Introduction to accounting Test - 33

Fixed assets are long-term tangible assets that are used in the operations of a business and are not intended for sale. These assets are held for the purpose of generating revenue through the business's regular operations. They are expected to provide benefits to the business over multiple accounting periods and typically have a useful life of more than one year.

A liability typically arises from credit transactions, where goods or services are acquired on credit, meaning payment is deferred to a future date. In such transactions, the business incurs an obligation to pay for the goods or services received in the future, resulting in a liability on its balance sheet.

The fundamental steps in the accounting process are:

• Identifying financial transactions: This involves recognizing and identifying the economic events and transactions that have a financial impact on the business. 
• Recording the business transactions: This process involves documenting the details of each transaction, including the amount, date, accounts affected, and any other relevant information. 
• Classifying the business transactions: This step involves sorting and organizing the recorded transactions into specific accounts, such as assets, liabilities, equity, revenue, and expenses. 

Discounts received refer to reductions in the price of goods purchased by a buyer. Buyer of goods granted discount by seller" accurately describes discounts received. In this scenario, the seller offers a discount to the buyer as an incentive for purchasing goods. This discount is granted by the seller to the buyer and is reflected in the final price paid by the buyer for the goods.

The qualitative characteristics of accounting information, including reliability, relevance, and understandability, ensure that financial data is trustworthy, pertinent to decision-making, and comprehensible to users. Reliability ensures that the information is accurate and free from bias, while relevance ensures its significance to users' needs. Understandability guarantees that the information is presented clearly and in a manner accessible to users without specialized knowledge. Together, these characteristics contribute to the usefulness and credibility of financial reporting in guiding informed decisions.

The entity concept, also known as the separate entity principle, states that the business is considered as a separate economic entity from its owners. Therefore, transactions involving the personal affairs of the owner(s) should be kept separate from the business transactions.

When the owner pays insurance premiums for personal use, it represents a personal expense and should not be recorded in the accounting books of the business, as it does not relate to the business's activities or assets. This application of the entity concept helps maintain the distinction between personal and business transactions in accounting records.

Non-current liabilities are obligations or debts that are due after more than one year, such as long-term loans or bonds. Non-current liabilities, also known as long-term liabilities, are financial obligations or debts that are not expected to be settled within the operating cycle of the business or within one year, whichever is longer.

A contingent liability is a potential obligation that may arise in the future depending on the outcome of uncertain events. In this case, the creditor's claim for compensation of Rs. 20,000 against the business is contingent because the obligation to pay will depend on the decision made by the court. Until the court decides on the matter, the liability is uncertain. Therefore, it is classified as a contingent liability on the business's balance sheet.

Profits from foreign exchange transactions typically fall outside of the core operating activities of a business. They arise from currency fluctuations or gains made from trading currencies and are not directly related to the primary revenue-generating operations of the business. Therefore, such profits are classified as non-operating profits. 

Fixed assets are long-term tangible assets used in the operations of a business and are not intended for sale. Wooden cabinets for resale represents inventory, not a fixed asset. Inventory consists of goods held for sale in the ordinary course of business and is not considered a fixed asset.