Discover Accounting Definitions IV

We discussed previously this but now .!


This is a critical concept for you to understand that the net income made is not the same as the cash because of three reasons :


- Because of applying the accruals concept to preparation of accounts. This is where we deduct from sales the amounts we have incurred to
achieve those sales WHETHER WE HAVE PAID FOR THEM OR STILL OWE FOR THEM is irrelevant
In other words we count all costs incurred including those still owing to trade creditors at the end of the year.The costs deducted in the accounts
will therefore be greater than the actual cash payments made where amounts are still owed at the end of the year. Similarly
the sales figure is not made up of cash received from customers but is made up of cash received together with that still to be received .
- Because of accounting for depreciation which is a deduction against profits for the measure of wearing out of a fixed asset and
therefore does not involve a cash payment
- Because of the way we value closing stock which can be by using average unit costs, the last unit costs or the earliest unit costs.
None of these methods reflect the actual flow of cash because they are all estimates only.
you will learn that this is where we consider FIFO (first in first out) and LIFO (last in first out) valuations of closing stock .

- Profit types :
There are many types of profits exhibit here as :

* Accounting profit :
Which is the difference between income received or receivable and expenditure paid or payable that mean the net income resulted by the business
without any Taxation purposes .
* Taxation profit :
The same Accounting profit After adjusting and reconciling for Taxation purposes .
* Cash surplus :
Which is the difference between the receipts and the payments .
* Economic profit :
Another view to the profit thus it's not our goal to be explained

- Accounting period :
It's the period which the business of firm under examination refers to a year usually Although that we have two distinction when we
mention the two main statement (Balance sheet , Income statement formally "trade account and profit and loss account")

First : The heading of the statement is in balance sheet written as (In " The date" means that the assets and the liabilities in specific date
equal some amount .


* For example : Balance sheet
In January 31 2007



Second : The heading in the income statement be different as ( For the "period" ended "date" means that the profit or loss that the business gained
recorded to this statement in other words the statement covers the specific period means all deals with other firms and transactions
unlikeness with balance sheet that represent the assets and liabilities of the firm in the end of the period .


* For example : Income statement
For the year ended December 31 2007


Best hopes ,
Mostafa