roper measurement of income.
According to this concept, revenue is considered as earned on the date when it is realised. In other words, revenue realised (either by sale of goods or by rendering services) during an accounting period should only be taken in the income statement (Profit and Loss Account). Unearned/Unrealised revenue should not be taken into account. The revenue is treated as earned on some specific matters or transactions. For example, when goods are sold to customers, they are legally liable to pay, i.e., as soon as the ownership of goods passes from the seller to the buyer. In short, when an order is simply received from a customer, it does not mean that the revenue is earned or realised. On the other hand, when an advanced payment is made by a customer, the same cannot be treated as revenue realised or earned. In case of hire-purchase transactions, however, the title or ownership of the goods is not transferred from the seller to the buyer till the last instalment is paid, As such, the down payments and the instalment received or due should be treated as actual sale, i.e., revenue earned.
Balance Sheet Equation Concept: T
he Historical Cost Concept needs support of two other concepts for practical purposes, viz. (i) the Money Measurement Concept (already discussed above), (ii) the Balance Sheet Equation Concept. Accounting process, however, conforms to an algebraic equation which, in other words, is involved in two laws of nature, i.e., the law of constancy of matter and the law that every effect originates from a cause.In relation to the former, it may be deducted that all that has been received by us must be equal to (=) all that has been given to us (In accounts, receipts are classified as debits and giving or sacrifices are classified as credits.).Here, the equation comes :Debit = Credit(That is, in other words, every debit must have a corresponding equal credit or vice versa.) All receipts (referred to above) may again be classified into : (i) benefits/services received and totally consumed (which are known as expenses), (ii) benefits or services received but not used properly or misused (which are known as losses) and (iii) benefits or services received but kept to be used in future (which are known as assets). Similarly, in the opposite case, all that have been given by others may also be classified into : (i) What has been given to us but-are not to be repaid (which are known as incomes or gains), and (ii) What has been given by the others but has to be repaid at a later date (which are known as liabilities).Therefore, the above equation may again be rewritten as under:
Expenses + Loss + Assets = Income + Gains + Liabilities
However, if expenses and losses are set off against incomes and gains the same equation will be reproduced in the following form:
Assets = Income + Gains + Liabilities – Expenses – Losses Or, Assets = Net Profit (-) Net Loss + Liabilities
Liabilities become due either to outsider or to the owner, viz. the proprietors, in that case:
Assets = Net Profits or (-) Net Loss + External liabilities + Dues to Proprietors
We know that proprietor’s due increases with the amount of net profit whereas it decreases with the amount of net loss. The same is known as equity in the business.
So, the above-given equation comes down to:
Assets = Equity + External Liabilities Again, from the proprietor’s point of view, the equation can also be rewritten as under:
Proprietor’s Fund or Equity – Assets – Liabilities
From the above, it may be said that the entire accounting process depends on the above accounting equation.
Branches of Accounting
Accounting is vast in nature and revolves every organization or firm. Below are some of the branches of Accounting:
Financial Accounting: It is that branch of accounting, which involves the recording of the transactions, inclined towards the preparation of trial balance and final accounts.
- Cost Accounting: Cost account is the accounting discipline, which deals with costs, i.e. the unit costs of the goods produced and services provided. It helps the management of the organization in fixing the price, controlling costs and providing relevant information for the purpose of decision making.
- Management Accounting: The accounting system which supplies thenecessary information to the management, for rational decision making. The information may be concerned with funds, costs, profits and losses and so forth. This information is helpful in determining the effect of the decisions and analysing the performance of the entity.
- Tax Accounting: The accounting system that deals with the tax return and its payment, instead of preparation of final accounts of the enterprise, is called tax accounting.
- Social Accounting: This branch of accounting is commonly termed as social responsibility accounting. It aims at unveiling the facilities provided by the entity to the society, in terms of medical, housing, education, and so forth.
These accounting branches have been developed as a result of rapid economic development and technological improvements, that increased the company’s scale of operations. Due to this very reason, the management functions has become complicated and resulted in the development of branches.