- 1) It results in acquisition of fixed assets which are meant for use and not for resale.    The Assets acquired are used for earning profit as long as they can serve the purpose of the business and sold only when they become unfit or obsolete for business. 2) it results in improving the earning capacity of the fixed assets,e.g., over - hauling the machinery for improving the business by increasing the earning capacity of the machinery. 3) It represents unexpired cost i.e., cost of benefit to be taken in future. 4) it is a non - recurring expenditure. 5) The benefit of such Expenditure will be for more than one year.   Only a portion of such Expenditure know as depreciation is charged to profit and loss Account and balance amount of such Expenditure unless it is written off is shown in the Balance Sheet as an asset. 6) All items of capital expenditure which are not written off are shown in the Balance Sheet as Assets and are carried forward to the next year. Reve

  Profit and loss Account:- 1) The main objective of preparing profit and loss Accounts to ascertain the Net profit or Net loss of the business during the year. 2) profit and loss Account contains only Nominal Accounts. 3) All Revenue receipts and Revenue expenditure are recorded in profit and loss Account. 4) it is an Account having ' Debit ' and ' Credit ' . 5) The balance figure of this account is either Net profit or Net loss. 6) Generally it is prepared for year ending. Balance Sheet:- 1) The main objective of preparing Balance Sheet is to ascertain the correct financial position of the business on a specific date. 2) Balance Sheet contains all  Real and personal accounts. 3) capital Receipts and capital expenditure are shown in the Balance Sheet. 4) It is a statement and hence ' T ' and ' By ' are not used. 5) Balance Sheet will not show any balancing figure. Assets are equal to liabilities. 8) Generally it is prepared for half - year ending or yea

    Trail Balance:- 1) The main purpose of preparing Trail Balance is to check the arithmetical accuracy of the books 📚 of account. 2) The Trail Balance contains all three types of Accounts viz., Personal, Real and Nominal Accounts. 3) Trail Balance does not reveal the financial position of the business. 4) Trail Balance does not reveal profit. 5) The column heads of trail Balance are date, particulars, debit and credit. 6) The preparation of the Trail Balance is not compulsory. 7) closing stock will not be shown in trail Balance. 8) Trail Balance is prepared whenever is necessary, generally, every month or for three months. 9) The preparation of Trail Balance is not compulsory. 10) The Balance of capital in the trial Balance does not include the Net profit or loss for the period under consideration. 11) Trail Balance is generally prepared before the final adjusting entries are passed. 12) from trail Balance it is not possible to know the advance and pre-receipts and payments. 13) Tra

  Balance Sheet:   The Trading Account provides the information regarding the gross profit or gross loss during the Accounting period. Similarly, the profit and loss Account provides the information regarding profit or loss made by a businessman during the Accounting period. But this is not at all that a businessman wants. What he wants is his financial Accounting position on the closing date of the Accounting period.   He wishes to know whether his capital increase or decreased since the beginning of the period and various Assets and liabilities he has on the closing date of the business period. For obtaining this information he prepares a statement of his assets and liabilities, know as the Balance Sheet. Thus a Balance Sheet is prepared to know the financial position of the business and the capital of the trader on a particular date. The Balance Sheet shows that what a business owns and what is owes to others on a particular date.    We can say that Balance sheet is a snap shot of t