MID TERM NOTES

1. As1 – accounting concepts and conventions

Accounting Concepts:

1. Entity Concept:
• The entity concept, also known as the business entity or economic entity concept,
states that a business is a separate and distinct entity from its owners or
shareholders. As per this concept, business transactions should be recorded and
reported separately from personal transactions of the owners. It ensures that the
financial affairs of the business are treated independently.
2. Dual Aspect Concept:
• The dual aspect concept is the foundation of double-entry accounting. It states that
every financial transaction has two aspects: a debit and a credit. For every debit
entry made in an account, there must be an equal and corresponding credit entry.
This concept ensures that the accounting equation (Assets = Liabilities + Equity)
remains in balance.
3. Going Concern Concept:
• The going concern concept assumes that a business will continue to operate
indefinitely and will not be liquidated in the foreseeable future. This concept allows
assets and liabilities to be recorded on the assumption that the business will
continue its operations, which is crucial for proper financial reporting.
4. Money Measurement Concept:
• The money measurement concept suggests that financial transactions and events
should only be recorded if they can be expressed in monetary terms. It implies that
non-monetary events, such as employee morale or customer satisfaction, are not
recorded in the financial statements.
5. Cost Concept:
• The cost concept, also known as the historical cost concept, states that assets should
be recorded on the balance sheet at their original purchase cost. This concept
ensures objectivity and verifiability in financial reporting, as historical cost is a
concrete and objectively determinable value.
6. Accrual Concept:
• The accrual concept requires revenue to be recognized when it is earned and
expenses to be recognized when they are incurred, regardless of when cash is
received or paid. This concept aligns with the matching principle and aims to provide
a more accurate representation of a company's financial performance.
7. Accounting Period Concept:
• The accounting period concept, also known as the time period concept, divides the
financial life of a business into discrete and regular time periods, such as months,
quarters, or years. This allows for the systematic recording and reporting of financial
information, making it easier for users to analyse and compare data over time.
8. Realization Concept:
• The realization concept, also called the recognition concept, states that revenue
should be recognized when it is earned and realizable, meaning there is a reasonable
expectation of receiving payment. This concept ensures that revenue is not
prematurely recognized and is reported when it is earned.
 Accounting Conventions:

1. Convention of Disclosure:
• The convention of disclosure emphasizes the importance of providing complete and
transparent information in financial statements. It requires that all relevant financial
information, including significant accounting policies, be disclosed in the financial
statements and accompanying notes. This convention ensures that users of financial
statements have access to all necessary information to make informed decisions.
2. Convention of Materiality:
• The convention of materiality guides accountants in determining what information
to include in financial statements. It suggests that only information that is material
or significant should be reported. Materiality is assessed based on whether the
omission or misstatement of information could influence the decisions of financial
statement users. Less significant details are often excluded to avoid cluttering
financial statements.
3. Convention of Consistency:
• The convention of consistency requires that a company use consistent accounting
methods, principles, and presentation formats from one accounting period to the
next. Any changes in accounting policies should be disclosed, and their impact on
financial statements should be explained. Consistency ensures that financial
statements are comparable across different periods.
4. Convention of Conservatism:
• The convention of conservatism, also known as the prudence concept, advises
accountants to be cautious and conservative when recognizing revenues and assets.
It suggests recognizing losses and liabilities as soon as they are probable, even if not
yet certain. In contrast, gains are only recognized when realized. This convention
promotes a more cautious and less optimistic approach to financial reporting,
prioritizing prudence over optimism.

2. a. Define inventory

b. Cash Definition as per as 3

The cash flow statement, also known as the statement of cash flows, is a financial statement
that reports cash flows during a specific period and classifies them into three main
categories:
1. Operating Activities:
• Cash flows from operating activities include cash transactions that result from a
company's primary business operations. These activities represent the day-to-day
financial activities that generate revenue and incur expenses. Examples of cash flows
from operating activities include cash received from customers, interest and
dividends received, and cash paid to suppliers, employees, and other operating
expenses. The net cash flow from operating activities reflects the cash generated or
used by a company's core business operations.
2. Investing Activities:
• Cash flows from investing activities pertain to cash transactions related to a
company's investments in assets and capital expenditures. These activities involve
the purchase and sale of long-term assets, such as property, plant, and equipment,
as well as investments in other businesses or securities. Cash received from the sale
of investments and assets is considered a cash inflow from investing activities, while
cash spent on acquiring new assets or investments represents a cash outflow from
investing activities. The net cash flow from investing activities helps assess a
company's capital allocation decisions and investment strategies.
3. Financing Activities:
• Cash flows from financing activities encompass cash transactions related to a
company's capital structure and financing activities. These activities involve raising
capital, repurchasing stock, retiring debt, paying dividends, and other financing-
related transactions. Cash inflows from financing activities include proceeds from
issuing stock, taking out loans, or securing other financing sources. Cash outflows
from financing activities include repayments of loans, repurchases of stock, payment
of dividends, and other obligations to shareholders and creditors. The net cash flow
from financing activities provides insights into a company's financing and capital
management strategies.

4. Cash flow formats (operating)

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