3) Consistency Principle requires that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be comparable.
4) Conservatism or Prudence Principle guides accountants to select the less optimistic estimate when two estimates of amounts to be received or paid are about equally likely.
V. Revenue – the receipt, from sales of a product or service, of assets such as cash or accounts receivable that will eventually have an effect on the owner’s equity.
Expenditures – the costs of doing business; that is, the costs that must be incurred in order to generate revenue.
The two types of expenditures:
1. Capital expenditure - a material expenditure for an asset that will be used for more than 1 year, that increases the value of fixed asset.
2. Revenue expenditure – an expenditure related to a plant asset that is expensed when incurred.(e.g. maintenance and repair costs)
All businesses exist for the purpose of earning a profit. An excess of revenue over expenses represents a profit. If expenses exceed revenue, the result is known as a loss.
VI. Accounting equation – the relationship between the assets, liabilities, and capital of a business organization. The equation states: Assets = Liabilities + Capital.
Asset – anything that is owned and has money value.
Types of assets:
1) Tangible asset – a current or long-term asset that can be readily seen and possibly touched
1.1. Current assets are defined as cash and other assets that can be converted to cash, used up, or sold within one year or less (e.g. cash, accounts receivable, supplies).
1.2. Fixed assets are long-term assets that are used in the continuing operations of the organization for more than a year (e.g. property, land, building, machinery, equipment).
1.3. Investments are generally of a long-term nature (e.g. shares and bonds).
2) Intangible asset are usually of a long-term nature and have no physical substance but are of value to the owners of the organization (e.g. copyright, patents, goodwill, trade mark).
Liabilities – amounts due creditors and other interested parties; also, the ownership of the assets of an organization by its creditors.
Types of liabilities:
1. Current liabilities are those that fall due for payment within one year.
2. Long-term or deferred liabilities – an obligation that is not expected to mature within one year (e.g. mortgage).
Capital – the ownership of the assets of a business by the proprietors.
Capital/Shareholder’s funds = Assets – Liabilities = Fixed assets + net current assets
VII. Financial statements are prepared at least once a year. The business is said to have a calender-year accounting period. Any business that has an accounting period consisting of 12 months other than a calender year is generally known as a fiscal-year accounting period.
Consolidated account – grouped statement for all subsidiaries during a certain period of time.
Basically three financial reports are prepared:
1) The income statement (profit and loss account) shows revenue, expenses, and net income or net loss for a business for a period of time. The business and investment community uses this report to determine investment value, creditworthiness, and income success. The income statements has one more deficiency – it only shows the changes in financial position caused by those operations that produced an income or loss.
2) The Balance Sheet shows the financial position of a business at a particular moment in time – a detailed presentation of the assets, liabilities, and owner’s equity. Actually, it is a detailed accounting equation, in which the total value of the assets is equal to the total liabilities plus proprietor’s capital. The balance sheet can be shown as a vertical presentation and as a two-sided presentation. On every balance sheet items are classified according to categories: assets, liabilities, and stockholders’ equity or share capital.
3) The cash flow statement.
Working capital is the amount by which current assets (stock, debtors, cash) exceed current liabilities.
1. How working capital rotates? Starting with cash, the business buys supplies of goods and services such as labour to create work in progress. This in turn becomes finished goods from which sales may be made.
2. How working capital gets lost? During the production process there can be theft, errors in production and wastage will also take their toll. Even when finished goods are ready for sale, some are likely to suffer deterioration or obsolescence and theft. When the goods are sold at proper prices, that profit can be lost through the incidence of bad debts.
3. How working capital gets augmented? A building which is owned can be sold and leased back; new premises could be taken on a long lease; company can take loans or attract fresh capital. Many businesses receive immediate payment when they sell goods on credit by the use of factoring arrangements. Under this process, a finance company will provide 75-80% of the face value of the sales invoice against an assignment to it of that debt.
VIII. The objectives of financial statements in the RAS and IAS systems are different too.
1) RAS ignore inflation and rely heavily on fulfilling the letter of Russian legislation, while IAS are said to emphasise the time economic activity of a business;
2) Accounts prepared in RAS are intended to satisfy the requirements of tax authorities, while accounts prepared in accordance with IAS are intended mainly for investors such as shareholders, creditors.
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