Accounting Concepts:

Business entity concept: The business enterprise and its owners are two separate independent
entities. Thus, the business and personal transactions of its owner are separate. For example, when the
owner invests money in the business, it is recorded as liability of the business to the owner. Similarly,
when the owner takes away from the business cash/goods for his/her personal use, it is not treated as
business expense.
Money measurement concept: All business transactions must be in terms of money that is in the
currency of a country.
Going concern concept: A business firm will continue to carry on its activities for an indefinite period
of time. Only if any voluntary or legal issues, this business will be shutdown.
Accounting period concept: All the transactions are recorded in the books of accounts on the
assumption that profits on these transactions are to be ascertained for a specified period . Thus, this
concept requires that a balance sheet and profit and loss account should be prepared at regular
intervals. This is necessary for different purposes like, calculation of profit, ascertaining financial
position, tax computation etc.
Accounting cost concept: All assets are recorded in the books of accounts at their purchase price,
which includes cost of acquisition, transportation and installation and not at its market price. It means
that fixed assets like building, plant and machinery, furniture, etc. are recorded in the books of accounts
at a price paid for them. If not, we need to make changes in financial statements.
Duality aspect concept: It provides the very basis of recording business transactions in the books of
accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in
their respective opposite sides. Ex. Assets = Liabilities + Capital.
Realization concept: This concept states that revenue from any business transaction should be
included in the accounting records only when it is realized. The term realization means creation of legal
right to receive money. Selling goods is realization, receiving order is not. In other words, it can be said
that: Revenue is said to have been realized when cash has been received or right to receive cash on the
sale of goods or services or both has been created.
Accrual concept: That revenue is realized at the time of sale of goods or services irrespective of the
fact when the cash is received.
Matching concept: The revenue and the expenses incurred to earn the revenues must belong to the
same accounting period. So once the revenue is realized, the next step is to allocate it to the relevant
accounting period.
Conservatism concept: This requires company accounts to be prepared with caution and high degrees
of verification. All probable losses are recorded when they are discovered, while gains can only be
registered when they are fully realized.
Accounting Cycle:
Golden Rules of Debit and Credit:
1) Real Account: related to assets and liabilities. Will not close at end of year, rather carries to next
accounting period.
Debit: what comes in Credit: what
goes out

2) Personal Account: related to all persons (Man or artificial (company/firm)).

Debit: The Receiver Credit: The
Giver

3) Nominal Account: related to income, expenses, losses, gains.

Debit: All Expenses and Losses Credit: All
income and gains
Accounting Equation:

Assets (Own) = Liabilities (Owe)

= Shareholders Equity + Outside Liabilities (Loans, expenses etc...)
= Share Capital + Reserves and surplus (leftover profit over years belong to shareholders
– Prev yrs. profit and current year profit (Income-Expense)) + Outside Liabilities

An Asset is a resource with economic value that an individual, corporation, or country owns or controls
with the expectation that it will provide a future benefit.

1) A - Cash +25000 2) A - Cash -500 3) A -

Equipment +8000 4) A - Cash -500 and office supplies +500
L - Equity share +25000 L - Reserves and surplus -500 L-
Equipment supplier +8000 L - NILL

5) A - Cash -750 6) A - Cash -3000 7) A - Cash

+2000 and Trade Receivables +8000 8) A - Cash -5000
L - R & S +750 L - R & S +3000 L-R&S
+10000 L - Equipment supplier -5000

9) A - Office Supplies -100 10) A - NILL

L - R & S -100 L – R & S -1000 and Credit Card A/C +1000

Balance C/D: Balance is carried down for next financial year.

Balance B/D: In the next year, we call that carried down as brought down (Closing Balance).

Subsidiary Books:
Cash Book- It is a book which records the receipts and payment of cash transaction.
Purchase Book- It is a book which records all the credit purchases of goods of the company.
Purchase Return Book (Return Outwards Book) - It is a book which records all the return of credit
purchases of goods of the company.
Sales Book- It is a book which records all the credit sales of goods of the company.
Sales Return Book (Return Inwards Book) - It is a book which records all the return of credit sales of
goods of the company.
Bills Receivable Book- It is a book which records all the bills receivable.
Bills Payable Book- It is a book which records all the bills payable.
Journal Proper- All the transactions which are not recorded in the above books are recorded here.

Advantages:

Perpetual inventory systems: This keeps track of inventory balances continuously, with updates made
automatically whenever a product is received or sold.
Periodic inventory systems: Uses an occasional physical count to measure the level of inventory and
the cost of goods sold (COGS).

Inventory Valuation:
Specific identification method: Specially keeping track of each specific item in inventory. Usable when
company is able to identify, mark and track each item. Eg: Chassis number of any vehicle in automobile
industry.

FIFO: Closing inventory: remaining goods cost.

Purchased cost = COGS + Closing Inventory, if during the lifetime of the company. Find the slide for FIFO
(First In First Out).

WAC (Weighted average cost):

Example:

Long- Lived assets: Building, Land, Furniture etc..

Expenditure: Long term (will not feature in Profit/Loss statement)

Expense: Short term (reduces the profit)

Example: Machines are purchased at 10L and used for 10years. (Expenditure)
To convert this into Expense = Cost of asset/ Life = 10L/10 = 1L (Depreciation). Depreciation is the
mechanism in which long term assets are converted to expense.
Assets: Tangible (Depreciation) and Intangible (Amortization) assets.

Land can never be depreciated or appreciated, because the assets will remain till end. And we do any
mechanism; it will affect the profit/loss statement. Cost of asset will not be included when the asset is
reached to it final level of production, Like when use of intention happens.

Methods of Depreciation:

Straight Line: Salvage (Scrap) value is the value that the asset being sold after the usage. Dep. = (Cost of
asset – salvage value)/ life of asset.

Example: Cost 10L, Life 5years and salvage value = 10000. So, Dep. = (1000000-10000)/5 = 198000
every year for 5 years.

So, the total dep. Value = 198000*5 = 990000 and add salvage value = 10L

The high salvage value, the low depreciation and the high profit to the organization during the period.
So, the salvage value will determine the profit in any organization.

The more the life of the asset, the less the depreciation and will increase the profit to the organization
during the period.

When Dep. Is uniform and R&M (Repairs and Maintenance) increasing, so the expense will be high and
profit decline.
So, Dep. Should decrease and R&M is increased, not much impact to profit. So, WDV (Written Down
Value) or DBM (Diminishing Balance Method) will help us for this.

WDV: Example:

With salvage
Without salvage
Production Method: Machine-Hour-Rate Method. When the producing unit is 1L, the machine will not
be further used.

Example:
Accumulated Depreciation: Summing all the depreciation values. Always WDV and Accumulated
depreciation sums up to cost of the asset in straight line method. Example:
Basic EPS = (PAT – Preference Dividend)/ Total number of equity shares.
Diluted EPS = (PAT – Preference Dividend)/ Weighted average of equity shares.

NCP1 Questions:
Intro -6
Trail balance, journals, ledgers, transaction analysis – 10
Subsidiary books – 2
Inventory – 6
Depreciation - 6