I.

Accounting Rules:

Nominal: Debit all Expenses and Losses Credit all incomes and Gains II Accounting Principles: 1. Business Entity: For accounting purposes business is treated as a unit or entity apart from its owners, creditors etc. Capital is also treated as permanent liability and withdrawals is treated as reduction of capital and for Corporate companies can sell their share of capital to other investors. 2. Going Concern: Enterprise will continue for foreseeable future. It is fundamental accounting assumption Disadvantage 1) Assets recorded at Historical basis not Current value and it is testifies objective evidence 2) Assets depreciated based on the Expected life not on the basis of market value realization 3. Money measurement: All transactions and events which will be recognized in terms of money can only recorded in books of accounts. Disadvantages a) Time value of money b) Brand Value c) Man power resources 4. Cost Concept: A Business entity can record it's Assets, Liabilities and Capital at purchase value (Cost ) or as per principles it is Cost (or) if it is for exchange Fair value Disadvantages: 1) There is no objectivity and Standard verifiability lacking of Market value 2) No standard objectivity among Current worth and Market value and Realizable value 3) Fixed assets are purchased for use in production and held for sale 5. Accounting Period Concept: A Business should report its operations over a standard period of time. Business is continued for foreseeable future, so at standard periodical intervals results require to be measured i.e. 12 months 6. Dual Aspect: Recognition of two aspects of every transaction call Dual aspect 7. Matching Concept: Expenses which are actually during specific activity period in order to earn revenue for the said period must be matched against the revenue which is realized for that period. (Expenses which are incurred for earning of revenue of the related period are to be considered. Disadvantages: Preliminary Expenses, Capital expenditure written off and Long term contracts revenue recognition as per Construction accounts 8. Realization (or) Revenue Recognition:Revenue is considered as earned on the date it is realized. Revenue realized during an accounting period should only taken into P&L account. Unearned and Unrealized revenue is treated as earned on some specify matters 9. Balance sheet Equation: Expenses + Loss + Assets = Income + Gains + Liabilities Assets = Equity + External Liabilities 10. Objective Evidence: Accounting data is subject to verifiability by Independent experts, So, documentary evidences of all transactions which are capable of verification. actual receipt, Costs are recognized when they are incurred, not when paid. But some authorities would prefer (Ex: Tax) Hybrid system of accounting Expenditure on Mercantile basis and Income Cash basis III Accounting Conventions: Disclosure:It implies all accounts are honestly prepared and material information must be disclosed therein. Along with financial statements and other various facts also disclosed as Note. 1) Contingent liabilities as Note 2) Market value of investments as Note 2. Materiality: It is the matter of important or unimportant and unimportant items are merged with other items which are relative nature of items 3. Consistency: It is essential that accounting practices and methods are remain unchanged from one accounting year to another accounting year along with that Vertical and Horizontal consistency also need to maintained

1. 2. 3.

Personal: Debit the benefit receiver-Credit the benefit giver Real: Debit what comes in Credit what goes out

11. Accrual Concept: It is against to Cash system of Accounting. In this method Revenue recognition depends on its realization not 1.

revenues and assets only when you are sure that they will occur. It is applied very cautiously. Otherwise it will bring out doctrine of full disclosure Ex: Provision against doubtful debts and fluctuating inventory prices, Amortization of good will which has indefinite life valuing of stock and Capital Revenue bais also
IV Accounting Principles Related: 1. Basic Accounting assumption: 1) Going concern 2) Consistency 3) Accrual 2. Other Accounting assumptions: 1) Objective evidence 2) Conservatism 3) Time Period 4) Economic Entity

4.

Conservatism: This is the concept that you should record expenses and liabilities as soon as possible, but to record

3.

Capital maintenance: It is an accounting concept, stating that a profit should not be recognized unless a business has at least maintained the amount of its net assets during an accounting period.This concept excludes the following cash inflows and outflows that impact net assets:

Increase in assets from the sale of stock to shareholders (increases cash) Decrease in assets from the payment of dividends or other distributions to shareholders (decreases cash)Technically, the
capital maintenance concept means that the amount of net assets should be reviewed for changes before determining the profit generated during an accounting period. The capital maintenance concept is concerned with the net change in account balances during an accounting period; it is not concerned with the proper maintenance of the capital equipment owned or operated by a business.

4.

Commercial Substance: A business transaction is said to have commercial substance when it is expected that the futurecash flows of a business will change as a result of the transaction. A change in cash flows is considered to be when there is a significant change in any one of the following (not including tax considerations):

Risk. Such as experiencing an increase in the risk that inbound cash flows will not occur as the result of a transaction; for
example, a business accepts junior secured status on a debt in exchange for a larger repayment amount.

Timing. Such as a change in the timing of cash inflows received as the result of a transaction; for example, a business
agrees to a delayed payment in exchange for a larger amount.

Amount. Such as a change in the amount paid as the result of a transaction; for example, a business receives cash
sooner in exchange for receiving a smaller amount. Examples of situations where there is no commercial substance include:

Sale of assets to the owner of a sole proprietorship, who immediately leases it back to the business. There is little
distinction between a proprietorship and its owner, so it is likely that no real change of ownership occurred. The swapping of bandwidth capacity by different Internet and phone service providers. By doing so, both entities recognize revenue, when in fact no real revenue generation occurs that would result in a change in profits. The concept of commercial substance is also applied to exchanges of assets between businesses. When there is commercial substance (which is when there is a change in cash flow resulting from the transaction), the parties should recognize a gain or loss on the exchange. If there is no commercial substance, then you record the acquired asset at the book value of the asset given up in the exchange. There are additional issues related to the recognition of a gain or loss when a transaction has no commercial substance.

5. 6.

Substance over form: Substance over form is the concept that the information shown in the financial statements and accompanying disclosures of a business should reflect the underlying realities of accountingtransactions, rather than the legal form in which they appear. Ex: Hire Purchase and Installment Purchase

Prudence:Under the prudence concept, you should not overestimate the amount of revenues that you record, nor underestimate the expenses. You should also be conservative in recording the amount of assets, and not underestimate liabilities. V. Book Keeping:

1. Accounting for Bonds: 1) Bonds issue entries at the time of issue at discount/premium 2) Amortization of discount or premium and Redemption of bonds 2. Change in Accounting Estimate: Changes in estimate are a normal and expected part of the ongoing process of reviewing the current status and future benefits and obligations related to assets and liabilities. A change in estimate arises from the appearance of new information that alters the existing situation Examples of Changes in Accounting Estimate All of the following are situations where there is likely to be a change in accounting estimate: Allowance for doubtful accounts Reserve for obsolete inventory Changes in the useful life of depreciable assets Changes in the salvage values of depreciable assets Changes in the amount of expected warranty obligations
When there is a change in estimate, you should account for it in the period of change. If the change affects future periods, then the change will likely have an accounting impact in those periods, as well. A change in accounting estimate does not require the restatement of earlier financial statements, nor the retrospective adjustment of account balances Change in Accounting Principles: 1) Prescribed by law 2) Better and appropriate presentation Effect by way of note 4. Trial Balance Errors: This unadjusted trial balance may contain a number of errors, only a few of which are easy to spot in the trial balance report format. Here are the more common errors, with suggestions on how to find them:

3.

Entries made twice. If an entry is made twice, the trial balance will still be in balance, so that is not a good document for
finding it. Instead, for an ongoing transaction, you may have to wait for the issue to resolve itself. For example, a duplicate invoice to a customer will be rejected by the customer, while a duplicate invoice from a supplier will (hopefully) be spotted during the invoice approval process.

Entries not made at all. Impossible to find on the trial balance, since it is not there (!). Your best bet is to maintain a
checklist of standard entries, and verify that all of them have been made.

Entries to the wrong account. This may be apparent with a quick glance at the trial balance, since an account that
previously had no balance at all now has one. Otherwise, the best form of correction is preventive - use standard journal entry templates for all recurring entries.

Reversed entries. An entry for a debit may be mistakenly recorded as a credit, and vice versa. This issue may be visible
on the trial balance, especially if the entry is large enough to change the sign of an ending balance to the reverse of its usual sign.

Unbalanced entries. This is listed last, since it is impossible in a computerized environment, where entries must be
balanced or the system will not accept them. If you are using a manual system, then the issue will be apparent in the column totals of the trial balance. However, locating the exact entry is vastly more difficult, and will call for a detailed review of every entry, or at least of the totals in every subsidiary journal that rolls into the general ledger 5. Adjusting Errors: Adjusting entries are journal entries that are used at the end of an accounting period to adjust the balances in various general ledger accounts to more closely align the reported results and financial position of a business to meet the requirements of an accounting framework, such asGAAP or IFRS. This generally involves the matching of revenues to expenses under the matching principle, and so impacts reported revenue and expense levels.The use of adjusting journal entries is a key part of the period closing processing, as noted in theaccounting cycle, where you convert a preliminary trial balance into a final trial balance. It is usually not possible to create financial statements that are fully in compliance with accounting standards without the use of adjusting entries. An adjusting entry can used for any type of accounting transaction; here are some of the more common ones:

6.

To record depreciation and amortization for the period To record an allowance for doubtful accounts To record a reserve for obsolete inventory To record a reserve for sales returns To record a warranty reserve
To record any accrued revenue

To record previously billed but unearned revenue as a liability

To record any accrued expenses

To record any previously paid but unused expenditures as prepaid expenses To adjust cash balances for any reconciling items noted in the bank reconciliation
As shown in the preceding list, adjusting entries are most commonly of three types, which are:

Accruals. To record a revenue or expense that has not yet been recorded through a standard accounting
transaction.

Deferrals. To defer a revenue or expense that has been recorded, but which has not yet been earned or used. Estimates. To estimate the amount of a reserve, such as the allowance for doubtful accounts or the inventory
obsolescence reserve. When you record an accrual, deferral, or estimate journal entry, it usually impacts an asset or liability account. For example, if you accrue an expense, this also increases a liability account. Or, if you defer revenue recognition to a later period, this also increases a liability account. Thus, adjusting entries impact the balance sheet, not just the income statement.

7. 8.