The financing is considered for the short term when the business is bound to make repayment within the next 12 months. This type of financing is classified in the short-term liability section of balance sheet. The interest paid on the short terms financing is taken to the profit and loss statement as finance expense. Let’s…

Year one-year comparison means comparing numbers in the financial statement with the last year’s numbers. So, it’s about analyzing the numbers in series and concluding on the performance. Increase/decrease can have different interpretations for the numbers when compared with last year. For instance, an increase in revenue is considered good, and an increase in expenses…

The realization concept states the business should only recognize the revenue when earned. The revenue is earned when goods are delivered to the customer or services are rendered for them. In other words, the realization concept states revenue should only be recognized when the legal process related to revenue earning has been completed. If the…

Bank reconciliation is the process of reconciling the balance in the accounting/cash/bank ledger with the bank statement. In simple words, we compare transactions in the bank statement with accounting records. So, if we can see that the total balance of the bank/cash ledger is the same as the closing balance of the bank statement, it…

This article extends to discuss accounting treatment for addition/purchase, sales, provision, and write-off for the inventory. Accounting for the purchase of inventory The following journal entry is posted when inventory is purchased from the vendor/supplier. Description Debit Credit Inventory (assets) XXX   Accounts payable (liability)/ cash (asset)   XXX The debit impact of the given…

Substance over form means financial transactions should be recorded & disclosed based on their substance/economic reality rather than legal form. Substance/economic reality means the real purpose/intent of transactions should be identified and measured rather than a value given in the documents (form). So, presenting real economic value is the goal of this concept. It’s important…

Accounting convention refers to principles/guidelines generally accepted in areas where clear guidelines are not available via accounting standards. So, an accounting convention is followed to record such transactions in the accounting system. It’s important to note that following these guidelines is not a legal requirement but a general expectation of the stakeholders. Hence, it should…

Performance guarantee means the contractor will ensure the fulfilment of contractual obligations. In other words, the contractor is responsible for complying with the terms and conditions mentioned in the contract. The contractor may be required to arrange a performance guarantee from the employer, insurance company, or bank. It’s a sign for the contract employer that…

Functional currency Functional currency refers to the currency of the primary economic environment. It’s a currency used to execute the business operations. For instance, business operations like selling goods, buying materials, paying expenses, collecting revenue, and other operations are executed using functional currency. In simple words, functional currency is a currency of business operations. Although…

Detailed explanation Monetary unit principle states business events must be measured in monetary terms and recorded in the accounting record. If the business cannot allocate monetary units for the specific event/transactions, it should not be recorded in the financial statement. For instance, your team motivation, leadership charisma, management expertise, customer experience, and service quality can…