Accounting Concepts and

Financial Statements

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Source: Financial Accounting by T.S. Grewal and Kaplan Schewser for CFA
What is Accounting?
Accounting is the process of recording financial transactions pertaining to a business. The accounting
process includes summarizing, analyzing, and reporting these transactions to oversight agencies,
regulators, and tax collection entities. The financial statements used in accounting are a concise
summary of financial transactions over an accounting period, summarizing a company's operations,
financial position, and cash flows.
The difference between finance and accounting is that accounting focuses on the day-to-day flow of
money in and out of a company or institution, whereas finance is a broader term for the management of
assets and liabilities and the planning of future growth.
Double vs Single Entry System
Double Entry System means a system of accounting that recognizes and records both aspects – debit
and credit of a financial transaction. At the time of recording a transaction, one aspect is recorded on
the debit side and another aspect is recorded on the credit side. For example, when goods are purchased
for cash, goods are acquired and in and paying cash. Under the double entry system, both these aspects
are recorded. This system is based on the ‘Dual Aspect Concept’ and is universally applied in
accounting.
Features of the Double Entry System

• It maintains a complete record of each transaction

• It recognizes a two-fold aspect of every transaction, viz., the aspect of receiving (value in) and
the aspect of giving (value out)
• In this system, one aspect is debited and the other is credited following debit and credit rules
• Since one aspect of a transaction is debited and the other is credited, the total of all debits is
always equal to the total of all credits. It helps in establishing arithmetical accuracy by preparing
the trial balance
Accounts from Incomplete Records or Single Entry System of recording transactions in the books of
account may be defined as an incomplete Double Entry System. In this system, all transactions are not
recorded on a double entry basis. In some transactions, both aspects of the transactions are recorded,
while in others, either one aspect is recorded or not recorded at all. Instead of maintaining all the
accounts, the accounts maintained under this system are incomplete and unsystematic and, therefore,
not reliable.
Since all transactions are not recorded under this system on a double entry basis, preparing a Trial
Balance is not possible. As a result, the Profit & Loss Account and the Balance Sheet cannot be
prepared.

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Source: Financial Accounting by T.S. Grewal and Kaplan Schewser for CFA
Accrual vs Cash Basis of Accounting
Cash Basis of Accounting is a system in which transactions are recorded when cash is transacted,
whether received or paid. It means, revenue is recognized on receipt of cash. Likewise, expenses are
recorded as incurred when they have been paid. The difference between the total income and total
expenses represents Profit or Loss of a business for the accounting period. Thus, when Cash Basis of
Accounting is followed, outstanding and prepaid expenses and income received in advance or accrued
incomes are not considered.
Advantages of Cash Basis of Accounting are:

• It is a simple basis of accounting as adjustments for outstanding expenses, prepaid expenses,

accrued income and income received in advance is not made
• This approach is more objective as very few estimates and judgments are required
• This basis of accounting is suitable for those enterprises where most of the transactions are on
a cash basis
Disadvantages of Cash Basis of Accounting are:

• It does not give a true and fair view of the profit or loss and the financial position of a firm
because it ignores outstanding and prepaid expenses and accrued income received in advance
• It does not follow the Matching Principle of Accounting
• This system does not distinguish between capital and revenue items and, as a result, there is no
consistency in the profits of two years
Under Accrual Basis of Accounting, income is recorded as income when it is earned or accrued. For
example, a credit sale is recognized as a sale irrespective of the fact whether the amount has been
received or not. Similarly, if an expense has been incurred but payment has not been made, it will be
recorded as an expense. For example, rent for the month of March 2022 has not been paid., It will still
be recorded as an expense because it had become due.
This is based on the concept of realization and expiration and follows two basic accounting principles,
i.e., Revenue Recognition Principle and Matching Principle. Thus, under the Accrual Basis of
Accounting, outstanding and prepaid expenses are adjusted. Similarly, accrued income and income
received in advance are recognized for ascertaining the correct profit or loss for the accounting period.
It should be noted that almost all the laws require companies to prepare their financial statements on
the accrual basis of accounting.
Advantages of Accrual Basis of Accounting:

• It is more scientific compared to Cash Basis of Accounting and hence is preferred by

accountants
• This basis of accounting shows a complete picture of the financial transactions of the business
as it considers the effect of all transactions relating to a period as well as adjustments like
outstanding expenses, prepaid expenses, accrued income, and income received in advance
• This basis discloses the correct profit or loss for a particular period and also exhibits the true
financial position of the business on a particular day
• It reflects true profit or loss during the accounting period and therefore has wide acceptability
• It reflects the true financial position at the end of the accounting by adjusting outstanding
expenses, prepaid expenses, accrued income, income received in advance, etc.

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Source: Financial Accounting by T.S. Grewal and Kaplan Schewser for CFA
Disadvantages of Accrual Basis of Accounting:

• This system is not as simple as the Cash Basis of Accounting

• The accounting process is too elaborate
• A quick appraisal of the profit/loss is not possible because many adjustments are required to
ascertain the true financial position of the business
Difference between Accrual Basis of Accounting and Cash Basis of Accounting
Basis Accrual Basis of Accounting Cash Basis of Accounting
1. Nature of Transactions
Both cash and credit transactions Cash transactions are recorded.
are recorded.
[Link]/Outstanding Prepaid and outstanding expenses Prepaid and outstanding expenses
Expenses are accounted in the P&L A/C are not adjusted. Similarly,
Accrued Income/Income Accrued Income and Income accrued income and income
Received in Advance Received in Advance are also received in advance are not
accounted and shown in the BS. adjusted.
3. Profit or Loss Correct profit or loss is ascertained Correct profit or loss is not
because it records both cash and ascertained because it records
credit transactions. only cash transactions.
4. Technical Knowledge Requires technical knowledge as It does not require much of
many adjustments like prepaid, technical knowledge as is required
outstanding, capital, and revenue for the Accrual Basis of
are required to be made Accounting
5. Legal Position Accrual Basis of Accounting is Cash Basis of Accounting is
recognized by almost all legal recognized by legal bodies.
bodies.
6. Acceptability This is more acceptable in business This is generally not acceptable in
as it reveals correct income and business as it does not reveal the
expenses besides assets and required information.
liabilities.
7. Reliability This is more reliable as it records This is less reliable as it records
both cash and credit transactions only cash transactions and as a
and reveals the correct profit or result does not reveal correct
loss besides assets and liabilities. profit or loss and also assets and
liabilities.

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Important Accounting Concepts
An entity means an economic unit that performs economic activities (e.g., Reliance Industries, Bajaj
Auto, Maruti, TISCO). A business entity means an enterprise established in accordance with the law to
engage in business activities.
An account is a record of transactions (both cash and credit) under a particular head of accuracy (say
Sales, Purchases, Salaries, Telephone expenses, Electricity Expenses, Akhil, etc.) or a particular head
(say asset. liability, etc.). It not only shows the amounts of transactions but also shows their effect and
direction.
Capital is the amount invested in an enterprise by the proprietor (in the case of proprietorship) or by
partners (in partnership business). It may be in the form of money or assets having a monetary value.
In the case of companies, contributors of capital are many and they are known as shareholders. It is a
liability of the firm towards the proprietor or partners. It is so because under the “Business Entity
Concept”, a business is a separate and distinct entity from its owners. Transactions are recorded in the
books of account from the point of view of the business. Capital is also known as Owner’s Equity or
Net Worth. It is always equal to assets less outside liabilities. It can be expressed as:
Capital = Assets – Outside Liabilities
Liabilities mean the amount owned (payable) by the business. Liability towards the owners (proprietor
or partners) of the business is termed as an internal liability. On the other hand, liability towards the
outsiders, i.e., other than the owners (proprietor or partners) is termed as an external liability. External
liability arises because of credit transactions or loans taken. Examples of external liability are creditors,
bank overdrafts, long-term borrowings (loans), and other liabilities. Liability is further classified into:

• Non-Current Liability (also termed Long-Term Liability) is the liability that is payable after
a period of more than 12 months from the end of the accounting period, i,e., the date of the
Balance Sheet. For example, a firm has taken a loan from a bank for the purchase of machinery
on 1st October 2021. The loan is payable in 5 yearly installments beginning 1st April 2023. It is
a non-current or long-term liability since it is payable after 12 months from the date of the
balance sheet
• Current Liability (also termed Short-Term Liability) is the liability that is payable within 12
months from the end of the accounting period, i.e., the date of the Balance Sheet. For example,
a firm has taken a loan from a bank on 1st September 2021 and is payable by 31st August 2022.
It is a current Liability since it is payable within 12 months from the date of the Balance Sheet
Assets are the properties (tangible assets and intangible assets) owned by an entity or enterprise. They
are the economic resources of the business. In other words, anything which will enable the firm to get
economic benefit in the future is an asset. Examples of assets are land, building, machinery, furniture,
stock, debtors, cash and bank balances, trademarks, copyright, goodwill, etc.
Thus, assets should have the following characteristics:

• It should be owned (i.e., property) by the business

• It may be in tangible (physical) form or intangible form
• It should have some values attached to it
• It should be capable of being measured in money terms
Assets can be classified into:

• Non-Current Assets are held by an entity or enterprise not with the purpose to resell but are
held either as an investment or to facilitate business operations. In other words, those assets are
held by the business from a long-term point of view. Examples of non-current assets are fixed

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 assets, non-current investments, long-term loans and advances, and other Non-current Assets.
Fixed Assets are those non-current assets of an enterprise that are not held for resale but with
the purpose to increase its earning capacity. Fixed assets are further classified into:
o Tangible Assets are those assets that have a physical existence, i.e., they can be seen
and touched. Examples of tangible assets are land, building, machinery, computer,
furniture, etc.
o Intangible Assets are those assets that do not have a physical existence, i.e., they
cannot be seen and touched. Examples of intangible assets are patents, goodwill,
trademark, computer software, etc.
• Current Assets are those assets that are held by an entity or enterprise with the purpose of
converting them into cash within a short period, i.e., one year. For example, goods are
purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash,
i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
• Fictitious Assets are those assets that are neither tangible nor intangible assets. They are losses
not written off in the year in which they are incurred but in more than one accounting period.
An example of fictitious Assets is deferred revenue Expenditure such as advertisement
expenditure
Receipts are categorized into revenue receipts and capital receipts.

• Revenue Receipt is the amount received in the normal course of business or rendering of
services or from the use of business resources. For example, the amount received or receivable
against sales of goods or rendering of services is revenue receipts. Similarly, interest received
or receivable for fixed deposits in a bank is a revenue receipt
• Capital receipts are the receipts that are not of a revenue nature. For example, capital
contribution by owners, receipts from the sale of fixed assets such as machinery, building,
furniture, investments, loan, etc. They either increase liabilities or reduce assets thus, are shown
on the balance sheet
Expenditure is the amount spent or liability incurred for purchasing assets, goods, or taking services.
Expenditure may be categorized into Capital Expenditure and Revenue Expenditure.

• Capital Expenditure is an expenditure incurred to purchase fixed assets improving the existing
fixed assets which will increase the earning capacity of the business, i.e., will give the benefit
of enduring nature. It may be incurred to purchase tangible fixed assets or intangible assets. For
example, machinery is purchased for $500,000 to manufacture goods, and $500,000 is capital
expenditure. Purchase of furniture, computer, etc. are also examples of capital expenditure.
Capital Expenditure is shown on the assets side of the Balance Sheet
• Revenue Expenditure is the expenditure incurred, the benefit of which is consumed or
exhausted within the accounting period. It has a direct relationship with revenue or with the
accounting period. For example, goods costing $10,000 are sold. $10,000 is a revenue
expenditure. Another example is the staff is paid a salary of $20,000, it is a revenue expenditure
as its benefit is exhausted within the same accounting period. Other examples of revenue
expenditure are rent, electricity expenses, telephone expenses, etc. Revenue Expenditure is
shown on the debit side Profit and Loss Account
• Deferred Revenue Expenditure is a revenue expenditure in nature but is written off (charged)
in more than one accounting period because it is estimated that the benefit of such expenditure
will be available in more than one financial year. For example, a large advertising expenditure
that will give benefit for more than one accounting period is a deferred revenue expenditure

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Expense is the cost incurred for generating revenue. Expense is a monetary measure of inputs or
resources consumed. It is a value that has expired during the accounting period. It is a value that has
expired during the accounting period. It may be

• Cash payments such as salaries, wages, rent, etc.

• Writing off a part of fixed assets (i.e., depreciation)
• An amount is written off of a current asset (say bad debts)
• Decline in the value of assets (say investments)
• Cost of goods sold
An expense is transferred to the debit of the Profit and Loss Account.
Prepaid Expense is an expense that has been paid in advance and the benefit of which will be available
in the following year or years. For example, an insurance premium of $50,000 has been paid for one
year beginning 1st October 2021. The financial year ends on 31st march 2022. It means a premium for
six months, i.e., 1st April 2022 to 30th September, 022 amounting to $25,000 is paid in advance. Thus,
the amount of premium paid in advance ($25,000) is the prepaid expense.
Outstanding Expense is an expense that has been incurred during the accounting year but has not been
paid. For example, rent of $10,000 for march 2022 is not yet paid. It means an expense of $10,000 has
been incurred and is yet to be paid, i.e., a liability is established for the amount. $10,000 is the
outstanding expense (rent). It is transferred to the profit & loss account and shown under the head
current liabilities in the balance sheet.
Revenue is the gross inflow of cash. Receivable or other consideration arising during ordinary activities
of the enterprise from the sales of goods, from the rendering of services, and from the use by others of
enterprise yielding interest, dividends, etc. Thus, revenue is the amount received or receivable by the
enterprise from its operating activities and from the use of the entity’s resources by others. Examples
of revenue are receipts from the sale of goods, rent, commission, interest, etc. Revenue differs from
income; Income is the difference between revenue and expenses.
Income is the profit earned during an accounting period. In other words, Income is the excess of revenue
over expenses. It is a broader term than ‘profit’ and includes profit from activities other than its
Operating Activities. For example, goods costing $15,000 are sold for $21,000, the cost of goods sold,
i.e., $15,000 is an expense, and the sale of goods, i.e., $21,000 is a revenue.
The firm also earned interest of $2,000 on a fixed deposit in the bank. Thus,
Income = Revenue ($21,00 + $2,000) – Expense ($15,000) = $8,000
Profit means income earned by the business from its Operating Activities, i.e., the activities carried out
by the enterprise to earn a profit, i.e., the sale of goods and/or the rendering of services. Continuing the
previous example:
Profit = Revenue from sale of goods ($21,000) – Cost of Goods Sold ($15,000) = $6,000
The cost of goods sold is the direct cost attributable to the production of goods sold and/or services
rendered.
Gain is the increase in owner’s equity resulting from a transaction other than the day-to-day transaction
of irregular or non-recurring nature. Stating differently, it is a profit that arises from transactions that
are not the operating activities of the business but are incidental to it such as gain on the sale of land,
machinery, or investments.
Loss is the excess of expenses of a period over its revenue and other income. It decreases the Owner’s
Equity. It is a broad term and includes loss incurred in its operating (business) activities, money or

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money’s worth lost against which the firm receives no benefit, e.g., cash or goods lost in theft, and loss
arising from events of non-recurring nature, e.g., loss on sale of fixed assets.
Revenue from Operations means revenue earned by an enterprise from its operating activities, i.e.,
business activities. It is net of sales return, i.e., sales minus sales return.
Goods are the physical item of trade that are purchased or manufactured to be sold. The term applies to
all the items making up the sales or purchases of a business. Stating differently, they are the stock-in-
trade of an enterprise dealing in home appliances such as TV, Fridge, AC, etc., are goods and for a
stationer, stationery is goods.
Stock/Inventory is a current asset held by an enterprise for the purpose of sale in the ordinary course
of business or for the purpose of using it in the production of goods meant for sale. Inventory may be:

• Opening inventory is the stock-in-hand at the beginning of the accounting year. In other words,
it is stock-in-hand at the end of the previous accounting year
• Closing inventory is the stock-in-hand at the end of the current accounting period
Stock or inventory may be the following kinds:

• Stock or Inventory of Goods in the case of a trading concern comprises a stock (inventory) of
goods remaining unsold. In the case of a manufacturing concern, it comprises processed goods
manufactured for the purpose of sale. It is valued at cost or net realizable value (market place),
whichever is lower
• Stock or Inventory of Raw Material comprises the stock of raw material used for
manufacturing goods lying unused. For example, stock of cloth to be used for stitching shirts.
It is valued at a cost or net realizable value (market value), whichever is lower
• Work-in-Progress is a stock that is in the process of being finished, i.e., they are partly finished
goods. It is valued as an aggregate of the cost of raw material used, cost of labor, and other
production costs, i.e., power, fuel, etc.
Trade Receivable is the amount receivable against the sales of goods and /or services or both rendered
in the ordinary course of business.
Trade Payable is the amount payable for the purchase of goods and/or services or both taken in the
ordinary course of business.
Cost is the amount of expenditure incurred on or attributable to a specified article, product, or activity.
Bad Debt is the amount owed to the business that is written off because it becomes irrecoverable. It is
a loss for the business.
Balance Sheet is a statement of the financial position of an individual or enterprise at a given date,
which exhibits its assets, liabilities, capital, reserves, and other account balances at their respective book
values.
Book Value is the amount at which an item exists in the books of account, i.e., cost less depreciation.
An account has two parts, i.e., debit and credit. Credit is the right side of an account. If an account is
to be credited, then the entry is posted to the credit side of the account. The left side is the Debit side.
If an account is to be debited, then the entry is posted to the debit side of the account.
Depreciation is a fall in the book value of an asset because of usage or with efflux of time or
obsolescence or accident. It is an allocation of the fixed asset cost in a systematic manner in each
accounting year over its estimated useful life.

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Accounting Concepts and Assumptions
Accounting Concepts are the basic assumptions or fundamental propositions within which accounting
operates. They have generally accepted accounting rules based on which transactions are recorded and
financial statements are prepared. It is important to follow the accounting concepts because it helps the
users to understand the financial statements better and in the same manner.
Going Concern Assumption prescribes that the transactions should be recorded and reported on the
basis that business shall continue for a foreseeable period and there is no intention to close the business
or scale down its operation significantly. It is because of this concept that a distinction is made between
capital expenditure, i.e., expenditure that will give benefit for a long period, and revenue expenditure,
i.e., one whose benefit will be consumed or exhausted within the accounting period. On the basis of this
concept, fixed assets are recorded at their original cost and they are depreciated in a systematic manner
over their expected useful life. For example, a machine purchased for $110,000 (residual value of
$10,000) has an expected useful life of 10 years. $100,000 is written off in the next 10 years to determine
profit/loss for each year. The total cost of machinery is not treated as an expense in the year of purchase
itself.
According to the Consistency Assumption, accounting practices once selected and adopted, should be
applied consistently year after year. The concept helps in better understanding of accounting
information and makes it comparable with the previous years. The consistency concept is important
because alternative accounting practices are equally acceptable and it eliminates personal bias and helps
in showing results that are comparable. For example, if two methods are equally acceptable, under the
assumption, the method once chosen and applied should be applied consistently year after year to make
the financial statement comparable. The accounting practice may be changed if the law or accounting
standard requires it or the change will result in a more meaningful presentation.

Accounting Principles
According to the Business Entity Principle, a business is considered to be separate from its owners.
Business transactions are recorded in the books of account from the business point of view and not from
the owners. Owners being regarded as separate from business are considered as creditors of the business
to the extent of their capital. Their account with business is credited with the capital introduced and
profit earned during the year, etc., and debited by the drawings made. For example, Amrit started a
business and introduced $100,000 by cheque. Since the firm has received the amount, it will debit the
bank and credit Amrit’s capital account. Thus, a transaction is recorded in the books of the firm from
the firm’s point of view.
As per the Money Measurement Principle, transactions and events that can be measured in money
terms are recorded in the books of account of the enterprise. Stating differently, money is the common
denominator in recording and reporting transactions. This principle suffers from two major limitations:

• Transactions and events that cannot be measured in money terms are not recorded in the books
of account; howsoever important they may be to the enterprise. For example, human resources
within the enterprise are important to the enterprise but not be reflected in the financial
statement because they cannot be measured and expressed in money terms
• The value of money is considered to have static value as the transactions are recorded at the
value on the transaction date and continue to be shown at the recorded value. Due to inflation,
goods that can be purchased for $1,000 today may be purchased for (say) $1,200 later
According to the Accounting Period Principle, the life of an enterprise is broken into smaller periods
so that its performance is measured at regular intervals. The accounts of an enterprise are maintained
following the going concern concept, meaning the enterprise shall continue its activities for a

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foreseeable future. Users of financial statements, especially the management and banks, require
information from the accounts at regular intervals so that decisions can be taken at the appropriate time.
Management requires information at regular intervals to assess performance. Funds requirement (short-
term as well as long-term), banks require accounting information periodically because they have
invested money and have to ensure their safety and returns. Similarly, the government has to assess tax
dues from enterprises. In view of the above, the life of the enterprise is broken into smaller periods
(usually one year) which is termed as ‘ACCOUNTING PERIOD’.
According to the principle of Full Disclosure, “there should be complete and understandable reporting
on the financial statement of all significant information relating to the economic affairs of the entity.”
Apart from legal requirements, good accounting practice requires all material and significant
information to be disclosed. Disclosure of material information will result in a better understanding.
For example, the reason for low turnover should be disclosed.
Materiality Principle refers to the relative importance of an item or an event. According to the
American Accounting Association, “an item should be regarded as material if there is a reason to believe
that knowledge of it would influence the decision of an informed investor.” Thus, whether an item is
material or not will depend on its nature and/or amount. It, thus means that it is a matter of exercising
judgment to decide which item is material and which is not. And only those items should be disclosed
that have a significant effect or are relevant to the user. An item may be material for one enterprise but
may not be material for another.
Prudence or Conservatism Principle is many a time described using the phrase “do not anticipate a
profit, but provide for all possible losses.” Stating differently, it takes into consideration all prospective
losses but not the prospective profit. The application of this concept ensures that the financial statement
does not paint a better picture than what it actually is. For example, closing stock is valued at a lower
cost or net realizable value (market value) or making the provision for doubtful debts and discount on
debtors in anticipation of bad debts and discounts. Prudence or conservatism principle prescribes that
anticipated expenses and losses should be accounted. Thus, as a result, liabilities may be overstated. It
has a drawback as it may be used to create secret reserve (e.g., by creating excess provision for doubtful
debts, depreciation, etc.) and thus financial statements may not depict a true and fair view of the state
of affairs of the business. The concept of conservatism needs to be applied with caution and care so that
the results reported are not distorted.
According to the Cost Concept, an asset is recorded in the books of account at the price paid to acquire
it and the cost is the basis for all subsequent accounting of the asset. The asset is recorded at the cost at
the time of purchase but is systematically reduced by charging depreciation. The market value of an
asset may change with the passage of time but for accounting purposes, it continues to be shown in the
book of accounts at its book value (i.e., cost at which it was purchased minus depreciation provided up-
to-date) final accounts, even if its market value is say $400,000 or $700,000 yet the asset shall continue
to be shown at its purchase price of rupees $500,000. The cost concept brings objectivity to the
preparation and presentation of financial statements. They are not influenced by personal bias or
judgments.
Matching Principle: An important objective of business is to determine profit periodically. It is
necessary to match the ‘revenue’ of the period with the ‘expenses’ of that period to determine the correct
profit and loss for the accounting period. Profit earned by the business during the period is matched
with the expenditure incurred to earn that revenue. It is not relevant when the payment was made or
received. Therefore, as per this concept, adjustments are made for all outstanding expenses and prepaid
expenses. In brief, according to this concept, the expenses for an accounting period are matched against
related revenue, rather than cash received and cash paid. This concept should be followed while
preparing financial statements to have a true and fair view of the profitability and financial position of
the business firm.

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According to the Dual Aspect Concept, every transaction entered into by an enterprise has two aspects,
debit and credit of equal amounts. Simply stated for every debit there is a credit of an equal amount in
one or more accounts. It is also true vice versa. For example, Rahul starts a business with a capital of
$100,000 there are two aspects to the transaction. On one hand, the business has an asset of $100,000
(cash) while on the other hand, it has a liability towards Rahul of $1,00,000 (capital of Rahul). Thus we
can say
CAPITAL (Equities) = CASH (Asset)
$100,000 = $100,000
Suppose further, the enterprise borrows an amount from a bank; its assets will increase but this will
mean that out of the total assets, an amount equal to borrowing is payable to the outsider. Thus, we can
say
OWNER’S EQUITY OR CAPITAL + CLAIM OF OUTSIDERS = ASSETS
OR
ASSETS = OWNER’S EQUITY + CLAIMS OF OUTSIDERS
This fundamental equation will always remain good. In other words, the accounting equation
demonstrates the fact that for every debit there is an equal credit and vice versa. This system of Double
Entry Book Keeping is based on this concept.
According to the Revenue Recognition Concept, revenue is considered to have been realized when a
transaction has been entered into and the obligation to receive the amount is established. It is to be noted
that recognizing revenue and receipt of an amount are two separate aspects. Let us take an example to
understand it. An enterprise sells goods in February 2022 and receives the amount in April 2022.
Revenue of this sales should be recognized in February 2022, i.e., when the goods are sold because the
legal obligation to receive the amount is established (upon sales) in February 2022 for the sale to be
made in April 2022, revenue shall be recognized in May 2022, upon sales having been made because
the legal obligation to receive the amount is established in May 2022.
The Verifiable Objective Concept holds that accounting should be free from personal bias.
Measurements that are based on verifiable evidence are regarded as objective. It means all accounting
transactions should be evidenced and supported by business documents. These supporting documents
are cash memos, invoices, sales bills, etc.

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Financial Statements Overview

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Income Statement Overview

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Revenue Recognition

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Expense Recognition

Depreciation and Amortization

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Operating vs Non-Operating Components of Income Statement

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EPS and Dilutive Securities

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Common Size Income Statement

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Other Comprehensive Income

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Balance Sheet Overview

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Key Sections of a Balance Sheet

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Non-Current Assets and Liabilities

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Shareholders’ Equity

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Common Size Balance Sheet

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Cash Flow Statement Overview

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Non-Cash Investing and Financing Activities

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Financial Statements Interlinkages

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Common Size Cash Flow Statement

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Free Cash Flow

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