ACCOUNTING CONCEPTS

ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into two categories:

Accounting Concepts; and

Accounting Conventions.

ACCOUNTING PRINCIPLES
Accounting Concepts

Accounting Conventions

The term concept is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. The term convention is used to signify customs and traditions as a guide to the presentation of accounting statements.

ACCOUNTING PRINCIPLES
Accounting Conventions
The term convention is used to signify

customs and traditions as a guide to the

presentation of accounting statements.

Accounting Conventions
Conventions means doctrines Types of Accounting Conventions

Conservatism

Discloser

Consistency

Materiality

Provide for Future Losses but Anticipate No Profit

Disclose All Material Information

Continuance of Accounting Practices Regularly

All Material Facts Recorded

Convention of Consistency
In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that of another is possible only when the convention of consistency is followed.

Convention of Disclosure
This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.

Convention of Conservation
Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.

ACCOUNTING PRINCIPLES
Accounting Period Concept

Dual Aspect Concept

Money Measurement Concept

Realization Concept
Business Entity Concept

Cost Concept

ACCOUNTING PRINCIPLES

Going Concern Concept

Accounting Equivalence Concept

Verifiable Objective Evidence Concept

Capital Concept

Matching Concept
Accrual Concept

ACCOUNTING PRINCIPLES
Accounting Concepts
The term concept is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based.

Business Entity Concept

Business is treated as a separate entity or unit apart from its owner and others. All the transactions of the business are recorded in the books of business from the point of view of the business as an entity and even the owner is treated as a creditor to the extent of his/her capital.

Money Measurement Concept

In accounting, we record only those transactions
which are expressed in terms of money. In other

words, a fact which can not be expressed in

monetary terms, is not recorded in the books of

accounts.

Cost Concept
Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.

Going Concern Concept

It is persuaded that the business will exists for a
long time and transactions are recorded from this

point of view.

Dual Aspect Concept

Each transaction has two aspects, that is, the
receiving benefit by one party and the giving

benefit by the other. This principle is the core of

accountancy.

Dual Aspect Concept continue

For example, the proprietor of a business starts his business with Cash Rs.1,00,000/-, Machinery of Rs.50,000/- and Building of Rs.30,000/-, then this fact is recorded at two places. That is Assets account (Cash, Machinery & Building) and Capital accounts. The capital of the business is equal to the assets of the business.

Dual Aspect Concept continue

Thus, the dual aspect can be expressed as under

Capital + Liabilities = Assets

or

Capital = Assets Liabilities

Realization Concept
Accounting is a historical record of transactions.
It records what has happened. It does not

anticipate events. This is of great important in

preventing business firms from inflating their

profits by recording sales and income that are

likely to accrue.

Accounting Period Concept

Strictly speaking, the net income can be measured by comparing the assets of the business existing at the time of its liquidation. But as the life of the business is assumed to be infinite, the measurement of income according to the above concept is not possible. So a twelve month period is normally adopted for this purpose. This time interval is called accounting period.

CLASSIFICATION OF ACCOUNTS
Every business deal with other Person, possesses Assets, pay Expenses and receive Income.
So from the above, we can see every business has to keep An account for each person An account for each asset and An account for each expense or income.

CLASSIFICATION OF ACCOUNTS
Accounts in the names of persons are known as Personal Accounts
Accounts in the names of assets are known as Real Accounts Accounts in respect of expenses and incomes are known as Nominal Accounts

CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONAL ACCOUNTS

IMPERSONAL ACCOUNTS

REAL ACCOUNTS

NOMINAL ACCOUNTS

PERSONAL ACCOUNTS
Accounts in the name of persons are known as personal accounts.
Eg: Babu A/C, Babu & Co. A/C, Outstanding Salaries A/C, etc.

REAL ACCOUNTS
These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature. Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.

NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All expenses and losses and all incomes and gains fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.

DEBIT AND CREDIT

Each accounts have two sides the left side and the
right side. In accounting, the left side of an account is called the Debit Side and the right side of an account is called the Credit Side. The entries made on the left side of an account is called a Debit Entry and the

entries made on the right side of an account is called a

Credit Entry.

RULES FOR DEBIT AND CREDIT

Debit the Receiver Credit the Giver Debit what comes in Real Accounts Credit what goes out Debit all Expenses and Losses Credit all Incomes and Gains

Personal Account

Nominal Accounts

Steps for finding the debit and credit aspects of a particular transaction
Find out the two accounts involved in the
transaction. Check whether it belongs to Personal, Real or Nominal account. Apply the debit and credit rules for the two accounts.

Subsidiary Books
General Journal Special Journals Purchase Book Sales Book Purchase Return Book Sales Return Book Bills Receivable Book Bills Payable Book Cash Book Petty Cash Book

Journal
Journal is the prime or original book of entry in which all transactions are recorded in the form of entries. Journalising is an act of recording or entering transactions in a Journal in the order of date.
Date Particulars LF Debit Amount Credit Amount

Journal Entry
Jan 1, 1981 Prakash Started a business Rs. 15,000/Date 1981 Jan 1 Particulars Cash a/c Dr. To Capital a/c (Being cash invested to business) LF Debit Amount 15,000 15,000 Credit Amount