Definition of expense loss revenue gain profit effect of revenue and expenses on capital

Q. Definition of Expense, Loss, Revenue, Gain, Profit, Effect of Revenue and Expenses on Capital (Nov’11).

Expense: Expenses are decreases in economic benefits during the accounting period in the form of' outflows or depletion of assets or increases in liabilities that result in decrease in equity other than those relating to distribution to equity participants.

Some examples of expenses:

(a) Rs5000 is paid for the salary of a salesman every month. This is an outflow of cash and hence an expense for the firm.

(b) A firm pays Rs200 for postage for a month. This is an outflow of cash and hence an expense for the firm.

 

A firm pays Rs200 as rent for the premises for its business. Thus is an expense for the business, as an outflow of cash

Loss: Excess of expenses over revenue is called loss.

Revenue: This is the amount a business gains as a result of its operations, if a business sells goods to customers; the gross income resulting from these sales is called revenue. In other words, revenue is an inflow of assets like cash and receivable from customers any business transaction that generates revenue is classified as revenue transaction. Revenue is related primarily to the sale of goods or supply of services.

Example of revenue: 

(i) A firm sells goods for Rs 50,000 for cash; the revenue for the firm is Rs 50,000.

(ii) A firm sells goods for Rs 150,000 on credit. The revenue for the firm is Rs 150,000.

Gain:  Gain is a change in the value of an asset  or liability resulting from something other than the earnings process. While gains are often associated with investments, derivatives and other financial instruments, they can also result from something as simple as selling a production asset for more than its net book (accounting) value.

Profit: Excess of revenue over expenses is called profit or income.

Q. Explain the monetary unit assumption and economic entity assumption (Nov-2011).

Monetary unit assumption: In accounting we can communicate only those business transactions and other events which can be expressed in monetary unit. This is called monetary unit assumption. One aspect of the monetary unit assumption is that currencies lose their purchasing power over time due to inflation, but in accounting we assume that the currency units are stable in value. This is alternatively called stable dollar assumption.

Example: The Company’s property, plant and equipment on 2009 balance sheet amounted to $2 billion. During 2010 inflation was 10%. The monetary unit and stable dollar assumption prohibits any adjustment to current or prior period figures to account for the inflation.

Economic entity assumption: In accounting, an economic entity is one of the assumptions made in generally accepted accounting principles. Basically, any organization or unit in society can be an economic entity.

Examples of economic entities are hospitals, companies, municipalities, and federal agencies.

The "Economic Entity Assumption" says that the activities of the entity are to be kept separate from the activities of its owner and all other economic entities.

The business is accounted for separately from other business entities, including its owner. The reason for this is that separate information about each business is necessary for good decisions. Economic entity can be any organization or unit in society.