starting a new business by competitors may affect the earnings of the business, but it is not recorded in the books of accounts. why?
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All the transactions are recorded in a business and all the events are not recorded. The case stated by you is an event but not a transaction.
If the impact of an event can be quantified then it becomes a transaction. For example you’ve made an agreement with the person ( who has started business in competition to you ) of not indulging in the same business for 5 years, non compliance of which will cause a penalty of ₹10,00,000.
Then in this scenario, since the person has started business in your competition which he has agreed he won’t do.
We will penalise him for ₹10,00,000 which is going to be an extraordinary income for our business.
Supporting the conclusion with a very basic example:
Suppose your employees have gone to strike in demand of higher salaries. This is an event not a transaction which has indirect impact on the company’s financials. But since the same cannot be quantified in the terms of money, you cannot record it in the books of accounts.
If the impact of an event can be quantified then it becomes a transaction. For example you’ve made an agreement with the person ( who has started business in competition to you ) of not indulging in the same business for 5 years, non compliance of which will cause a penalty of ₹10,00,000.
Then in this scenario, since the person has started business in your competition which he has agreed he won’t do.
We will penalise him for ₹10,00,000 which is going to be an extraordinary income for our business.
Supporting the conclusion with a very basic example:
Suppose your employees have gone to strike in demand of higher salaries. This is an event not a transaction which has indirect impact on the company’s financials. But since the same cannot be quantified in the terms of money, you cannot record it in the books of accounts.
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above one is better .....
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