Page 12 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 1: Basic Accounting Review

the current usage by not considering the future utility of the assets in the firm which will not Notes
distinguish in between the long term assets and short term assets known as tradable in
categories.

Accounting concept for long lastingness of the business enterprise
1.4.4 Matching Concept

This concept only makes the entire accounting system as meaningful to determine the volume
of earnings or losses of the firm at every level of transaction; which is an outcome of matching
in between the revenues and expenses.
The worth of the transaction is identified through matching of revenues which are mainly
generated from the sales volume and the expenses of the firm at every level.

Example: The cost of goods sold and selling price of the pen of ABC Ltd. are 5 and 10
respectively. The firm produced 100 ball pens during the first shift and out of 100 pens
manufactured 20 pens are considered to be damage which cannot be supplied to the customers,
rejected by the quality circle department. There was an order from the firm XYZ Ltd. which
amounted to 80 pens to be supplied immediately.
The worth of the transaction of the firm at every level of the transaction is being studied only
through the matching of revenues with the expenses.

At first instance, the firm produced 100 pens which incurred the total cost of 500 required to
match with the expected revenues of 1,000; illustrated the level of profit how much would it
accrue if the entire level of production is sold out?

If the entire production capacity is sold out in the market the profit level would be 500. Out of the
100 pens manufactured 20 were identified not ideal for supply as damages, the remaining 80 pens
were supplied to the individual retailer. The retailer has been dispatched 80 pens amounted 400
which equated to 800 of the expected sales. At the moment of dispatching, the firm expected to earn
a profit of 400 at the level of 80 pens supplied. After the dispatch, the retailer found that 50 pens are
in accordance with the order placement but the remaining are to the tune of the retailers’ specifications.
Finally, the retailer has agreed to make the payment of the bill only in accordance with the order
placed which amounted 500 out of the expenses of the manufacturer 250.

This concept facilitates to identify the worth of the transaction at every moment.
Concept of fusion in between the expenses and revenues

1.4.5 Accounting Period Concept

The life period of the business is of a long span which is classified into the operating periods which
are smaller in duration. The accounting period may be either calendar year of Jan.-Dec. or fiscal year
of April-Mar. The operating periods are not equivalent among the trading firms. This means that the
operating period of one firm may be shorter than the other one. The ultimate aim of the concept is
to nullify the deviations of the operating periods of various traders in the trading practice.
According to the Companies Act, 1956, the accounting period should not exceed more than
15 months.

Concept of uniform accounting horizon among the firms to evade deviations

LOVELY PROFESSIONAL UNIVERSITY 7