REVISION 4 ACCOUNTING PRINCIPLES(CONTINUED) AND SOURCES OF DOCUMENTS
LEARNING OUTCOMES:
A Quick Recap of:
Principles of Accounting:
Accounting Period
Full Disclosure
Materiality Principle
Objectivity Principle
Revenue Realisation Principle
Meaning and Types of Source Documents
Objectives
Principles of Accounting:
Accounting Period
Full Disclosure
Materiality Principle
Objectivity Principle
Revenue Realisation Principle
Meaning and Types of Source Documents
Objectives
After going through this , you shall be able to understand the following concepts.
• Source Documents
Cash Memo
Invoice or Bill
Receipt
Pay-in- Slip
Cheque
7. Accounting Period Concept
Even though a business is assumed to continue forever (going concern assumption) but it is necessary to keep accounts in such a way that the results are known at frequent intervals. This time interval is known as “Accounting Period”.
While accounting periods might vary in terms of reporting dates but they must be consistent. The various users of accounting information require financial information at regular intervals, so we cannot wait for the liquidation of the company for the preparation of financial statements.
Hence, as per the accounting period concept the financial statements are prepared at regular interval of time.
Example
XYZ Ltd. refused to prepare books of accounts for the year ended 31 March 2013 saying that according to the concept of going concern its business is never ending entity and it shall go on forever so it shall not prepare the accounts.
But, Mr. B clarified this doubt of XYZ Ltd. by quoting the Accounting Period Concept, thus XYZ Ltd. has to prepare its books of accounts for the year ending 31 March 2013.
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8.Full Disclosure Principle
According to the principle of full disclosure, the financial statements shall disclose all material facts either on the face of it or in the notes to accounts.
Full disclosure principle is of great relevance to materiality concept. Even though the provisions of Companies Act, 1956 has made many disclosures mandatory for the companies but still there are several ways in which the businesses can make better disclosure.
Example
A business shall disclose all its accounting policies in order to help the users of financial statements to better understand the financial reports.
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9. Materiality Concept
The main aim of preparation of financial statements is to enable the end users of the financial statements in making informed decisions.
Thus, all such information which has the ability to affect the end users decisions is material in nature and must be disclosed in the financial statements.
The decision whether information is relevant or not involves an element of judgement. This depends on two factors i.e. the amount involved or importance of the event.
Example
The various accounting policies employed by organisations must be disclosed in the financial statements in order to enable a better understanding of financial position of the company.
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10.Objectivity Concept
According to the objectivity principle, the accounting should be free from personal bias.
That is, the accounting transaction should be supported with written documents such as cash memo, invoices etc.
It basically means that the accounting entries shall be based on facts rather than being open to interpretation, as interpretations are nothing but opinions.
Example
Miss A is an accountant responsible for auditing the accounts of XYZ Ltd. She asks for invoices and other documents to support the purchases and sales. XYZ Ltd requests her to take the numbers as given as it will involve too much work for them to search for related documents. Subsequently, she took the totals as given violating the objectivity principle because financial statements must be based on verifiable and reliable documents and not on someone’s opinion or interpretation.
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11. Revenue Recognition or Realisation Concept
According to the concept of revenue recognition, revenue is to be recognised only when rewards and benefits associated with the items sold and services provided are transferred i.e. when the right to receive money is established.
In other words, at the point where the seller has completed his part of the transaction.
It is to be noted that receipt of revenue and receipt of an amount are two distinct aspects.
Example
Star Sports recognises the revenue when the advertisement is actually aired. That is, it does not matter whether the payment is received in advance or after the broadcast of advertisement.
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TO BEGIN WITH :
Source Documents
Document is a piece of paper which is used for recording any business transaction. This document is used as an evidence for recording a transaction. In fact, it is a written proof that a particular transaction actually took place. That is why these are termed as Source Documents.
A source document acts as a base for recording a particular transaction. This is because it contains information that tells which account is to be debited and which is to be credited along with the amount of transaction. Source document is prepared at the time when a transaction takes place.
It contains details of such transaction.
Let’s understand some of the source documents.
(1) Cash Memo:
Whenever goods are sold in cash, the seller prepares cash memo and records therein the details of goods sold. It includes quantity, rate and total amount of goods sold, along with the date of transaction.
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(2) Invoice or Bill:
Whenever goods are sold on credit, seller prepares invoice or bill and records therein the details of goods sold. It includes details of party, quantity, rate and the total amount of goods sold, along with the date of transaction.
The seller generally prepares two copies of the invoice or the bill, the first copy is kept with himself and the other copy is send to the purchaser.
For a seller, this is an invoice and for the purchaser the same source document will be regarded as a bill.
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(3) Receipt:
Whenever any amount of cash is received from the customers, a receipt is issued to them by the receiver (usually the seller of goods). This receipt acts as a proof in the hands of customer that he has made payment to the seller with the amount specified in the receipt.
Receipt is prepared in two copies, first copy is handed over to the party making the payment and other copy is retained by the person accepting the payment for future reference.
Receipt contains details regarding party’s name, amount paid, date and nature of payment.
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(4) Pay-in-Slip:
Whenever cash or any cheque is deposited into bank, the depositor has to fill pay-in-slips and submit it to the cashier along with cash or cheque.
This pay-in-slip is a form that contains a counter foil which is returned back to the depositor by the cashier after signing it, as a receipt. Pay-in-slips basically contains details of date and amount relating to cash or cheque deposited.
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(5) Cheque:
It is a document drawn by a banker in writing, payable on demand. In the cheque, the name of the person to whom the payment is to be made is legibly written along with amount to be paid in words as well as in numerals.
The name of the party is written against the words “PAY”. The cheque must be signed and dated by the issuer.
Details of cheque should also be entered in the attached counterfoils for future reference.
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• Source Documents
Cash Memo
Invoice or Bill
Receipt
Pay-in- Slip
Cheque
7. Accounting Period Concept
Even though a business is assumed to continue forever (going concern assumption) but it is necessary to keep accounts in such a way that the results are known at frequent intervals. This time interval is known as “Accounting Period”.
While accounting periods might vary in terms of reporting dates but they must be consistent. The various users of accounting information require financial information at regular intervals, so we cannot wait for the liquidation of the company for the preparation of financial statements.
Hence, as per the accounting period concept the financial statements are prepared at regular interval of time.
Example
XYZ Ltd. refused to prepare books of accounts for the year ended 31 March 2013 saying that according to the concept of going concern its business is never ending entity and it shall go on forever so it shall not prepare the accounts.
But, Mr. B clarified this doubt of XYZ Ltd. by quoting the Accounting Period Concept, thus XYZ Ltd. has to prepare its books of accounts for the year ending 31 March 2013.
8.Full Disclosure Principle
According to the principle of full disclosure, the financial statements shall disclose all material facts either on the face of it or in the notes to accounts.
Full disclosure principle is of great relevance to materiality concept. Even though the provisions of Companies Act, 1956 has made many disclosures mandatory for the companies but still there are several ways in which the businesses can make better disclosure.
Example
A business shall disclose all its accounting policies in order to help the users of financial statements to better understand the financial reports.
9. Materiality Concept
The main aim of preparation of financial statements is to enable the end users of the financial statements in making informed decisions.
Thus, all such information which has the ability to affect the end users decisions is material in nature and must be disclosed in the financial statements.
The decision whether information is relevant or not involves an element of judgement. This depends on two factors i.e. the amount involved or importance of the event.
Example
The various accounting policies employed by organisations must be disclosed in the financial statements in order to enable a better understanding of financial position of the company.
10.Objectivity Concept
According to the objectivity principle, the accounting should be free from personal bias.
That is, the accounting transaction should be supported with written documents such as cash memo, invoices etc.
It basically means that the accounting entries shall be based on facts rather than being open to interpretation, as interpretations are nothing but opinions.
Example
Miss A is an accountant responsible for auditing the accounts of XYZ Ltd. She asks for invoices and other documents to support the purchases and sales. XYZ Ltd requests her to take the numbers as given as it will involve too much work for them to search for related documents. Subsequently, she took the totals as given violating the objectivity principle because financial statements must be based on verifiable and reliable documents and not on someone’s opinion or interpretation.
11. Revenue Recognition or Realisation Concept
According to the concept of revenue recognition, revenue is to be recognised only when rewards and benefits associated with the items sold and services provided are transferred i.e. when the right to receive money is established.
In other words, at the point where the seller has completed his part of the transaction.
It is to be noted that receipt of revenue and receipt of an amount are two distinct aspects.
Example
Star Sports recognises the revenue when the advertisement is actually aired. That is, it does not matter whether the payment is received in advance or after the broadcast of advertisement.
TO BEGIN WITH :
Source Documents
Document is a piece of paper which is used for recording any business transaction. This document is used as an evidence for recording a transaction. In fact, it is a written proof that a particular transaction actually took place. That is why these are termed as Source Documents.
A source document acts as a base for recording a particular transaction. This is because it contains information that tells which account is to be debited and which is to be credited along with the amount of transaction. Source document is prepared at the time when a transaction takes place.
It contains details of such transaction.
Let’s understand some of the source documents.
(1) Cash Memo:
Whenever goods are sold in cash, the seller prepares cash memo and records therein the details of goods sold. It includes quantity, rate and total amount of goods sold, along with the date of transaction.
(2) Invoice or Bill:
Whenever goods are sold on credit, seller prepares invoice or bill and records therein the details of goods sold. It includes details of party, quantity, rate and the total amount of goods sold, along with the date of transaction.
The seller generally prepares two copies of the invoice or the bill, the first copy is kept with himself and the other copy is send to the purchaser.
For a seller, this is an invoice and for the purchaser the same source document will be regarded as a bill.
(3) Receipt:
Whenever any amount of cash is received from the customers, a receipt is issued to them by the receiver (usually the seller of goods). This receipt acts as a proof in the hands of customer that he has made payment to the seller with the amount specified in the receipt.
Receipt is prepared in two copies, first copy is handed over to the party making the payment and other copy is retained by the person accepting the payment for future reference.
Receipt contains details regarding party’s name, amount paid, date and nature of payment.
(4) Pay-in-Slip:
Whenever cash or any cheque is deposited into bank, the depositor has to fill pay-in-slips and submit it to the cashier along with cash or cheque.
This pay-in-slip is a form that contains a counter foil which is returned back to the depositor by the cashier after signing it, as a receipt. Pay-in-slips basically contains details of date and amount relating to cash or cheque deposited.
(5) Cheque:
It is a document drawn by a banker in writing, payable on demand. In the cheque, the name of the person to whom the payment is to be made is legibly written along with amount to be paid in words as well as in numerals.
The name of the party is written against the words “PAY”. The cheque must be signed and dated by the issuer.
Details of cheque should also be entered in the attached counterfoils for future reference.
Ronit jacob toppo
ReplyDeleteRoll no-40
11-B
Ma'am is the cash memo given to the buyer or is kept with the seller?
ReplyDelete