Basic terms of Financial Accounting
1. Assets: An asset is anything of value owned by
an enterprise. They consist of tangible objects or intangible rights owned by an enterprise and carrying probable future benefits. Examples of tangible assets are cash, bank balance, inventories, machinery, furniture, building etc. Examples of intangible assets are patents, copyrights, trademarks, goodwill etc.
2. Liability: Liability is a financial obligation of an enterprise other than owner’s funds. Exmaples are bills payable, creditors bank overdraft, bank loan etc.
3. Current Assets: These are cash and other assets that are expected to be converted into cash or consumed in the production of goods, or redering of services in the normal course of business.
4. Current Liability: Liabilities including loans, bills payable, deposits and bank overdrafts which are due for payment in a relatively short period, normally in one year.
5. Working Capital: These are funds available to an enterprise for conducting its day-to-day operation. Current Assets Current Liabilities Working Capital.
6. Transactions: Transactions refer to business activities involving transfer of money or goods or services between two accounts, e.g. purchase of goods, sale of goods, amount lent to another firm, payment of expenses, receipt of commidsion, dividends.
7. Goods: All such things are included in goods, which are purchased for resale or converted for sale The sale and purchase of articles are included in goods. The various forms of goods are as under:
Purchase: The goods which are purchased
for selling are known as purchases. If it is
purchased on credit it is known as credit pur-
chase, and in case of cash purchase, it is
treated as cash purchase.
Sales: Whatever articles are sold, they are
included in sales. If the goods are sold on
credit, it is known as credit sale and if they are
sold in cash, it is known as cash sale.
Purchase Return: If the goods once pur-
chased are returned due to any reason, it is
called purchase returns or Returns outwards.
Sales Returns: If any sold goods are returned
by the customers, it is known as sales returns,
or Returns inwards.
8. Creditors: Whenever the purchases are made on credit, the persons who supply such goods are known a creditors.
9. Debtors: The persons who take the goods and
services on credit are called the debtors.
10. Entry: Whenever the transactions are recorded
in the books, they are known as entry.
11. Discount: It is a kind of concession, which is
provided by the trader to its customers. It is of two types:
1.Trade discount and
12. Turnover: The total sales in a particular period,cash and credit sales are known as turnover.
13. Insolvent: If a person is unable to redeem his
loan, he is treated as insolvent. The liabilities of such persons are more than the assets and he is not in a position tonmake full payments for his debts taken.
14. Account: Account is a schedule, under which
transactions are recorded and classified in a systematic way,such as Building account, Mohan account etc.
15. Bad debts: If the debtor does not make the payment standing in his name, it is called bad debts.
16. Voucher: The written documents which verify
the transactions of the business are called vouchers. Invoices, receipts of payments etc., are called vouchers.
17. Proprietor: The person who invests capital in
the business is known as proprietor of the business. He isnauthorised to get the entire profits of the business. He takes the risk in doing the business and is responsible for the losses also. Sole traders, Partnership firms, Joint Stock Companies they all are included in it.
18. Drawings: The amount or goods which is taken by the proprietor for his personal use, is called drawings.
Inter Process Profits
Sometimes the output of one process is transferred to a subsequent process, not at cost, but at a price showing a profit to the transferor process. Transfer price may be madeat a price: corresponding to current wholesale market price or at cost plus an agreed percentage. The objects are:
1.to show whether the cost of production competes with the market price,
2.to make each process stand on its own efficiency and economies i.e. the transferee processes are not given the benefits of economies affected in the earlier process.
This system involves a rather unnecessary complication of the accounts, as the desired comparisons could be prepared on separate cost reports for each process or by adopting a standard costing system, when standards could be set for each process. The complexity brought into the accounts arises from the fact that the inter process profits introduced remain included in the prices of process stocks, finished stocks and work-in-progress. For balance sheet purposes, inter-process profit cannot be included in stock, as a firm cannot make a profit by trading itself. To avoid these complications a provision must be created to reduce the stock to actual cost price. This problem arises only innrespect of stock on hand at the end of the period, because goods sold will have realised the internal profits.
In order to compute the profit element in closing in-ventories and to obtain the net realised profit for a period, three columns have been shown on each side of process accounts and closing stocks have been deducted from the debit side of the process accounts instead of showing it on the credit side. Cost of closing stock can be easily obtained ess. The cost of stock can be obtained by the formula:if we compare the accumulated cost and total in any process.
The profit on closing stock can then be easily ob-
tained by deducting the cost of stock thus arrived at from the value of stock.
Sometimes, opening stock and production overheads are given. If stock is to be valued at prime cost, then we should add the opening stock at the beginning along with transfer cost of materials and wages. From the total of these,
closing stock should be deducted to calculate prime cost. Then production overheads are added. This becomes the total cost of the process to which is added the desired per-
centage of profit.
The advantages and disadvantages of using interprocess profits in case of process type industries are as follows:
1.It helps in comparison between the cost of output and its market price at the stage of completion.
2.Each process is made to stand by itself as to profit ability.
1.The use of inter process profits involves complications.
2.The system shows profits which are not realised because of stock not sold out.
The problem of work-in-progress or unfinished unitsnin process industries is a very important problem and frequently a difficult One. In most of the firms manufacturing isnon a continuous basis and the problem of work-in-progressnis quite common. The work-in-progress consists of direct materials, direct wages and production overhead. Direct material is put into the process at the beginning of the periodnand then added to in the course of the period. Some of thisbmaterial is thus worked on, completed and transferred to stock. At the end of the period the closing work-in-progressnconsists of material which has only partially been processednbut the full cost was incurred immediately on transfer from stores to the process. Thus it is necessary to assume the closing work-in-progress to be 100 per cent complete as regards materials. In some cases where additions are made in the second or any subsequent process of other kinds ofnmaterials, further considerations would apply according to the circumstances of each case. Direct labour and production overheads are not incurred in the same way. The costs accrue during the period and attach to the units as and whennthey are completed. Hence the closing work-in-progress only shows these costs to the extent to which the units being processed have been completed.