ACCOUNTING CONVENTIONS AND

TRANSACTION ANALYSIS

Dr Stephen Kasumba
 CONCEPTS/CONVENTIONS OF
ACCOUNTING
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1. The Going Concern Concept

 The enterprise is normally viewed as a going
concern i.e. as continuing in operation for the
foreseeable future.
 It is assumed that the enterprise has neither
the intention nor the necessity of liquidation
or curtailing materially the scale of its
operations in the foreseeable future.

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2.Accrual Basis of Accounting (Accrual

concept)
This is where the effects of transactions and

other events are recognized when they occur.

(and not as cash or its equivalent is received
or paid ), and
They are recorded in the accounting records

and reported in the financial statements of the

periods to which they related.
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3. Consistency of presentation;
 To maintain consistency, the presentation and
classification of items in the financial
statements should stay the same from one
period to the next

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4. Realisation Concept
 This concept holds to the view that profit and gains can
only be taken into account when realisation has
occurred and that realisation occurs only when the
ultimate cash to be realised is capable being assessed.
 The criteria to be observed before realization occurs are:-
 When goods or services are provided by the seller.
 The buyer accepts liability to pay for the goods or services.
 The monetary value of the goods or services has been established.
 The buyer will be in a position to be able to pay for the goods or
services

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5. Prudence Concept/ Conservatism

 Prudence is the inclusion of a degree of
caution in the exercise of the judgment
needed in making the estimates required
under conditions of uncertainty, such that
assets or incomes are not overstated and
liabilities or expenses are not understated.

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6. Materiality and Aggregation

 Materiality means that the item should be of interest to the
stakeholders ie those who make use of financial statements.
 Information is material if its omission or misstatement could
influence the economic decision of users taken on the basis
of the financial statements.
 An error that is too trivial to affect any one’s understanding
of the accounts is referred to as immaterial.
 Amounts which are immaterial can be aggregated with
amounts of a similar nature or function and need not be
presented separately.

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7. Substance over form

The principle of substance of over forms is that
transaction and other events are accounted for and
presented in accordance with their substance and
economic reality and not merely their legal form.
Substance over form helps to stop enterprises

distorting their results by following the letter of

the law, instead of showing what the enterprise
has really been doing.

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8. Dual Aspect Concept
 Every transaction has two effects.

 This convention underpins double entry book keeping.

 It brings out the fact that there are two aspects of

accounting.
 One represented by the assets of the business and;
 The other by the claims against the assets.
 The concept states that those two aspects are always
equal to each other i.e it’s a form of accounting equation
where:
 Assets = Capital + Liabilities.
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9. Business Entity Concept

 This implies that the affairs of the business
are to be treated as being quite separate from
the non- business affairs of its proprietors.
 The business organisation is a separate entity
created by law.
 The items recorded in the books of the
business are therefore restricted to the
transaction of the business.
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10. Historical Cost Convention

 This states that resources are normally stated in
accounts at their historical cost i.e. at the
amount which the business paid to acquired
them.
 Historical cost means that transactions are
recorded at the cost when they occur.

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11. Objectivity
 This means that accounts must be free from
bias. In practices, objectivity is difficult.
 Two accountants faced with the same
accounting data may come to different
conclusions as to the correct treatment of
certain transactions.
 The accounting standards were developed to
combat subjectivity
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12. Stable Monetary Unit (The stability of currency

concept)
 The value of the unit is not usually constant and
comparison between accounts of the current year
and those of the previous years away may be
misleading.
 This means that to make a correct assessment of
accounting statements, one must bear in mind the
distorting effects of changing price levels upon the
accounting entries as recorded.

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13. The Monetary measurement concept
 This states that, accounts will only deal with those
items to which a monetary value can be attached/
attributed.
 Thus, Accounting can never show the following:
 Whether a business has good or bad mangers.
 Whether there are serious problem in the work force.
 Whether a rival product is about to take away many of is
best customers.
 Whether the government is about to pass a law which will
cost the business a lot of extra expenses in future.
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 THE CONCEPT OF DOUBLE ENTRY
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It is stated that every business transaction
involves two aspects i.e. give and take and it is
recorded twice in the ledger.
These two entries are named as debit and credit
entries.
These two entries are made in the ledger.

In order to explain the concept of double entry,

we should understand first the different types of
accounts.
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 TYPES OF ACCOUNTS
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 An account may be defined as a record of

transactions of a particular type or with a
particular person usually expressed in financial
terms and maintained in a ledger.
 Each page of ledger is given a heading or a title
and is used to record transactions of similar
nature.
 These accounts contain the name of a business,
person or firm.
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 TYPES OF ACCOUNTS
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 Personal Accounts
 Capital

 Accounts Receivables (Debtors)

 Accounts Payables (Creditors)

 Impersonal Accounts
 Nominal

 Real

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 ACCOUNTS AND DOUBLE ENTRY
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 Business transactions are recorded in the ledger.
 For each transaction, two ledger accounts are affected.
 When faced any transaction, the following three points
must be considered.
i. What two accounts are affected?
ii. What type of accounts are they?

iii. Which account is to be debited and which

credited?

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 ACCOUNTS AND DOUBLE ENTRY
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 In terms of assets, liabilities and capital, we can
summarize the rules of double entry as follows:

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 ILLUSTRATION
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 The following transactions can be used to explain the procedure
of completing double entry:
 M. William started a business dealing in furniture with capital of
shs.50,000 in cash as on January 1, 2012
 Jan . 5 - He purchased two sofa sets at sh.2,000 each paying cash.
 Jan . 7 – He purchases one dining table with six chairs for cash
shs.1,000.
 Jan . 10 – He sells one sofa set for sh. 3,000.
 Jan . 15 –He sells one dining table & six chairs for sh.1,750
 Jan . 20 – He sells the remaining sofa set for cash sh. 2,800
 Jan . 30 – He pays sh.300 for advertisement and other sundry
expenses.

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 BOOKS OF ORIGINAL ENTRY
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 The journal is that day book in which we can
record the details of any transaction that cannot be
recorded in any other subsidiary book.
 A Journal is book of original or prime entry.
 All other books of original entry are regarded as
the division of journal for recording specific type
of transaction.
 The main uses of journal are to: record purchases
or sales of assets, correct errors, and record
opening and closing entries.
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 THE CASH BOOK
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 It is a book in which cash and cheque

transactions are entered.
 Whenever cash or cheques are either received or
paid out, the first book to enter such transactions
is the cash book.
 In this way the cash book is said to be a book of
original entry.

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 FORMAT OF TWO COLUMN CASH BOOK
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 LEDGERS
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 Each account is placed on a separate page in a

bound or loose-leaf book, called the ledger.
 Transactions are posted from the journal to the
ledger.

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 FORMAT OF A LEDGER
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 THE TRIAL BALANCE
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 A trial balance is a list of debit and credit balances extracted
from the ledger aimed at checking the accuracy of the
accounting process.
 Accounts with net debit balances i.e. before closing the
account, the total on the debit side was more than the total on
the credit side.
 All assets accounts (except bank in case of bank overdraft),
expense accounts and drawings accounts are expected to
have debit balances.
 all liability accounts, revenue or income accounts, capital
accounts and reserve accounts are expected to have credit
balances.
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 TRIAL BALANCE
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