Financial Accounting

Financial Statements

The statements which are prepared to know the financial condition of a business are called " Financial Statements". The main financial statements are as follows:

(1) Income Statement

(2) Balance Sheet

(3) Statement of Owner’s Equity

(4) Statement of Cash Flows

(5) Note Disclosure 

 

Generally Accepted Accounting Principles (GAAP) 

The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. These standards are commonly called Generally Accepted Accounting Principles (GAAP)

Some Assumptions and Principles:

l(1) Monetary unit assumptions

l(2) Going concern concept and Periodicity concept

l(3) Conservatism concept

l(4) Cost Principle

l(5) Economic Entity Assumptions

 

(1) Monetary unit assumptions: 

 

The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in accounting records.

A good manager died yesterday. It was a great loss but it can not be measured in monetary terms.

So, we can take it in accounting record

 

l(2) Going concern concept and Periodicity concept:

lA business will continue for a long run. This long run is to be divided into some parts.

lThis part is called a period of accounting. Generally, the period is for one year. It may be three months period, six months period and so on.

We will calculate profit after each accounting period.

 

l(3) Conservatism concept:

lProbable loss will be counted but not probable gain/profit. Business should be conscious about loss but not about profit. For this concept, cost of stock is valued on lower of cost and market price at the time of their valuation.

lAssume that, cost price of your stock was Tk 10,000 in January and its market price in December is Tk 12,000. Then which amount will be counted? 

 

l(4) Cost Principle:

lEvery asset must be recorded by its cost price only. It is also known as Historical Cost concept.

lFor example, a land purchased in 1st January 2000 at Tk 200,000 is still recorded by Tk 200,000 in 2010.

lTherefore, it does not matter whether the price of an asset is increase or decrease. We always count the purchase price. 

 

l(5) Economic Entity Assumptions:

It requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. 

  

Types of business on the basis of ownership:

(1) Proprietorship

(2) Partnership

(3) Corporation/ Company

 

 (1) Proprietorship:

 The common characteristics of a proprietorship or sole proprietorship business-

       (i) Generally owned by one person.

       (ii) Often small service-type businesses

       (iii) Owner receives any profits, suffers any losses, and is personally liable for all debts.

 

(2) Partnership:

  The common characteristics of a partnership business-

       (i) Owned by two or more persons.

      (ii) Often retail and service-type businesses

     (iii) Generally unlimited personal liability

     (iv) Partnership agreement 

 

(3) Corporation/ Company:

 The common characteristics of a company-

        (i) Ownership divided into shares of stock

        (ii) Separate legal entity organized under state corporation law

        (iii) Limited liability