North South University,
School of Business
ACT 201 (Sec.: 11)
Introduction to Accounting
M. Morshed (MDM)
Senior Lecturer, School of Business.
Robiul Hassan Labib
ID – 1220296030.
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Question 1: Explain using various examples, how the major accounting concepts are used in preparing financial statements.
Introduction to Financial Statements
One of the steps included in the accounting cycle is the preparation of the principal financial statements. They are the Income Statement and the Balance Sheet. These financial statements are a means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Once the worksheet is completed, it is easy to prepare the financial statements as the necessary data have already been summarized. A third financial statement, which is the Statement of Cash Flows, provides information about cash receipts and cash payments into operating, investing, and financing activities. A Balance Sheet is a formal statement that shows the financial condition of the business as of a given date. It reports the resources of the business (assets), its obligations (liabilities), and the residual ownership (capital or owner’s equity). The Income statement, on the other hand, shows the results of the operations during a given time period. It summarizes business activities for a given period and reports the net income or loss resulting from operations. It contains the nominal accounts or the revenue and expense accounts. Fundamental Accounting Concepts
Accounting is the language used by businesses to communicate their financial information and performance to interested parties. Like every language accounting too has a set of concepts that it is based on. Accounting has a set of twelve fundamental concepts that form the basis of all accounting; these concepts are called the General Accepted Accounting Principles (GAAP). These concepts explain the meaning of all the figures that are found in the financial statements of a company.
All financial statements should be created, preserved and presented according to the concepts and conventions that follow. Accounting concepts and conventions are the rules and guidelines by which the accountant lives. There are four general accounting concepts, although for some there are even more as each concept is interrelated with the other concepts. The four basic concepts are the going concern concept, accruals or matching concept, consistency concept, and the prudence concept. The going concern concept is the underlying assumption that any accountant makes in preparing the set of accounts. It means that the business under consideration will remain in existence for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations. However, if such intention or need exists, a different basis is needed in the preparation of the said statements, therefore disclosing the former basis used. Second is the accrual concept, or otherwise known as the matching principle. The purpose of this concept is to be sure that all revenues and costs are recorded exactly on the time they happened, on the financial statements of the period to which they relate. Thus, when a profit statement is compiled, the cost of goods sold related to those sales should be recorded accurately and completely in that statement....
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