Financial Accounting Tutorials for Beginners

CAPITAL AND REVENUE : Why is the distinction between capital and revenue important ? The concepts of capital and revenue are important for the correct determination of accounting profit for a period and the recognition of business assets at the end of that period.  The difference affects the measurement of profit over several accounting periods. Capital is defined by economists as those assets used in the production of goods and services for the production of assets.  In accounting , on the other hand, the capital of a business is increased by a share of periodic income that has not been consumed by the owner. The relation of capital and revenue is between a tree and its fruits. It is the tree that produces fruit, and it is the fruit that can be consumed. If the tree is taken care of, it will produce more fruit, on the contrary, if the tree is destroyed, there will not be more fruit. Similarly, revenue originates from capital and capital is the source of revenue . Capital is inve

Accounting for Inventory: In this session, describing the Basic concept of Stock or Inventory accounting. So, the first thing what is stock or inventory in accounting? Stock or Inventory means any stock held by a manufacturing business to meet its production requirements. A trading concern holds stock of goods for sale. A per Indian Accounting Standard 2 [AS. -2] Inventories mean tangible property held: for sale in the ordinary course of business, or in the process of production for such sale, or for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares. Importance of  Stock or Inventory  valuation: AS-2 and its implications-- Before going into any discussion regarding any method of  Stock or Inventory  valuation the epitome of Indian Accounting Standard 2 (AS 2) should be understood. It says that--- Stock or Inventory  should normally be valued at historical cost or net realisable value whichever

 Characteristics of Depreciation: In this chapter describing  characteristics and different methods of Depreciation :-- What are the characteristics of depreciation ? It is charged against profit . It indicates diminution in service potential . It is an estimated loss of the value of an asset . It is not an actual loss. It depends upon different assumptions, like the effective life and a residual value of an asse t. It is a process of allocation and not of valuation . It arises mainly from an internal cause like wear and tear or depletion of an asset. But it is treated as any expense charged against profit like rent, salary, etc., which arise due to an external transaction. Depreciation on any particular asset is restricted to the working life of the asset . What is amortization in depreciation accounting ?   It is charged on tangible fixed assets. It is not charged on any current asset. For allocating the costs of intangible fixed assets like goodwill, etc., a certain amount of th

  What is the depreciation in accounting? Depreciation is the allocation of the cost of fixed assets over the years of its working life. Indian Accounting Standard (AS-6) states that Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the assets. Long-term fixed assets are used in the process of earning revenue. Due to regular use, such assets gradually lose their service potentials. Such losses are considered as expired costs which have to be matched against the periodic revenues. The Latin word depretium  literally means a  reduction of value . So Depreciation means the reduction in the value of assets which has to consider for determining revenue. R.S.Anthony and J.S.Reece observed that the cost of an asset that has a long but nevertheless limited life is systematically reduced over that life by a process called Depreciation . Is depreciation an asset ? What do you think?? The deprec

Meaning of Trial balance After the transactions are posted to various accounts (from journal or subsidiary books ) and they are balanced, the next step is to prepare a list of all balances. We know that some ledger accounts will show that debit balance  ( more debit side than credit side ), while another will reflect credit balance  ( credit side being higher than the debit side ).  All account balances are listed to ensure that all debit balances are equal to the total credit balance . Why does this happen? We called the dual aspect concept which discusses in the previous post of my blog. In this concept, each debit side has the same credit side . That we called a trial balance. Trial Balance Definition: According to the Dictionary for Accountants by Eric. L. Kohler , Trial Balance is defined as “a list or abstract of the balances or of total debits and total credits of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to establi