Ch 9Financial Statements - II — Class 11 Accountancy, concept-first.

Chapter 8 covered the preparation of simple final accounts — a trading and profit and loss account and a balance sheet.

The accrual concept of accounting is the foundation of why adjustments are necessary. Under this concept, profit or loss for a year is not determined by the cash actually received or paid during that…

Closing stock is the cost of goods that remain unsold at the end of an accounting period. These goods are still lying in the store, and their value must be brought into the books to correctly calculat…

It is common for a business to have some expenses that remain unpaid at the end of an accounting year.

When a business pays for an expense before the benefit of that expense has been fully received, the portion that relates to the next accounting period is called a prepaid expense.

Income is recorded when it is earned, not necessarily when cash is received. If you have provided a service or lent money during the current year, and the payment for that is due but still unpaid at t…

Income received in advance, also called unearned income, arises when a business receives cash for a service or use of an asset, but the earning period for that income falls partly or wholly in the nex…

Depreciation is the gradual reduction in the value of a fixed asset over its useful life. This decline happens because of two main reasons: wear and tear from using the asset, and the simple passage o…

Bad debts are amounts owed to a firm by its debtors that the firm has determined it will never be able to collect.

When a business sells goods on credit, it creates debtors. Not all debtors will pay the full amount they owe. Some may default partially or completely.

A business often offers discounts to its debtors to encourage them to pay early. This discount is an expense for the business, and the amount likely to be allowed in the current accounting year can be…

A manager is sometimes entitled to a commission based on the net profit of the business. This is a reward for performance and is treated as an expense of the business.

Interest on capital is not a compulsory charge. A proprietor may choose to calculate profit after providing for interest on their own capital if they want to know the true return from the business aft…

The key terms introduced in this chapter, with a short meaning for each.

- Need for adjustments: Under the accrual basis of accounting, the profit or loss of a year must be based on revenues earned and expenses incurred in that year, not on cash actually received or paid.