Cash Book is called a journalized ledger because it is considered to be both a journal as well as a ledger. As you know Cash Book is a subsidiary book. But like a journal, the transactions in the Cash Book are recorded in it for the first time from the source documents/vouchers. Hence it is considerRead more
Cash Book is called a journalized ledger because it is considered to be both a journal as well as a ledger.
As you know Cash Book is a subsidiary book. But like a journal, the transactions in the Cash Book are recorded in it for the first time from the source documents/vouchers. Hence it is considered to be a journal for all cash transactions.
Cash Book can also be viewed as a Cash A/c because all transactions involving cash are recorded in it. It provides a summary of cash transactions. Hence it is considered to be a ledger account for cash transactions.
Since Cash Book is both a journal and ledger, you can very well call it a ‘journalized ledger’.
The difference between a ledger & a trial balance is as follows: Basis Ledger Trial Balance Meaning Ledger is a book/register in which all the accounts are put together. A Trial Balance is a statement showing the debit and credit balance of all the accounts to ascertain the arithmetical accuracyRead more
The difference between a ledger & a trial balance is as follows:
Basis
Ledger
Trial Balance
Meaning
Ledger is a book/register in which all the accounts are put together.
A Trial Balance is a statement showing the debit and credit balance of all the accounts to ascertain the arithmetical accuracy of the books of accounts.
Basis of preparation
Journal is the basis for recording transactions in the ledger.
The closing balances of different accounts in the ledger are the basis for preparing the trial balance.
Objective
It is prepared to see the net effect of various transactions affecting a particular account.
It is prepared to check the arithmetical accuracy of the books of accounts.
Format
A ledger has four identical columns on the debit and credit sides: 1. Date, 2. Particulars, 3. Journal Folio, 4. Amount.
A Trial Balance has five columns: 1. S.No, 2. Name of Accounts, 3. Ledger Folio, 4. Debit Balance, 5. Credit Balance.
Stage of Recording
A ledger is prepared after recording the transactions in the journal.
A trial balance is prepared after posting the transactions in the ledger.
As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts. Here I've explained the steps involved in posting a journal entry to the ledger.Read more
As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts.
Here I’ve explained the steps involved in posting a journal entry to the ledger.
Posting of an account debited in the journal entry:
Step 1: Identify the account which has to be debited in the ledger.
Step 2: Write the date of the transaction under the ‘Date Column’ of the debit side of the ledger account.
Step 3: Write the name of the account which has been credited in the journal entry in the ‘Particulars Column’ on the debit side of the account as “To (name of the account)”.
Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.
Step 5: Enter the amount in the ‘Amount Column’ on the debit side of the ledger account.
Posting of an account credited in the journal entry:
Step 1: Identify the account which has to be credited in the ledger.
Step 2: Write the date of the transaction under the ‘Date Column’ of the credit side of the ledger account.
Step 3: Write the name of the account which has been debited in the journal entry in the ‘Particulars Column’ on the credit side of the account as “By (name of the account)”.
Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.
Step 5: Enter the amount in the ‘Amount Column’ on the credit side of the ledger account.
I’ll explain the process of preparing a ledger A/c with a simple transaction.
On 1st May ABC Ltd. purchased machinery for 5,00,000. In the Journal the following entry will be made.
Machinery A/c
5,00,000
To Bank A/c
5,00,000
(Being machinery purchased for 5,00,000)
Let’s assume that this entry appears on page no. 32 of the journal. Now we will open Machinery A/c and Bank A/c in the Ledger.
On the debit side of the Machinery A/c “To Bank A/c” will be written. In the Bank A/c “By Machinery A/c” will be written on the credit side.
Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue. Note that as per the accrual concept of accounting, sales are recognized on the daRead more
Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue.
Note that as per the accrual concept of accounting, sales are recognized on the day it was made, irrespective of whether the business receives cash or not.
The business records unbilled revenue by passing the following journal entry:
Unbilled Revenue is treated as an asset because it is yet to be fully recognized as an income. Therefore it is debited. Revenue A/c is credited as there is an increase in income.
Once the bill/invoice has been issued to the customer, the following entry is passed to close the Unbilled Revenue A/c.
Let me explain this concept with an example,
Luca Traders, a business dealing in stationery and office supplies receives an order on August 5th for 1,000 pens worth 10 each. On August 8th they deliver the pens but they are yet to issue an invoice to the customer. They issue the invoice only on August 13th.
So the sales revenue of 10,000 (1,000*10) will be treated as an unbilled revenue for the period of August 8th – August 12th. On August 8th the following entry is made to record unbilled revenue.
Unbilled Revenue A/c
10,000
To Revenue A/c
10,000
(Being entry for recording unbilled revenue worth 10,000)
When the invoice is sent to the customer on August 13th, the following journal entry is posted to close the unbilled revenue A/c.
Here I have prepared the Income & Expenditure A/c and Balance Sheet of Bharti Club: Income & Expenditure A/c for the year ended 31st March 2019 Expenditure Amt Income Amt To Salary 25,000 By Subscriptions (WN 1) 69,900 To Travelling Expenses 4,000 By Donations Read more
Here I have prepared the Income & Expenditure A/c and Balance Sheet of Bharti Club:
Income & Expenditure A/c for the year ended 31st March 2019
Expenditure
Amt
Income
Amt
To Salary
25,000
By Subscriptions (WN 1)
69,900
To Travelling Expenses
4,000
By Donations
5,000
To Stationery
13,000
By Life Membership Fees
10,000
To Rent
32,000
By Income from Investments
2,000
To Surplus (Balancing figure)
12,900
86,900
86,900
Balance Sheet as on 31st March 2019
Liabilities
Amt
Assets
Amt
Capital Fund (WN 2)
44,900
Cash
30,000
Add: Surplus
12,900
57,800
9% Investments
25,000
Advance Subscription
3,500
Books
12,000
Life Membership Fees
10,000
Outstanding Subscription
4,300
71,300
71,300
Working Note 1: Calculation of Subscriptions
Particulars
Amt
Total subscriptions received in 2018-19
70,500
Add: Advance subscription for 2018-19
2,000
Subscription outstanding for 2018-19
4,300
6,300
76,800
Less: Advance subscription for 2019-20
(3,500)
Subscription outstanding for 2017-18
(3,400)
(6,900)
69,900
Working Note 2: Calculation of Capital Fund
We prepare the previous year’s balance sheet of Bharti Club to identify the capital.
Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period. A part of the expense is amortized/written off every year against the compRead more
Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period.
A part of the expense is amortized/written off every yearagainst the company’s earnings. The remaining part (which is yet to be written off) is shown as an asset in the balance sheet. They are shown as assets because these expenses are expected to give returns to the company over a period of time.
Here are some examples of fictitious assets:
Preliminary expenses.
Promotional expenses.
Loss incurred on the issue of debentures.
Underwriting commission.
Discount on issue of shares.
To make it simple I’ll explain the accounting treatment of preliminary expenses with an example.
The promoters of KL Ltd. paid 50,000 as consultation fees for incorporating the company. The consultation fee is a preliminary expense as they are incurred for the formation of the company. The company agreed to write off this expense over a period of 5 years.
At the end of every year, the company will write off 10,000 (50,000/5) as an expense in the Profit & Loss A/c.
The remaining portion i.e. 40,000 (50,000 – 10,000) will be shown on the Assets side of the Balance Sheet under the head Non – Current Assets and sub-head Other Non – Current Assets.
Here are the financial statements of KL Ltd.,
Note: As per AS 26 preliminary expenses are fully written off in the year they are incurred. This is because such expenses do not meet the definition of assets and must be written off in the year of incurring.
The correct answer is C. Balance Sheet. A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet. It is also known as Position Statement (as it shows financial position) or SRead more
The correct answer is C. Balance Sheet.
A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet.
It is also known as Position Statement (as it shows financial position) or Statement of Affairs (when it is prepared under the Single Entry System of accounting).
The balance sheet shows the assets and liabilities of a firm at any specific point in time. It is a summary of the assets held by a firm and the liabilities owed to outsiders.
As the name suggests, a balance sheet must always be balanced i.e, the total of assets should always be equal to the total of liabilities on any single day. To put it simply,
Assets = Liabilities + Capital
In the case of a sole proprietorship or partnership, capital means the amount invested by the proprietor/partners in the business. In the case of a company, capital means the funds contributed by the shareholders in the form of shares.
Here is a link for the official balance sheet format as per the Companies Act 2013 (page 260 of the pdf),
The total depreciation of an asset cannot exceed its 3. depreciable value. Depreciable value means the original cost of the asset minus its residual/salvage value. The asset's original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simplRead more
The total depreciation of an asset cannot exceed its 3. depreciable value.
Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,
The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.
Let me show you an example to make it more understandable,
Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,
The estimated useful life of the machine – 10 years.
Residual value at the end of 10 years – $50,000.
Method of depreciation – Straight-line method.
The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:
Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)
Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).
Thus, the total depreciation of an asset cannot be more than its depreciable value.
Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence. Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitableRead more
Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence.
Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitable and natural.
For example, Kumar has purchased a car for 25,00,000. After five years he wishes to sell his car. Now the market price of his used car is 12,00,000. This reduction in the value of the car from 25,00,000 to 12,00,000 is because of its usage. This fall in the value of the asset due to usage is known as normal wear & tear.
In generic terms, obsolescence means something that has become outdated or is no longer being used. Foreseen obsolescence is nothing but obsolescence that is expected.
In the context of business, whenever the value of an asset falls because it has become outdated or is replaced by a superior version, we call it obsolescence. The fall in the value of the asset due to obsolescence expected by the purchaser of the asset is known as foreseen obsolescence.
When an asset becomes obsolete it doesn’t mean it is not in working condition. Even when an asset is in good working condition it can become obsolete due to the following reasons:
Technology advancement.
Change in demand (change in fashion, change in taste and preferences of the consumers, etc.)
For example, before the invention of computers, people used typewriters for getting their paperwork done. With the invention of computers, laptops, etc. it is easier to type as well as save our documents, spreadsheets, etc. Thus typewriters became obsolete with the invention of computers. It has become a technology of the past.
Here is a summarised version of wear & tear and obsolescence:
Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more
Yes, I agree with your statement that accounting information should be comparable.
Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.
Comparability of financial statements is crucial due to the following reasons:
1. Intra-Firm Comparison:
Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.
Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.
The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.
To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.
2. Inter-Firm Comparison:
Comparison of financial statements of two or more firms is known as an inter-firm comparison.
Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.
Inter-firm comparison is also known as Cross-sectional Analysis.
I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.
Here is a piece of bonus information for you,
Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.
One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.
why cash book is called journalised ledger?
Cash Book is called a journalized ledger because it is considered to be both a journal as well as a ledger. As you know Cash Book is a subsidiary book. But like a journal, the transactions in the Cash Book are recorded in it for the first time from the source documents/vouchers. Hence it is considerRead more
Cash Book is called a journalized ledger because it is considered to be both a journal as well as a ledger.
As you know Cash Book is a subsidiary book. But like a journal, the transactions in the Cash Book are recorded in it for the first time from the source documents/vouchers. Hence it is considered to be a journal for all cash transactions.
Cash Book can also be viewed as a Cash A/c because all transactions involving cash are recorded in it. It provides a summary of cash transactions. Hence it is considered to be a ledger account for cash transactions.
Since Cash Book is both a journal and ledger, you can very well call it a ‘journalized ledger’.
See lessWhat is the difference between ledger and trial balance?
The difference between a ledger & a trial balance is as follows: Basis Ledger Trial Balance Meaning Ledger is a book/register in which all the accounts are put together. A Trial Balance is a statement showing the debit and credit balance of all the accounts to ascertain the arithmetical accuracyRead more
The difference between a ledger & a trial balance is as follows:
Write the process of preparing ledger from a journal?
As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts. Here I've explained the steps involved in posting a journal entry to the ledger.Read more
As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts.
Here I’ve explained the steps involved in posting a journal entry to the ledger.
Posting of an account debited in the journal entry:
Step 1: Identify the account which has to be debited in the ledger.
Step 2: Write the date of the transaction under the ‘Date Column’ of the debit side of the ledger account.
Step 3: Write the name of the account which has been credited in the journal entry in the ‘Particulars Column’ on the debit side of the account as “To (name of the account)”.
Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.
Step 5: Enter the amount in the ‘Amount Column’ on the debit side of the ledger account.
Posting of an account credited in the journal entry:
Step 1: Identify the account which has to be credited in the ledger.
Step 2: Write the date of the transaction under the ‘Date Column’ of the credit side of the ledger account.
Step 3: Write the name of the account which has been debited in the journal entry in the ‘Particulars Column’ on the credit side of the account as “By (name of the account)”.
Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.
Step 5: Enter the amount in the ‘Amount Column’ on the credit side of the ledger account.
I’ll explain the process of preparing a ledger A/c with a simple transaction.
On 1st May ABC Ltd. purchased machinery for 5,00,000. In the Journal the following entry will be made.
Let’s assume that this entry appears on page no. 32 of the journal. Now we will open Machinery A/c and Bank A/c in the Ledger.
On the debit side of the Machinery A/c “To Bank A/c” will be written. In the Bank A/c “By Machinery A/c” will be written on the credit side.
An extract of both the accounts are as follows:
Machinery A/c
Bank A/c
What is the journal entry for unbilled revenue?
Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue. Note that as per the accrual concept of accounting, sales are recognized on the daRead more
Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue.
Note that as per the accrual concept of accounting, sales are recognized on the day it was made, irrespective of whether the business receives cash or not.
The business records unbilled revenue by passing the following journal entry:
Unbilled Revenue is treated as an asset because it is yet to be fully recognized as an income. Therefore it is debited. Revenue A/c is credited as there is an increase in income.
Once the bill/invoice has been issued to the customer, the following entry is passed to close the Unbilled Revenue A/c.
Let me explain this concept with an example,
Luca Traders, a business dealing in stationery and office supplies receives an order on August 5th for 1,000 pens worth 10 each. On August 8th they deliver the pens but they are yet to issue an invoice to the customer. They issue the invoice only on August 13th.
So the sales revenue of 10,000 (1,000*10) will be treated as an unbilled revenue for the period of August 8th – August 12th. On August 8th the following entry is made to record unbilled revenue.
When the invoice is sent to the customer on August 13th, the following journal entry is posted to close the unbilled revenue A/c.
Following is the Receipts and Payments Account of Bharti Club for the year ended 31st March 2019?
Here I have prepared the Income & Expenditure A/c and Balance Sheet of Bharti Club: Income & Expenditure A/c for the year ended 31st March 2019 Expenditure Amt Income Amt To Salary 25,000 By Subscriptions (WN 1) 69,900 To Travelling Expenses 4,000 By Donations Read more
Here I have prepared the Income & Expenditure A/c and Balance Sheet of Bharti Club:
Income & Expenditure A/c for the year ended 31st March 2019
Balance Sheet as on 31st March 2019
Working Note 1: Calculation of Subscriptions
Working Note 2: Calculation of Capital Fund
We prepare the previous year’s balance sheet of Bharti Club to identify the capital.
Balance Sheet as on 31st March 2018
What are some examples of fictitious asset?
Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period. A part of the expense is amortized/written off every year against the compRead more
Fictitious assets are not actually assets. They are expenses/losses not written off in the year in which they are incurred. They do not have any physical presence. Their expense is spread over more than one accounting period.
A part of the expense is amortized/written off every year against the company’s earnings. The remaining part (which is yet to be written off) is shown as an asset in the balance sheet. They are shown as assets because these expenses are expected to give returns to the company over a period of time.
Here are some examples of fictitious assets:
To make it simple I’ll explain the accounting treatment of preliminary expenses with an example.
The promoters of KL Ltd. paid 50,000 as consultation fees for incorporating the company. The consultation fee is a preliminary expense as they are incurred for the formation of the company. The company agreed to write off this expense over a period of 5 years.
At the end of every year, the company will write off 10,000 (50,000/5) as an expense in the Profit & Loss A/c.
The remaining portion i.e. 40,000 (50,000 – 10,000) will be shown on the Assets side of the Balance Sheet under the head Non – Current Assets and sub-head Other Non – Current Assets.
Here are the financial statements of KL Ltd.,
Note: As per AS 26 preliminary expenses are fully written off in the year they are incurred. This is because such expenses do not meet the definition of assets and must be written off in the year of incurring.
Source: Some fictitious assets examples are from Accountingcapital.com & others from Wikipedia.
See lessThe following is a statement showing the financial status of the company at any given time?
The correct answer is C. Balance Sheet. A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet. It is also known as Position Statement (as it shows financial position) or SRead more
The correct answer is C. Balance Sheet.
A Balance Sheet is a financial statement prepared to know the financial position of a company at any particular point in time. Hence, the answer to your question is the balance sheet.
It is also known as Position Statement (as it shows financial position) or Statement of Affairs (when it is prepared under the Single Entry System of accounting).
The balance sheet shows the assets and liabilities of a firm at any specific point in time. It is a summary of the assets held by a firm and the liabilities owed to outsiders.
As the name suggests, a balance sheet must always be balanced i.e, the total of assets should always be equal to the total of liabilities on any single day. To put it simply,
Assets = Liabilities + Capital
In the case of a sole proprietorship or partnership, capital means the amount invested by the proprietor/partners in the business. In the case of a company, capital means the funds contributed by the shareholders in the form of shares.
Here is a link for the official balance sheet format as per the Companies Act 2013 (page 260 of the pdf),
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
See lessTotal depreciation of an asset cannot exceed its?
The total depreciation of an asset cannot exceed its 3. depreciable value. Depreciable value means the original cost of the asset minus its residual/salvage value. The asset's original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simplRead more
The total depreciation of an asset cannot exceed its 3. depreciable value.
Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,
The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.
Let me show you an example to make it more understandable,
Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,
The estimated useful life of the machine – 10 years.
Residual value at the end of 10 years – $50,000.
Method of depreciation – Straight-line method.
The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:
Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)
Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).
Thus, the total depreciation of an asset cannot be more than its depreciable value.
See lessDepreciation of fixed capital assets refers to?
Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence. Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitableRead more
Depreciation of fixed capital assets refers to C. Normal wear & tear & foreseen obsolescence.
Normal wear & tear refers to the damage caused to an asset due to its continuous usage. Even when the asset is properly maintained, wear and tear occurs. Hence, it is considered to be inevitable and natural.
For example, Kumar has purchased a car for 25,00,000. After five years he wishes to sell his car. Now the market price of his used car is 12,00,000. This reduction in the value of the car from 25,00,000 to 12,00,000 is because of its usage. This fall in the value of the asset due to usage is known as normal wear & tear.
In generic terms, obsolescence means something that has become outdated or is no longer being used. Foreseen obsolescence is nothing but obsolescence that is expected.
In the context of business, whenever the value of an asset falls because it has become outdated or is replaced by a superior version, we call it obsolescence. The fall in the value of the asset due to obsolescence expected by the purchaser of the asset is known as foreseen obsolescence.
When an asset becomes obsolete it doesn’t mean it is not in working condition. Even when an asset is in good working condition it can become obsolete due to the following reasons:
For example, before the invention of computers, people used typewriters for getting their paperwork done. With the invention of computers, laptops, etc. it is easier to type as well as save our documents, spreadsheets, etc. Thus typewriters became obsolete with the invention of computers. It has become a technology of the past.
Here is a summarised version of wear & tear and obsolescence:
See lessAccounting information should be comparable do you agree with this statement give two reasons?
Yes, I agree with your statement that accounting information should be comparable. Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company's financial statements across time and across other companies. Comparability oRead more
Yes, I agree with your statement that accounting information should be comparable.
Comparability is one of the qualitative characteristics of accounting information. It means that users should be able to compare a company’s financial statements across time and across other companies.
Comparability of financial statements is crucial due to the following reasons:
1. Intra-Firm Comparison:
Comparison of financial statements of two or more periods of the same firm is known as an intra-firm comparison.
Comparability of accounting information enables the users to analyze the financial statements of a business over a period of time. It helps them to monitor whether the firm’s financial performance has improved over time.
The intra-firm analysis is also known as Time Series Analysis or Trend Analysis.
To understand intra-firm analysis, I have provided an extract of the balance sheet of ABC Ltd. for two accounting periods.
2. Inter-Firm Comparison:
Comparison of financial statements of two or more firms is known as an inter-firm comparison.
Inter-firm comparison helps in analyzing the financial performance of two or more competing firms in an industry. It enables the firm to know its position in the market in comparison to its competitors.
Inter-firm comparison is also known as Cross-sectional Analysis.
I’ve provided the balance sheets of Co. A and Co.B to make an inter-firm comparison.
Here is a piece of bonus information for you,
Sector Analysis – it refers to the assessment of economical and financial conditions of a given sector of a company/industry/economy. It involves the analysis of the size, demographic, pricing, competitive, and other economic dimensions of a sector of the company/industry/economy.
One more important thing to note here is that comparability can only be achieved when the firms are consistent in the accounting principles and standards they adopt. The accounting policies and standards must be consistent across different periods of the same firm and across different firms in an industry.
See less