Accounting: Prudence Concept Essay

Prudence concept: revenue and profits are included in the balance sheet only when they are realized(or there is reasonable ‘certainty’ of realizing them) butliabilities are included when there is a reasonable ‘possibility’ of incurring them. Also called conservation concept. Du Pont analysis A type of analysis that examines a company’s Return on Equity (ROE) by breaking it into three main components:profit margin, asset turnover and leverage factor. By breaking the ROE into distinct parts, investors can examine how effectively a company is using equity, since poorly performing components will drag down the overall figure. To calculate a firm’s ROE through Du Pont analysis, multiply theprofit margin (net income divided by sales), asset turnover(sales divided by assets) and leverage factor (total assetsdivided by shareholders’ equity) together. The higher theresult, the higher the return on equity. Return on Equity ROE. A measure of how well a company used reinvestedearnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage. It is used as a general indication of the company’s efficiency; in other words, how much profitit is able to generate given the resources provided by itsstockholders. investors usually look for companies withreturns on equity that are high and growing. Net Working Capital Net Working Capital, is defined as Current Assets minus Current Liabilities. Current assets include stocks, debtors, cash & equivalents and other current assets. Current liabilities include all the short-term borrowings. The formula is the following and the figures are expressed in millions: operation costing hybrid of job-order and process cost systems. Companies that manufacture goods that undergo some similar and some dissimilar processes use this system. Operation costing accumulates total conversion costs and determines a unit conversion cost for each operation. However, direct material costs are charged specifically to products as in job-order systems. Amortization 1. The paying off of debt in regular installments over a period of time.  2. The deduction of capital expenses over a specific period of time (usually over the asset’s life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright. Preliminary expenses These are incurred for the incorporation of a company. They may be paid by the promoters before the company is incorporated or by the company after it is incorporated. And they include the following: a) professional charges paid for drafting of memorandum of association and articles of association; b) professional charges for consultation in incorporating the company; c) cost of printing of the initial copies of MoA and AoA; d) stamp duty for the documents; e) registration fee paid to the Registrar of Companies (RoC) for incorporation; f) bank charges incurred on the above; and g) incidental expenses such as stationary, conveyance, and so on. capital gain The amount by which an asset’s selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn’t been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money called capital gains tax. opposite of capital loss. Leverage 1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. 2. The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged. Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. Job Costing Job Costing involves preparation to calculate the costs involved of a business manufacturing goods. These costs are recorded in ledger accounts throughout the year and are then shown in the final trial balance before the preparing of the manufacturing statement accounting concept and conventions In drawing up accounting statements, whether they are external â€Å"financial accounts† or internally-focused â€Å"management accounts†, a clear objective has to be that the accounts fairly reflect the true â€Å"substance† of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a â€Å"true and fair view†. The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business’ activities. To support the application of the â€Å"true and fair view†, accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.