Financial Accounting explaintion

  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

  Profit and loss Account:       Trading Account is prepared to ascertain the gross profit or gross loss made by the trader for any given period.   The next step in the preparation of financial Accounts is to prepare a profit and loss Account. The main object of the profit and loss Account is to know the net profit or net loss made by the business for a particular period.    The Trading Account is closed by transferring the gross profit or gross loss to the profit and loss Account. Therefore the profit and loss Account starts with gross profit on the Credit side or with gross loss on the debit side as the case may be.     The profit and loss Account is credited with the gains and incomes whether actually received or yet to be received relating to the business and belonging to the period such as discount received, commision received, intrest received, rent received etc.     It is debited with all expenses ( whether paid or yet to be paid) incidental to carry on the business such as offi