In these cases the revenue will be recognized as deferred revenue. Deferred revenue is a liability for the business. The double entry accounting system means that every financial or accounting transaction affects two accounts in the accounting books of the business.
One of these accounts should be debited while the other should be credited. If the account is that of an asset then it is debited in case of increase in assets and is credited in case of decrease in assets. If the account is a liability one then it is credited in case of increase in liabilities and is debited in case of decrease in liabilities. If the account is an income or revenue account then it is credited in case of increase in income or revenue and is debited in case of decrease in income or revenue.
If it is an expense account then it is debited in case of increase in expenses and is credited in case of decrease in expenses. A capital or equity account is credited in case of increase in capital and is debited in case of decrease in capital Revsine, Lawrence, Capital projects are those projects which are expected to generate revenue for a company in future.
While making investment decisions it is important that a company appraises the various alternative capital projects that it can choose from. Appraisal of capital projects is a very important activity for the finance team of any business because it has strategic, long term implications. In the payback period method the project having a shorter payback period is chosen over the one having a longer payback period.
Then the payback period for this project will be:. Then the payback period for this project is:. According to this capital appraisal technique, project A has a shorter payback period than project B. Therefore project A should be chosen over project B.
Payback period is not a very good technique for capital appraisal. It does not take into account the time value of money. This is a very serious flaw of this method. The discounted payback period method tries to overcome this limitation.
It discounts future cash flows by a suitable discount rate. This discount rate is usually the weighted average cost of capital Pieters, A. In net present value method the present value of future cash flows is subtracted from the present value of cash outflows to calculate the net present value NPV of the capital project. If the NPV is greater than zero then the project is accepted and if the NPV is less than zero then the project is considered to be a loss making one.
In case of two or more competing projects, the project having the highest NPV is accepted. The present value of cash flows is calculated by discounting the future cash flows with a suitable discount rate. The discount rate is usually taken equal to the weighted average cost of capital WACC. So the NPV of the project is:.
The NPV of project A is positive. It is also the most widely used one because of its inherent merits. However the appraisal made by this technique can go off the mark if the future cash flows are not estimated rightly or if the WACC is not calculated accurately. A project is profitable if the IRR is greater than the required rate of return of the company. The IRR is calculated usually by the hit-and-trial method.
The IRR method suffers from certain shortcomings. If two competing projects have the same IRR then it will be impossible to choose between these projects using this method. This severely limits the utility of this method. The right capital appraisal method leads the company to making right capital budgeting and investment decisions. A wrong appraisal method can lead the company to making loss making investment decisions. This will end up in the company destroying the wealth of its shareholders.
Capital appraisal is therefore one of the most crucial activities of the finance division of most companies. If a business concern prepares financial statements on a going concern basis, when it is not actually so, this has a serious reflection on the truth and fairness of the financial statements. It may therefore mislead because so many firms close down especially during periods of Recession after the publication of their accounts which have been drawn up on the basis of the going concern principle.
Liabilities that will arise in the event of liquidation are ignored thereby depriving the unsecured creditors of important information. Transtutors is the best place to get answers to all your doubts regarding the going concern concept, its advantages and drawbacks with examples.
You can submit your school, college or university level homework or assignment to us and we will make sure that you get the answers you need which are timely and also cost effective. Our tutors are available round the clock to help you out in any way with accounting. Transtutors has a vast panel of experienced accounting tutors who specialize in the going concern concept and can explain the different concepts to you effectively.
You can also interact directly with our accounting tutors for a one to one session and get answers to all your problems in your school, college or university level accounting. Our tutors will make sure that you achieve the highest grades for your accounting assignment. What is Going Concern Concept? The going concern assumption facilitates the classification of assets and liabilities into short-term and long-term respectively 3. Current assets are valued at lower of cost or market value in the normal course of the business 6.
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I’ll borrow a term from the military: Voluntold. downlwhopkd.cf defines voluntold as “an assignment that is technically voluntary but understood to be mandatory, ” and accounting firms have their share of them. Let’s look at a few. Situations you’ll reluctantly say yes to in an accounting firm. going concern 2. conservatism matching 3. cost 4. objective evidence 5. materiality One of the underlying principles in accounting is that the company, or at least the portion of the company reflected in the financial statements, Writing Assignment help on: Five of the accounting concepts and conventions Going concern concept.
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