Page 34 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes
Example: Mr. Z has brought a capital of 1 lakh for the commencement of retailing
business of refrigerators. The brought capital of 1 lakh is utilized for the purchase of refrigerators
from the Godrej Ltd. He finally bought 10 different sized refrigerators. Out of 10 refrigerators,
one was taken away by himself as the owner.

Type of Capital

Real Capital: Monetary Capital:
10 Refrigerators @ 1 lakh 1 lakh provided by Mr. Z

In the Angle of the Firm

The amount of the capital 1 lakh has to be returned to the owner Mr. Z, which considered being
as due. Among the 10 newly bought refrigerators for trading, one was taken away by the owner
for his personal usage. The one refrigerator drawn by the owner for his personal usage led the
firm to sell only 9 refrigerators. It means that 90,000 out of 1 Lakh is the volume of real capital
and the 10,000 worth of the refrigerator considered to be as drawings; which illustrates the
capital owed by the firm is only 90,000 not 1 lakh.

In the Angle of the Owner

The refrigerator drawn worth of 10,000 nothing but 10,000 worth of real capital of the firm was
taken for personal use as drawings reduced the total volume of the capital of the firm from
1 lakh to 90,000, which expected the firm to return the capital due amounted 90,000.

Notes Owner and business organizations are two separate entities.

Going Concern Concept

The concept deals with the quality of long lasting status of the business enterprise irrespective of
the owners’ status, whether he is alive or not. This concept is known as concept of long term assets.
The fixed assets are bought in the intention to earn profits during the season of the business. The
assets which are idle during the slack season of the business retained for future usage, in spite of
that those assets are frequently sold out by the firm immediately after the utility leads to mean
that those assets are not fixed assets but tradable assets. The fixed assets are retained by the firm
even after the usage is only due to the principle of long lastingness of the business enterprise.
If the business disposes the assets immediately after the current usage by not considering the
future utility of the assets in the firm which will not distinguish in between the long-term assets
and short-term assets known as tradable in categories.
Revenue Recognition Principle

It is also called revenue realization principle which means profit should be considered only
when realised. As per this principle the revenue is recorded in accounting when the sales have
taken place. If there is expectation that will be a particular transaction there in future, that is not

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