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Objectives of Accounting 1

To achieve these objectives, various forms of reports are provided to interested parties through accounting, which are known as financial statements.

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15 views8 pages

Objectives of Accounting 1

To achieve these objectives, various forms of reports are provided to interested parties through accounting, which are known as financial statements.

Uploaded by

Dineeka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Objectives of Accounting:-

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Providing necessary information to interested parties

Need for Accounting:-

01. Fulfilling legal requirements

02. Providing necessary information for decision making

03. Evaluating the results of economic processes

04. Minimizing the disadvantages that may occur due to forgetting or neglecting accounting
information

05. Making decisions about the use of resources

06. Proper handling of economic resources

To achieve these objectives, various forms of reports are provided to interested parties through
accounting, which are known as financial statements.

Business Transactions:-

The exchange of resources between a business and other parties is considered a business
transaction.

Financial Transactions:-

Transactions whose value can be measured in terms of money are considered financial transactions.
Examples:-

01. Investing a capital of Rs. 100,000 in a business

02. Buying a stock of goods worth Rs. 15,000 in cash

03. Taking a bank loan of Rs. 300,000

04. Paying an employee's salary of Rs. 50,000

05. Paying an electricity bill of Rs. 2,000

Note - Transactions can be made in cash or on credit

Characteristics of transactions:-

– Change in resources

– A management decision

– Approved

Event

A change in resources that occurs outside the decision of the business's managers is an event.

Examples:-

01. A stock of goods worth Rs. 20,000 catches fire


02. A receivable of Rs. 30,000 becomes a bad debt

(In addition to the transfer of assets, certain events that occur within the business are considered
transactions in accounting)

A business's transactions give rise to assets, liabilities, income and expenses.

The following arise as a result of a business's transactions.

01. Assets

02. Claims

03. Liabilities

04. Revenue

05. Expenses

Assets

Assets are resources controlled by the business and from which future economic benefits flow to the
business as a result of a past transaction.

Examples :-

01.Land

02.Buildings

03.Machinery
04.Equipment

05.Fixed Deposits

06.Investments

07.Inventory

08.Debtors

09.Accounts Receivable

10.Prepaid Expenses

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11.Banks

12.Cash on Hand

Characteristics of Assets:-

01.Result of a past transaction

02.Inflow of economic benefits to the business in the future

03.Controllable to the business

Current assets are:-


Current assets are assets that are subject to frequent changes in value that generate benefits within
a short period of time, such as 12 months.

Non-current assets:- Assets that do not undergo frequent changes and that provide benefits for
more than 12 months are non-current assets.

Liabilities

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Liabilities are those that are owed by the business as a result of a past transaction.

Examples:-

01. Bank loans

02. Creditors

03. Expenses payable

04. Bank overdraft

05. Mortgage loans

Characteristics of a liability:-

01. Being a result of a past transaction

02. Outflow of resources from the business

Types of liabilities
Current liabilities:-

Liabilities that must be settled within a short period of time, such as 12 months, are current
liabilities.

Non-current (long-term) liabilities:

Liabilities that are to be settled within more than 12 months are non-current (long-term) liabilities.

Equity

The amount of assets available to the owners of the business can be called equity.

The value obtained after deducting liabilities from the total assets of the business

Equity = Assets – Liabilities

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Example:- Suppose a business has assets of Rs. 500,000, and a bank loan of Rs. 200,000. Then, after
settling the bank loan of Rs. 500,000, the remaining (500,000-200,000) Rs. 300,000 is equity.

Income

The cash income earned by the business from its operating activities.

Examples :-

01. Sales (on cash/credit)

02. Interest received


03. Commission received

04. Rent received

05. Discounts received

Expenditure

Expenses are the amounts that contribute to the income earned by the business from its operating
activities.

Examples :-

01. Salaries and wages

02. Purchases

03. Insurance premiums

04. Loan interest

05. Discounts given

The difference between the above income and expenses is the profit or loss. This profit or loss is
finally adjusted to the equity.

Profit = Income – Expenses

Equity + ( Income – Expenses )

E.H.A.Gayan chinthaka Ekanayake#Lesson 04#Introduction to the Accounting#Grade10#31/05.2020


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