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The accounting process is a series of activities that begins with a transaction

and ends with the closing of the books. Because this process is repeated each
reporting period, it is referred to as the accounting cycle and includes these
major steps:

Accounting Cycle Ȃ Steps During the Accounting Period

These accounting cycle steps occur during the accounting period, as each
transaction occurs:

1.m Identify the transaction or other recognizable event.

2.m Prepare the transaction's source document such as a purchase order or
invoice.
3.m Analyze and classify the transaction. This step involves quantifying the
transaction in monetary terms (e.g. dollars and cents), identifying the
accounts that are affected and whether those accounts are to be debited
or credited.
4.m Record the transaction by making entries in the appropriate journal, such
as the sales journal, purchase journal, cash receipt or disbursement
journal, or the general journal. Such entries are made in chronological
order.
5.m Post general journal entries to the ledger accounts.

__________________

The above steps are performed throughout the accounting period as

transactions occur or in periodic batch processes. The following steps are
performed at the end of the accounting period:

6.m Prepare the trial balance to make sure that debits equal credits. The trial
balance is a listing of all of the ledger accounts, with debits in the left
column and credits in the right column. At this point no adjusting entries

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have been made. The actual sum of each column is not meaningful; what
is important is that the sums be equal. Note that while out-of-balance
columns indicate a recording error, balanced columns do not guarantee
that there are no errors. For example, not recording a transaction or
recording it in the wrong account would not cause an imbalance.
7.m Correct any discrepancies in the trial balance. If the columns are not in
balance, look for math errors, posting errors, and recording errors.
Posting errors include:
˜m posting of the wrong amount,
˜m omitting a posting,
˜m posting in the wrong column, or
˜m posting more than once.

8.m Prepare adjusting entries to record accrued, deferred, and estimated

amounts.
9.m Post adjusting entries to the ledger accounts.
10.mPrepare the adjusted trial balance. This step is similar to the preparation
of the unadjusted trial balance, but this time the adjusting entries are
included. Correct any errors that may be found.
11.mPrepare the financial statements.
˜m Income statement: prepared from the revenue, expenses, gains, and
losses.
˜m Balance sheet: prepared from the assets, liabilities, and equity
accounts.
˜m Statement of retained earnings: prepared from net income and
dividend information.
˜m Cash flow statement: derived from the other financial statements
using either the direct or indirect method.

12.mPrepare closing journal entries that close temporary accounts such as

revenues, expenses, gains, and losses. These accounts are closed to a
temporary income summary account, from which the balance is
transferred to the retained earnings account (capital). Any dividend or
withdrawal accounts also are closed to capital.
13.mPost closing entries to the ledger accounts.

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14.mPrepare the after-closing trial balance to make sure that debits equal
credits. At this point, only the permanent accounts appear since the
temporary ones have been closed. Correct any errors.
15.mPrepare reversing journal entries (optional). Reversing journal entries
often are used when there has been an accrual or deferral that was
recorded as an adjusting entry on the last day of the accounting period. By
reversing the adjusting entry, one avoids double counting the amount
when the transaction occurs in the next period. A reversing journal entry
is recorded on the first day of the new period.

Instead of preparing the financial statements before the closing journal entries,
it is possible to prepare them afterwards, using a temporary income summary
account to collect the balances of the temporary ledger accounts (revenues,
expenses, gains, losses, etc.) when they are closed. The temporary income
summary account then would be closed when preparing the financial
statements.

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A widely accepted set of  


  , and

 for reporting 

, as established

by the   


   

Some of these major differences between US GAAP

and Indian GAAP which give rise to differences in profit are

highlighted hereunder

!"#$%&! '()!Under Indian GAAP, Financial

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statements are prepared in accordance with the principle of

conservatism which basically means DzAnticipate no profits and

provide for all possible lossesdz.

Under US GAAP conservatism is not considered,

if it leads to deliberate and consistent understatements.

$"#!*#+
$%#The Institute of Chartered Accountants of

India (ICAI) has been structuring Accounting Standards based on the

International Accounting Standards ( IAS), which employ concepts and `
prudence' as the principle in contrast to the US GAAP,

In the US GAAP which are , 

 ,

detailed and complex. It is quite easy for the US accountants to handle

issues that fall within the rules, while the International Accounting

Standards provide a general framework of accounting standards,

which emphasise "substance over form" for accounting. These

rules are less descriptive and their application is based on prudence.

US GAAP has thus issued several Industry specific GAAP, like SFAS

51 ( Cable TV), SFAS 50 (Record and Music Industry) , SFAS 53

(Motion Picture Industry) etc.

)$' (-$##!( ()!)  ! !* %( (#'#!(

Under Indian GAAP, financial statements are prepared in accordance

with the presentation requirements of Schedule VI to the Companies

m
m

Act, 1956

On the other hand , financial statements prepared as per US GAAP

are not required to be prepared under any specific format as long as they
comply with the disclosure requirements of US GAAP. Financial statements to be
filed with SEC include.

*)!)%" ()!) " $&*)' !#Under Indian GAAP (AS 21),

Consolidation of Accounts of subsidiary companies is not mandatory. AS 21 is
mandatory if an enterprise presents consolidated

financial statements for complying with the requirements of any statute or

otherwise, it should prepare and present consolidated financial statements in
accordance with AS 21.Thus, the financial income of any company taken in
isolation neither reveals the quantum of business between the group companies
nor does it reveal the true picture of the Group . Savvy promoters hive off their
loss making divisions into separate subsidiaries, so that financial statement of
their Flagship Company looks attractive .

Under US GAAP (SFAS 94),Consolidation of results of

Subsidiary Companies is mandatory , hence eliminating material, inter
company transaction and giving a true picture of the operations and
Profitability of the various majority owned Business of the Group.

* . %)/( (#'#!( Under Indian GAAP (AS 3) , inclusion of Cash Flow
statement in financial statements is mandatory only for companies whose share
are listed on recognized stock exchanges and Certain enterprises whose
turnover for the accounting period exceeds Rs. 50 corer. Thus , unlisted
companies escape the burden of providing cash flow statements as part of their
financial statements.
On the other hand, US GAAP (SFAS 95) mandates furnishing
of cash flow statements for 3 years Ȃ current year and 2 immediate preceding
years irrespective of whether the company is listed or not.

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m

!+#('#!(Under Indian GAAP (AS 13), Investments are classified as

Current and Long term. These are to be further classified Government or Trust
securities ,Shares, debentures or bonds Investment properties Others-specifying
nature.

Under US GAAP ( SFAS 115) , Investments are required to be

segregated in 3 categories i.e. held to Maturity Security (Primarily Debt
Security) , Trading Security and Available for sales Security and should be
further segregated as Current or Non current on Individual basis.
Page-4

"#$#* ()!Under the Indian GAAP, depreciation is provided based on

rates prescribed by the Companies Act, 1956. Higher depreciation provision
based on estimated useful life of the assets is permitted, but must be disclosed in
Notes to Accounts.( Guidance note no 49)
"

  


 than prescribed in any circumstance. Similarly , there is no
compulsion to provide depreciation at a higher rate, even if the actual wear and
tear of the equipments is higher than the rates provided in Companies Act. Thus ,
an Indian Company can get away with providing with lesser depreciation , if the
same is in compliance to Companies Act 1956.

Contrary to this, under the US GAAP , depreciation has to be

provided over the estimated useful life of the asset, thus making the Accounting
more realistic and providing sufficient funds for replacement when the asset
becomes obsolete and fully worn out. 

)$#!*$$#!*&($ ! *()!Under Indian GAAP(AS11) Forex

transactions ( Monetary items ) are recorded at the rate prevalent on the
transaction date .Year end foreign currency assets and liabilities ( Non Monetary
Items) are re-stated at the closing exchange rates. Exchange rate differences
arising on payments or realizations and restatements at closing exchange rates
are treated as Profit /loss in the income statement. Exchange fluctuations on
liabilities incurred for fixed assets can be capitalized.

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Under US GAAP (SFAS 52), Gains and losses on foreign currency

transactions are generally included in determining net income for the period in
which exchange rates change unless the transaction hedges a foreign currency
commitment or a net investment in a foreign entity . Capitalization of exchange
fluctuation arising from foreign liabilities incurred for acquiring fixed assets
does not exist. Translation adjustments are not included in determining net
income for the period but are disclosed and accumulated in a separate
component of consolidated equity until sale or until complete or substantially
complete liquidation of the net investment in the foreign entity takes place . US
GAAP also permits use of Average monthly Exchange rate for Translation of
Revenue, expenses and Cash flow items, whereas under Indian GAAP, the closing
exchange rate for the Transaction date is to be taken for translation purposes.

#0#!"($#"$!*)!($*()!#$)"As per the Indian GAAP

(Guidance note on ǮTreatment of expenditure during construction period' ) , all
incidental expenditure on Construction of Assets during Project stage are
accumulated and allocated to the cost of asset on completion of the project.

Contrary to this, under the US GAAP (SFAS 7), such

expenditure are divided into two heads Ȃ direct and indirect. While, Direct
expenditure is accumulated and allocated to the cost of asset, indirect
expenditure are charged to revenue.

$## $*. !""#+#%)'#!(#0#!"($#Indian GAAP ( AS 8)

requires research and development expenditure to be charged to profit and loss
account, except equipment and machinery which are capitalized and
depreciated. Under US GAAP ( SFAS 2) , all R&D costs are expenses except
intangible assets purchased from others and Tangible assets that have
alternative future uses which are capitalised and depreciated or amortised as
R&D Expense.

Under US GAAP, R&D expenditure incurred on software

development are expensed until technical feasibility is established ( SOP 81.1) .

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m

R&D Cost and software development cost incurred under contractual

arrangement are treated as cost of revenue.

$#+ % ()!$##$+#  Under Indian GAAP, if an enterprise needs to revalue

its asset due to increase in cost of replacement and provide higher charge to
provide for such increased cost of replacement, then the Asset can be revalued
upward and the unrealised gain on such revaluation can be credited to
Revaluation Reserve ( Guidance note no 57).

US GAAP does not allow revaluing upward property, plant and

equipment or investment.

%)!(#$'"#(nder the Indian GAAP, there is no such requirement and

hence the interest accrued on such long term debt in not taken as current
liability.

Under US GAAP , the current portion of long term debt is

classified as current liability.

#0($ )$"! $&(#'$)$#$)"(#' !"*. !#!

**)!(!)%*# Under Indian GAAP

( AS 5) , extraordinary items, prior period items and changes in accounting

policies are disclosed without netting off for tax effects.

Under US GAAP (SFAS 16) adjustments for tax effects are required
to be made while reporting the Prior period Items.

))"/%% Under the Indian GAAP goodwill is capitalized and charged to

earnings over 1
234 .

Under US GAAP ( SFAS 142) , Goodwill and intangible assets that

have indefinite useful lives are not amortized ,but they are tested at least
annually for impairment using a two-step process that begins with an

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estimation of the fair value of a reporting unit. The first step is a screen for
potential impairment, and the second step measures the amount of impairment,
if any. However, if certain criteria are met, the requirement to test goodwill for
impairment annually can be satisfied without a remeasurement of the fair value
of a reporting unit.

* ( %##0#!*#: Under Indian GAAP , capital issue expense can be

amortized or written off against reserves.

Under the US GAAP, capital issue expenses are required to be

written off when incurred against proceeds of capitals.

$))#""+"#!": Under Indian GAAP , dividends declared are accounted

for in the year to which they relate.

5, if dividend for the FY 1999-2000 is declared in Sep

2000 , then the corresponding charge is made in 2000-2001 as below the line
item.

Contrary to this , under US GAAP dividends are reduced from the

reserves in the year they are declared by the Board. Hence in this case under US
GAAP , it will be charged Profit and loss account of 2000-2001 above the line.

!+#('#!(! )* (#"*)' !# Under the Indian GAAP( AS 23) ,

investment in associate companies is initially recorded at Cost using the Equity
method whereby the investment is initially recorded at cost, identifying any
goodwill/capital reserve arising at the time of acquisition.

Under US GAAP ( SFAS 115) Investments in Associates are accounted under

equity method in Group accounts but would be held at cost in the Investorǯs own
account.

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m

$#)#$ (+##0#!*#: Under Indian GAAP, (Guidance Note 34 -

Treatment of Expenditure during Construction Period), direct Revenue
expenditure during construction period like Preliminary Expenses, Project
related expenditure are allowed to be Capitalised. Further , Indirect revenue
expenditure incidental and related to Construction are also permitted to be
capitalised. Other Indirect revenue expenditure not related to construction, but
since they are incurred during Construction period are treated as deferred
revenue expenditure and classified as Miscellaneous Expenditure in Balance
Sheet and written off over a period of 3 to 5 years.

Under US GAAP ( SFAS 7) , the concept of preoperative

expenses itself doesnǯt exist. SOP 98.5 also mandates that all Start up Costs
should be expensed. The enterprise has to prepare its balance sheet and Profit
and Loss Account as if it were a normal running organization. Expenses have to
be charged to revenue and Assets are Capitalised as a normal organization. The
additional disclosure include reporting of cash flow, cumulative revenues and
Expenses since inception. Upon commencement of normal operations, notes to
Statement should disclose that the Company was but is no longer is a
Development stage enterprise. Thus , due to above accounting anomaly,
Accounts prepared under Indian GAAP , contain higher charges to depreciation
which are to be adjusted suitably under US GAAP adjustments for indirect
preoperative expenses and foreign.

#'%)&###!# ( Under Indian GAAP, provision for leave encashment is

accounted based n actuarial valuation. Compensation to employees who opt for
voluntary retirement scheme can be amortized over 60 months.

Under US GAAP, provision for leave encashment is accounted on

actual basis. Compensation towards voluntary retirement scheme is to be
charged in the year in which the employees accept the offer

%))!#0(!.'#!() "#(: Under Indian GAAP, debt

extinguishment premiums are adjusted against Securities Premium Account.

m
m

Under US GAAP, premiums for early extinguishment of debt are

expensed as incurred.

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:

The '
 is a culmination of accrual accounting and the revenue
recognition principle. They both determine the accounting period, in which
revenues and expenses are recognized. According to the principle, expenses are
recognized when obligations are (1) incurred (usually when goods are
transferred or services rendered, e.g. sold), and (2) offset against recognized
revenues, which were generated from those expenses (related on the cause-and-
effect basis), no matter when cash is paid out. In cash accountingȄin contrastȄ
expenses are recognized when cash is paid out, no matter when obligations are
incurred through transfer of goods or rendition of services: e.g., sale.

If no cause-and-effect relationship exists (e.g., a sale is impossible), costs are

recognized as expenses in the accounting period they expired: i.e., when have
been used up or consumed (e.g., of spoiled, dated, or substandard goods, or not
demanded services). Prepaid expenses are not recognized as expenses, but as
assets until one of the qualifying conditions is met resulting in a recognition as
expenses. Lastly, if no connection with revenues can be established, costs are
recognized immediately as expenses (e.g., general administrative and research
and development costs).

Prepaid expenses, such as employee wages or subcontractor fees paid out or

promised, are not recognized as expenses (cost of goods sold), but as assets
(deferred expenses), until the actual products are sold.

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The matching principle allows better evaluation of actual profitability and

performance (shows how much was spent to earn revenue), and reduces noise
from timing mismatch between when costs are incurred and when revenue is
realized.

Matching principle is the foundation of accural accounting and revenue

recognition. According to the principle all expenses incurred in generating the
revenue must be deducted from the revenue earned in the same period. This
principle allows better evaluation of actual profitability and performance and
reduces mismatch between when cost is incurred and when revenue is
recognized. In accounts receivable providing for bad debt expense in the same
year in which related sale revenue is recognized is an application of matching
principle.

Accounts receivable represents the amount due from customers for

money, service or purchase of merchandise on credit. On the balance sheet, they
are classified as current or noncurrent assets based on expectations of the length
of time it will take to collect. Majority of receivables are trade receivables, which
arises from the sale of products or services to customers.

To help increase their sales revenue, company extends credits to its

customers. Credit limits entice its customers to make a purchase. But whenever a
company extends a credit to a customer there's also a risk that the customer will
not pay them back. In order to eliminate the risk company sets up some
guidelines and policies for extending credit to its customer. They conduct credit
investigation to assess the customer's credit worthiness. They set up collection
policy to ensure that they received the payment on time and reduce the risk of
nonpayment. Unfortunately, there are still sales on account that may not be
collected. It's either the customer go broke, unhappy of the service provided, or
just simply refuse to pay them back. Company does have legal recourse to try to
collect their money but those often fail and costly too. This uncollectible
accounts receivable is a loss in revenue recognized by recording bad debt
expense. As a result, it is become necessary to establish an accounting process
for measuring and reporting of these uncollectible accounts.

There are two methods for recording bad debt expense. The first method is
the "Direct Write-off Method" and the second is the "Allowance Method".

The Direct Write-off Method is a very weak method and it does not apply
the matching principle of recording the expenses and revenue in the same

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period. This method records bad debt expense only when a company has exerted
all it effort in collecting the money owed and finally declares it as uncollectible.
It has no effect on income because it is simply reducing the accounts receivable
to its net realizable value.

It is a simple method but it is only acceptable in cases where the company

has no accurate means of estimating the value of the bad dents during the year
or bad debts are immaterial. In accounting, an item is deemed material if it is
large enough to affect the judgment of its financial users. With the direct write
off method, several accounting periods have already passed before it is finally
determined to be uncollectible and written off. Revenue from the credit sales are
recognized in one period but the cost of uncollectible accounts that is related to
those sales are not recognized until the next accounting period. This results to a
mismatch of revenue and expenses.

The Allowance Method is a preferable method of recording bad debt

expenses. This method is in conformity with the Generally Accepted Accounting
Principles. Accounts receivable are reported in the financial statement at net
realizable value. Net realizable value is equal to the gross amount of receivables
minus an estimate of uncollectible accounts receivable. This is often called
allowance for bad debts. This is considered as a contra asset account in the
balance sheet. This contra asset account has a normal credit balance instead of
debit balance because it is a deduction to accounts receivable. The allowance for
bad debt accounts communicates to its financial user that the portion of the
accounts receivable is expected to be uncollectible. Under the allowance method,
you can estimate bad debts based on each period credit sales or based on
accounts receivables.

Estimating bad debt as a percentage of sales is consistent with the

matching concept because the bad debt expense is recorded in the same period
as the associated revenue. It is computed by providing a fixed percent of debt
provision from period to period to the bad debt expense account in the income
statement. Prior year trends or patterns in credit sales and related bad debts
provide a basis for a reasonable estimate or projection of the bad debt expense
for the current year.

In estimating bad debt based on receivables a company may estimate the

allowance from aging schedule or a single calculation of based on the total
accounts receivable. When using the estimate based on the receivables, the
journal entry for bad debt expense must consider the current balance in the

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allowance account. The amount for the entry is the amount that is needed to
bring the balance in the allowance account to the amount desired ending
balance.

Two types of balancing accounts exist to avoid fictitious profits and losses that
might otherwise occur when cash is paid out not in the same accounting periods
as expenses are recognized, because expenses are recognized when obligations
are incurred regardless when cash is paid out according to the matching
principle in accrual accounting. Cash can be paid out in an earlier or latter
period than obligations are incurred (when goods or services are delivered) and
related expenses are recognized that results in the following two types of
accounts:
Accrued expense: Expense is recognized before cash is paid out.
Deferred expense: Expense is recognized after cash is paid out.
Accrued expenses is a liability with an uncertain timing or amount, but where
the uncertainty is not significant enough to qualify it as a provision. An example
is an obligation to pay for goods or services received FROM a counterpart, while
cash for them is to be paid out in a latter accounting period when its amount is
deducted from accrued expenses. It shares characteristics with deferred income
(or deferred revenue) with the difference that a liability to be covered latter is
cash received FROM a counterpart, while goods or services are to be delivered in
a latter period, when such income item is earned, the related revenue item is
recognized, and the same amount is deducted from deferred revenues.
Deferred expenses (or prepaid expenses or prepayment) is an asset, such as cash
paid out TO a counterpart for goods or services to be received in a latter
accounting period when the obligation to pay is actually incurred, the related
expense item is recognized, and the same amount is deducted from prepayments.
It shares characteristics with accrued revenue (or accrued assets) with the

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difference that an asset to be covered latter are proceeds from a delivery of

goods or services, at which such income item is earned and the related revenue
item is recognized, while cash for them is to be received in a later period, when
its amount is deducted from accrued revenues.
Examples
Accrued expense allows one to match future costs of products with the proceeds
from their sales prior to paying out such costs.
Deferred expense (prepaid expense) allows one to match costs of products paid
out and not received yet.
Depreciation matches the cost of purchasing fixed assets with revenues
generated by them by spreading such costs over their expected life.
Accrued expenses
Accrued expense is a liability usedȄaccording to matching principleȄto enable
management of future costs with an uncertain timing or amount.
For example, supplying goods in one accounting period by a vendor, but paying
for them in a later period results in an accrued expense that prevents a fictitious
increase in the receiving company's value equal to the increase in its inventory
(assets) by the cost of the goods received, but unpaid. Without such accrued
expense, a sale of such goods in the period they were supplied would cause that
the unpaid inventory (recognized as an expense fictitiously incurred) would
effectively offset the sale proceeds (revenue) resulting in a fictitious profit in the
period of sale, and in a fictitious loss in the latter period of payment, both equal
to the cost of goods sold.
Period costs, such as office salaries or selling expenses, are immediately
recognized as expenses (and offset against revenues of the accounting period)
also when employees are paid in the next period. Unpaid period costs are

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accrued expenses (liabilities) to avoid such costs (as expenses fictitiously

incurred) to offset period revenues that would result in a fictitious profit. An
example is a commission earned at the moment of sale (or delivery) by a sales
representative who is compensated at the end of the following week, in the next
accounting period. The company recognizes the commission as an expense
incurred immediately in its current income statement to match the sale proceeds
(revenue), so the commission is also added to accrued expenses in the sale period
to prevent it from otherwise becoming a fictitious profit, and it is deducted from
accrued expenses in the next period to prevent it from otherwise becoming a
fictitious loss, when the rep is compensated.
Deferred expenses
A Deferred expense (prepaid expenses or prepayment) is an asset used to enable
management of costs paid out and not recognized as expenses according to the
matching principle.
For example, when the accounting periods are monthly, an 11/12 portion of an
annually paid insurance cost is added to prepaid expenses, which are decreased
by 1/12th of the cost in each subsequent period when the same fraction is
recognized as an expense, rather than all in the month in which such cost is
billed. The not-yet-recognized portion of such costs remains as prepayments
(assets) to prevent such cost from turning into a fictitious loss in the monthly
period it is billed, and into a fictitious profit in any other monthly period.
Similarly, cash paid out for (the cost of) goods and services not received by the
end of the accounting period is added to the prepayments to prevent it from
turning into a fictitious loss in the period cash was paid out, and into a fictitious
profit in the period of their reception. Such cost is not recognized in the income
statement (profit and loss or P&L) as the expense incurred in the period of

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payment, but in the period of their reception when such costs are recognized as
expenses in P&L and deducted from prepayments (assets) on balance sheets.
Depreciation
Depreciation is used to distribute the cost of the asset over its expected life span
according to the matching principle. If a machine is bought for $100,000, has a
life span of 10 years, and can produce the same amount of goods each year, then
$10,000 of the cost of the machine is matched to each year, rather than charging
$100,000 in the first year and nothing in the next 9 years. So, the cost of the
machine is offset against the sales in that year. This matches costs to sales.




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)%!


Cash Discount Trade Discount

Is a reduction granted by supplier

Is a reduction granted by
from the list price of goods or
supplier from the invoice
services on business consideration
price in consideration of
re: buying in bulk for goods and
immediate or prompt
longer period when in terms of
payment
services

As an incentive in credit
management to encourage Allowed to promote the sales
prompt payment

Not shown in the supplier Shown by way of deduction in the

bill or invoice invoice itself

Cash discount account is Trade discount account is not

opened in the ledger opened in the ledger

Allowed on payment of
Allowed on purchase of goods
money

It may vary with the time It may vary with the quantity of
period within which goods purchased or amount of
payment is received purchases made


m
m



5.(B)

(1) 
 Anything tangible or intangible that is capable of being owned or
controlled to produce value and that is held to have positive economic value is
considered an asset. Simplistically stated, assets represent ownership of value
that can be converted into cash (although cash itself is also considered an asset).
The balance sheet of a firm records the monetary value of the assets owned by
the firm. It is money and other valuables belonging to an individual or business.
Two major asset classes are tangible assets and intangible assets. Tangible
assets contain various subclasses, including current assets and fixed assets
Current assets include inventory, while fixed assets include such items as
buildings and equipment. Intangible assets are nonphysical resources and rights
that have a value to the firm because they give the firm some kind of advantage
in the market place. Examples of intangible assets are goodwill, copyrights,
trademarks, patents and computer programs,[5] and financial assets, including
such items as accounts receivable, bonds and stocks.






ôm The probable present benefit involves a capacity, singly or in combination

with other assets, in the case of profit oriented enterprises, to contribute
directly or indirectly to future net cash flows, and, in the case of not-for-
profit organizations, to provide services;
ôm The entity can control access to the benefit;
ôm The transaction or event giving rise to the entity's right to, or control of,
the benefit has already occurred.

m
m

In the financial accounting sense of the term, it is not necessary to be able to

legally enforce the asset's benefit for qualifying a resource as being an asset,
provided the entity can control its use by other means.

It is important to understand that in an accounting sense an asset is not the

same as ownership. Assets are equal to "equity" plus "liabilities."

The accounting equation relates assets, liabilities, and owner's equity:

Assets = Liabilities +Stockholder's Equity(Owners' Equity)

The accounting equation is the mathematical structure of the balance sheet.

Assets are listed on the balance sheet. Similarly, in economics an asset is any
form in which wealth can be held.

Probably the most accepted accounting definition of 

is the one used by the
International Accounting Standards Board. The following is a quotation from
the IFRS Framework: "An asset is a resource controlled by the enterprise as a
result of past events and from which future economic benefits are expected to
flow to the enterprise."

Assets are formally controlled and managed within larger organizations via the
use of asset tracking tools. These monitor the purchasing, upgrading, servicing,
licensing, disposal etc., of both physical and non-physical assets.In a company's
balance sheet certain divisions are required by generally accepted accounting
principles (GAAP), which vary from country to country.

* 



Current assets are cash and other assets expected to be converted to cash, sold,
or consumed either in a year or in the operating cycle (whichever is longer),
without disturbing the normal operations of a business. These assets are
continually turned over in the course of a business during normal business
activity. There are 5 major items included into current assets:

1.m * 6 

 Ȅ it is the most liquid asset, which includes
currency, deposit accounts, and negotiable instruments (e.g., money
orders, cheque, bank drafts).

m
m

2.m 
F


 Ȅ include securities bought and held for sale in
the near future to generate income on short-term price differences
(trading securities).
3.m $ Ȅ usually reported as net of allowance for uncollectable
accounts.
4.m 
4 Ȅ trading these assets is a normal business of a company. The
inventory value reported on the balance sheet is usually the historical cost
or fair market value, whichever is lower. This is known as the "lower of
cost or market" rule.
5.m   5 Ȅ these are expenses paid in cash and recorded as
assets before they are used or consumed (a common example is
insurance). See also adjusting entries.

The phrase net current assets (also called working capital) is often used and
refers to the total of current assets less the total of current liabilities.

%F




Often referred to simply as "investments". Long-term investments are to be held

for many years and are not intended to be disposed of in the near future. This
group usually consists of four types of investments:

1.m Investments in securities such as bonds, common stock, or long-term

notes.
2.m Investments in fixed assets not used in operations (e.g., land held for sale).
3.m Investments in special funds (e.g., sinking funds or pension funds).

Different forms of insurance may also be treated as long term investments.

5 


Also referred to as PPE (property, plant, and equipment), these are purchased
for continued and long-term use in earning profit in a business. This group
includes as an asset land, buildings, machinery, furniture, tools, and certain
wasting resources e.g., timberland and minerals. They are written off against
profits over their anticipated life by charging depreciation expenses (with
exception of land assets). Accumulated depreciation is shown in the face of the
balance sheet or in the notes.

m
m

These are also called capital assets in management accounting.





Intangible assets lack physical substance and usually are very hard to evaluate.
They include patents, copyrights, franchises, goodwill, trademarks, trade names,
etc. These assets are (according to US GAAP) amortized to expense over 5 to 40
years with the exception of goodwill.

Websites are treated differently in different countries and may fall under either
tangible or intangible assets.

(


Tangible assets are those that have a physical substance and can be touched,
such as currencies, buildings, real estate, vehicles, inventories, equipment, and
precious metals

% %(&Anything that is owed to others is a liability.

Liabilities are often referred to as ,4,

a liability is defined as an obligation of an entity arising from past transactions

or events, the settlement of which may result in the transfer or use of assets,
provision of services or other yielding of economic benefits in the future.

All type of borrowing from persons or banks for improving a business or person
income which is payable during short or long time.

Liabilities are generally separated into two groups

m
m

8*$$#!(% %(#E8%)!F(#$'
% %(#
8*$$#!(% %(#Debts to others that are due in a
short period of time and are paid with current assets.
#5  mentioned in below
G !
4 - Promissory notes to creditors.
G  
4 - What you owe others on account.
G $  - You've been paid, but haven't
delivered.
G4 - Salaries you owe employees.
G

4 - Interest you owe.
G(54 - Taxes you owe.

ii) %)!(#$'% %(# : Debts that are ,5 , or paid
long period of time, often for plant assets. Liabilities that are
carried over a number of years or at least more than one
accounting cycle.

#5Mortgages payable, Bonds payable, and

Long-term notes.


They embody a duty or responsibility to others that entails settlement by future

transfer or use of assets, provision of services or other yielding of economic
benefits, at a specified or determinable date, on occurrence of a specified event,
or on demand;

The duty or responsibility obligates the entity leaving it little or no discretion to

avoid it; and,

The transaction or event obligating the entity has already occurred.

m
m

Liabilities in financial accounting need not be legally enforceable; but can be

based on equitable obligations or constructive obligations. An equitable
obligation is a duty based on ethical or moral considerations. A constructive
obligation is an obligation that can be inferred from a set of facts in a particular
situation as opposed to a contractually based obligation.

Liabilities are debts and obligations of the business they represent creditors
claim on business assests. Example of Liabilities All kinds of payable 1) Notes
payable - an written promise. 2) Accounts Payable - an oral promise. 3) Interests
Payable. 4) Sales Payable.

m
m

:::::::::::::::::::::::::::::::::::::::::::::
::::::::::::::



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Particulars Debit Credit

Capital 7,670

Cash in Hand 30

Purchases 8,990

Sales 11,060

Cash at bank 885

Fixtures and Fittings 225

Freehold premises 1.500

Lighting and Heating 65

Bills Receivable 825

Return Inwards 30

Salaries 1.075

Creditors 1890

m
m

Debtors 5,700

Stock at 1st April 2007 3,000

Printing 225

Bills Payable 1,875

Rates, taxes and insurance 190

Discount received 445

Discount allowed 200

21,175 21,705

C 



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 1890

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 5,700


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$

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" 
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" 
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22,940 22,940

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To Opening 3000 By Sales 11060
Stock
To Purchase 8990 Less returns 30 11030
To Gross Profit 840 By Closing Stock 1800
c/d
2½9ë3  2½9ë3
To Salaries 1075 By Gross Profit 840
c/d
Add Outstanding 1110 By Discount 445
35
To Lighting and 65 By net loss
heating Transit and to 490
capital a/c
To Printing 225
To Rates, Taxes
and Insurance
190
Less: Insurance
Unpaid 40 150
To Discount
Allowed 200

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To Depreciation
of furniture & 25
Fittings
2@@1  2@@1



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Current Current Assets
Liabilities
Creditors 1890 Cash in Hands 30
Bills Payable 1875 Cash at Bank 885
Outstanding 35 Bill Receivable 825
Salary
Capital Debtors 5700
Opening Balance Closing Stock 1800
7670
Unexpired Rates
and Insurance 40
Fixed Assets
Less: Net less 7180 Furniture and
490 fittings 225
Less:
Deprecation 25 200
Free hold 1500
Promises

m
m

23H93  23H93