Definition Of Accounting

According to the American Institute Of

Certified Public Accountants the art of
recording, classifying and summarizing in a
significant manner and in terms of money,
transactions and events which are, in part at
least, of financial character and interpreting
the result thereof.
The above definition also highlights the steps in
the accounting process.

Accounting Concepts,
Conventions, Bases & Policies
Concepts vs Conventions
Concepts are the basic ideas, the theories on
how and why certain categories of transactions
should be treated in a particular manner.
Once the theories have been established and
tested and proved to be acceptable, the task of
the Conventions is to set out the limit of their
applications.

Accounting Concepts

1. Business Entity Concept business is a

separate entity.
2. Money Measurement Concept money
common denominator of measurement.
3. Going Concern Concept perpetual
succession.
4. Accounting Period Concept pre-determined
periodicity generally an year.
5. Cost Concept an assets cost is the basis
of all subsequent accounting.

Accounting Concepts

6. Realisation Concept revenue should be

recognized when it is earned.
7. Matching Concept associating the cause
and effect relationship of revenues and
expenses.
8. Accrual Concept similar to matching,
period should be decided on the basis of
accrual.
9. Dual Aspect Concept 2 aspects must be
examined the giving and the receiving.

Accounting Conventions

1. Consistency method once adopted should be followed.

2. Disclosure all relevant facts concerning financial
position must be communicated to users.
3. Materiality concerned with significant information.
4. Objectivity unbiased and subject to verification by
external expert.
5. Stable Monetary Unit the Indian Rupee.
6. Conservatism or Prudence when in doubt, choose the
solution that is least likely to overstate net assets and net
income for the current period.

Accounting Bases and Policies

Accounting bases are the methods which

have been deployed for applying
fundamental accounting concepts to
financial transactions and items. Eg.
Depreciation and Inventory.
Accounting policies are the specific
accounting bases selected and consistently
followed by a business enterprise.

Some Important Terminology Of

Accounting

Assets : The economic resources which

are owned by a business and are
expected to benefit future operations.
Assets may have definite physical form,
such as buildings, machinery or
merchandise.

Equity : this is the claim against the

assets owned by the business. Equities
or claim against the assets indicate the
sources from which the assets of a
business were obtained.

Continued..
Liabilities : liabilities are the debts owed by a
business to out side parties ( called creditors ). This
includes amount owed to suppliers for goods or
services purchased amount borrowed from banks
or other lenders, salaries and taxes due but not paid.
Net worth : the term net worth, proprietorship,
owners investment, or capital all have the same
meaning in accounting : namely, the owners equity
or interest in the assets of the business. It is the
difference between what the business owns and
what it owes.

Continued..
Revenue : It may be defined as the inflow of cash assets
resulting from the sale of goods and services in the
ordinary course of business. For eg., interest received on
investments, commission received, rent received etc.
Revenue cause an increase in capital.

Expenses : it may be defined as the cost of the goods

and services used up in the process of obtaining revenue.
Example include - the cost of goods sold, wages and
salaries of employees, charges for news paper, advertising
etc.

BALANCE SHEET

Introduction :
A balance sheet is a classified
summary of the balances remaining open in a set of
books after the preparation of the trading and profit
& loss account. It shows the financial position of a
business at a particular moment in time. It is a
snapshot of the financial condition of the business
and hence it is also known as the mirror of the
business.

The Accounting Equation

ASSETS= LIABILITIES +CAPITAL
Or
CAPITAL = ASSETS - LIABILITIES

Features of a balance sheet

Statement of a financial position.

Prepared at a given date.

In balance sheet total assets equal total

liabilities.

Assets are listed on the right side of the balance

sheet and liabilities are on the left side.

OBJECTIVE OF PREPARING A
BALANCE SHEET

To disclose the financial condition of a

business.

Examine the worth of a company and the

profitability of the company.

PRINCIPLES TO BE OBSERVED IN
PREPARING A BALANCE SHEET

The first principle to be observed in the

preparation of a balance sheet is that the balance
of similar significance should be grouped
together, and that the balances of dissimilar
significance should be stated under separate
heads.

Eg: plants & machinery, building, sundry debtors, land &

building should be grouped in a same group.

Continued..

The second principle of accounting relates to

marshalling . The assets and liability
should be arranged in a specific order. This
arrangement is called a marshalling.
There are three methods for marshalling.

Continued..

The first method is to arrange the assets

according to their availability to pay off the
liabilities i.e those assets which are
represented by cash or easily convertible
into cash would take the first place while
those which are not immediately available
for the payment of the liability will take
the second place.

Continued..
The second method of arranging the item is
almost the reverse of the first method.

Immovable property should be taken at

first place.
Moveable assets should be taken on
second place.
Liquid assets should be taken on third
place .

Continued..

The third method is a mixture of the first

and second methods, assets are arranged
in the first method and the liability in the
second method.

Profit & Loss

Balance Sheet

It is an account.

It is prepared to know
the final result of the
business.

It include only
revenue receipts and
revenue expenses.

It is an statement not
an account.
It shows the financial
position of the
business.
It includes assets and
liability.

Profit & loss

Balance sheet

It is prepared for the

particular period.

It is prepared on the
particular date.

The left side of the

account is known as
debit side and the
right side is known as
the credit side.

Left side is known as

the liability side and
right side is known as
the assets side.