UNIT-1

Accounting concepts,conventions and principles: Accounting, Accounting concepts and conventions, Accounting Equation, Journal, International Accounting principles and standards .


Chapter-1:Accounting concepts,conventions and principles

Accounting:

Principles, concepts and conventions, double entry systems of accounting, introduction to basic books of accounts of sole proprietary concern, closing of books of accounts and preparation of trial balance. Final accounts, trading, Profit and Loss accounts and balance sheet of sole proprietary concern (without adjustment).

Basic Accounting Terms

The understanding of the subject becomes easy when one has the knowledge of a few important terms of accounting. Some of them are explained below.
(a) Transactions
Transactions are those activities of a business, which involve transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, sale of goods, borrowing from bank, lending of money, salaries paid, rent paid, commission received and dividend received. Transactions are of two types, namely, cash and credit transactions.
Cash Transaction is one where cash receipt or payment is involved in the transaction. For example, When Ram buys goods from Kannan paying the price of goods by cash immediately, it is a cash transaction.
Credit Transaction is one where cash is not involved immediately but will be paid or received later. In the above example, if Ram, does not pay cash immediately but promises to pay later, it is credit transaction.
(b) Proprietor
A person who owns a business is called its proprietor. He contributes capital to the business with the intention of earning profit.
(c) Capital
It is the amount invested by the proprietor/s in the business. This amount is increased by the amount of profits earned and the amount of additional capital introduced. It is decreased by the amount of losses incurred and the amounts withdrawn. For example, if Mr.Anand starts business with Rs.5,00,000, his capital would be Rs.5,00,000.
(d)Assets
Assets are the properties of every description belonging to the business. Cash in hand, plant and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of goods, investments, Goodwill are examples for assets. Assets can be classified into tangible and intangible.
Tangible Assets: These assets are those having physical existence. It can be seen and touched. For example, plant & machinery, cash, etc.
Intangible Assets: Intangible assets are those assets having no physical existence but their possession gives rise to some rights and benefits to the owner. It cannot be seen and touched. Goodwill, patents, trademarks are some of the examples.
(e) Liabilities
Liabilities refer to the financial obligations of a business. These denote the amounts which a business owes to others, e.g., loans from banks or other persons, creditors for goods supplied, bills payable, outstanding expenses, bank overdraft etc.
(f) Drawings
It is the amount of cash or value of goods withdrawn from the business by the proprietor for his personal use. It is deducted from the capital.
(g) Debtors
A person (individual or firm) who receives a benefit without giving money or money’s worth immediately, but liable to pay in future or in due course of time is a debtor. The debtors are shown as an asset in the balance sheet. For example, Mr.Arul bought goods on credit from Mr.Babu for Rs.10,000. Mr.Arul is a debtor to Mr.Babu till he pays the value of the goods.
(h) Creditors
A person who gives a benefit without receiving money or money’s worth immediately but to claim in future, is a creditor. The creditors are shown as a liability in the balance sheet. In the above example Mr.Babu is a creditor to Mr.Arul till he receive the value of the goods.

Accounting concepts and conventions

In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view" . The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities. To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.

Accounting Conventions The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.
Accounting Period Assumption
The users of financial statements need periodical reports to know the operational result and the financial position of the business concern. Hence it becomes necessary to close the accounts at regular intervals. Usually a period of 365 days or 52 weeks or 1 year is considered as the accounting period.
Dual Aspect Concept
Dual aspect principle is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of benefit).
Full Disclosure Concept
Accounting statements should disclose fully and completely all the significant information. Based on this, decisions can be taken by various interested parties. It involves proper classification and explanations of accounting information which are published in the financial statements.
Verifiable and Objective Evidence Concept
This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it. For example, cash receipt for payments made. The documentary evidence of transactions should be free from any bias. As accounting records are based on documentary evidence which are capable of verification, it is universally acceptable.

Accounting Equation

Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity). The equations reads as follows:
A = L + C
Where,
A = Assets
L = Liabilities
C = Capital
The above equation can also be presented in the following forms as its derivatives to enable the determination of missing figures of Capital(C) or Liabilities (L).
(i) A – L = C
(ii) A – C = L
Since, the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also called the Balance Sheet Equation. As the name suggests, the balance sheet is a statement of assets, liabilities and capital.

Journal

This is the basic book of original entry. In this book, transactions are recorded in the chronological order, as and when they take place. Afterwards, transactions from this book are posted to the respective accounts. Each transaction is separately recorded after determining the particular account to be debited or credited.
Steps in Journalising
The process of analysing the business transactions under the heads of debit and credit and recording them in the Journal is called
Journalising: An entry made in the journal is called a ‘Journal Entry’.
Step 1 : Determine the two accounts which are involved in the transaction.
Step 2 : Classify the above two accounts under Personal, Real or Nominal.
Step 3 : Find out the rules of debit and credit for the above two accounts.
Step 4 : Identify which account is to be debited and which account is to be credited.
Step 5 : Record the date of transaction in the date column. The year and month is written once, till they change. The sequence of the dates and months should be strictly maintained.
Step 6 : Enter the name of the account to be debited in the particulars column very close to the left hand side of the particulars column followed by the abbreviation Dr. in the same line. Against this, the amount to be debited is written in the debit amount column in the same line.
Step 7 : Write the name of the account to be credited in the second line starts with the word ‘To’ a few space away from the margin in the particulars column. Against this, the amount to be credited is written in the credit amount column in the same line.
Step 8 : Write the narration within brackets in the next line in the particulars column.
Step 9 : Draw a line across the entire particulars column to separate one journal entry from the other.

Exercise-
Transactions during the month of April, 2013 are as under: Date Details
1.4.2013 Business started with cash Rs. 1,50,000.
1.4.2013 Goods purchased form Manisha Rs. 36,000.
1.4.2013 Stationery purchased for cash Rs. 2,200.
2.4.2013 Open a bank account with SBI for Rs. 35,000.
2.4.2013 Goods sold to Priya for Rs. 16,000.
3.4.2013 Received a cheque of Rs. 16,000 from Priya.
5.4.2013 Sold goods to Nidhi Rs. 14,000.
08.4.2013 Nidhi pays Rs. 14,000 cash.
10.4.2013 Purchased goods for Rs. 20,000 on credit from Ritu.
14.4.2013 Insurance paid by cheque Rs. 6,000.
18.4.2013 Paid rent Rs. 2,000.
20.4.2013 Goods costing Rs. 1,500 given as charity.
24.4.2013 Purchased office furniture for Rs. 11,200.
29.4.2013 Cash withdrawn for household purposes Rs. 5000.
30.4.2013 Interest received cash Rs.1,200.
30.4.2013 Cash sales Rs.2,300.
30.4.2013 Commission paid Rs. 3,000 by cehque.
30.4.2013 Telephone bill paid by cheque Rs. 2,000.
30.4.2013 Payment of salaries in cash Rs. 12,000.
Journalise the transactions

International Accounting principles and standards

DEFINITION OF BOOK KEEPING

The art of recording business transactions in a systematic manner is termed as bookkeeping. It is the name given to a system which is concerned with recording and summarising business transactions accurately so as to know the true state of affairs of a business.

Definition of Book Keeping. R.N. Carter in his book on Advanced Accounting defines book keeping as the Science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money or money’s worth”. This definition reveals the following features of book keeping

(a) It is a Science. Book Keeping is a science as it represents systematised knowledge. It is based upon a set of well defined principles which are followed throughout so that the reason for recording a transaction in a particular manner can be explained fully.

(b) It is an Art. Book keeping is an art as it deals with a system in which human skills and ability is involved in recording the business transaction according to principles of book keeping.

(c) Money Consideration. This implies recording of all transactions which can be expressed in terms of money.