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Define realization concept of accounting?

Define realization concept of accounting?

Solution

The realization concept states that revenue is earned on the date goods are sold or services are rendered in exchange for cash or a claim to cash. Revenue is realized when the sale is made, not when the money is later collected by cash or cheque.

  • Credit sales count: profit can be recognized on a credit sale even before the cash is collected.
  • No revenue before the sale: orders received but not yet filled, and income received in advance, are not treated as revenue. For example, if goods are sold for Rs. 20,000, the Rs. 20,000 is revenue because the sale has taken place.

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  1. 1.

    (a) What is accounting information? Who are the users of accounting information? Explain.

    (b) Define source of documents. Write down the objectives of source of documents.

    Practice
  2. 2.

    The Balance Sheet and Income Statement of a company have been given below:

    Liabilities Year I Year II Assets Year I Year II
    Equity share capital 800,000 1,000,000 Land and building 300,000 340,000
    Share premium 80,000 100,000 Plant and machinery 500,000 700,000
    Bank loan - 200,000 Inventories 230,000 300,000
    Accounts payable 180,000 160,000 Accounts receivable 220,000 250,000
    Provision for taxation 50,000 60,000 Provision for doubtful debts (40,000) (30,000)
    Profit and loss 140,000 280,000 Cash at bank 40,000 240,000
    Total 1,250,000 1,800,000 Total 1,250,000 1,800,000
    Particulars Rs. Rs.
    Sales 1,000,000
    Less: Cost of goods sold 600,000
    Gross profit 400,000
    Less: Operating expenses 100,000
    Interest on bank loan 20,000
    Depreciation on machinery 40,000
    Provision for taxation 60,000
    Loss on sale of machine (Book value Rs. 60,000) 40,000 260,000
    Net income 140,000

    Required: Cash flow statement by using direct method

    Long question Practice
  3. 3.

    Following are the transaction of a company.

    I. Started business with cash Rs. 800,000 in exchange of 8,000 shares of Rs. 100 each.

    II. Deposited into bank Rs.300,000.

    III. Took a bank loan of Rs. 100,000 @ 10% interest.

    IV. Sold merchandise goods for Rs.300,000 on account.

    V. Purchased merchandise goods for Rs.180,000 on account

    VI. Paid Rs.10,000 for insurance premium.

    VII. Received Rs.270,000 after deduction of 10% discount from the customers

    VIII. Paid Rs. 170,000 in full settlement of Rs.180,000 by cheque.

    IX. Paid electricity bill Rs. 5,000

    X. Pre-paid office rent Rs.26,000 by issuing cheque.

    Additional Information

    a) Closing stock Rs. 20,000.

    b) Prepaid rent expired Rs. 24,000.

    c) Outstanding interest Rs.10,000

    Required:

    a. Journal entries for above transactions

    b. Accounts receivable and payable account

    c. Triple column cash book

    d. Adjusted Trial balance

    Long question Practice
  4. 4.

    What is value added statement? Explain in brief the advantages of value added statement.

    Practice
  5. 5.

    "A lease is a legal contract under which one party agrees to pay rent for property owned by the other party." Discuss.

    Practice
  6. 6.

    (a) On Ashad 2081, Bank Statement disclosed a balance of Rs.16,000 and Cash Book showed the balance of Rs.14,800

    i) Deposit in transit Rs. 1,900

    ii) Outstanding cheques Rs. 1,000.

    iii) Notes receivable and interest collected by the bank Rs.4,000 and Rs. 200 respectively.

    iv) Cheque of Rs. 7,450 deposited by the company was recorded by the bank as Rs.7,350

    v) A customer's cheque for Rs.1,500 was returned by the bank due to insufficient fund.

    vi) A cheque for Rs. 7,800 paid by the bank was recorded as Rs. 7,600 by the company.

    vii) Bank charge Rs.300 for the service provided by the bank.

    Required: Bank Reconciliation Statement

    (b) Write down the meaning of bad debts. Also explain in brief the methods of estimating bad debts.

    Long question Practice