Accounting Concepts

The following are the generally accepted Accounting Assumptions.

1) Concepts at the recording stage. These are concepts to be observed at the

recording stage of transaction in books of account. They are discussed in brief
below.
a) Business Entity Concept.
Accounting treat business as different from the person who owns it. Without such
a distinction the affairs of the business would be mixed up with private affairs of
the owners and the true picture of the financial position of the business and its
profit will not be available.
b) Dual Aspect Concept.
Each transaction in accounts has two aspects which are expressed as Debits
and Credits and are recorded in the books of the account accordingly. This
principle is the Core of Double Entry System of Book Keeping and if it is
observed strictly, the system of recording transactions in books of account is
called Double Entry System of Book Keeping
c) money measurement Concept.
Accounting records only those transactions which can be recorded in monetary
terms.
d) Cost concept.
As per this concept transactions are recorded at the amount involved while
assets are always recorded at cost. For eg one book of Rs50/ is bought for
Rs100/ by mistake then also the entry in the books of the books of account is to
be made at the cost price ie Rs100/
e) Objective evidence concept.
According to this concept all transactions recorded in the books of accounts
should be evidenced and supported by objective documentary evidence.
f) Historic record concept.
Transactions are recorded in the books of account as and when they take place.
Ie in chronological manner date wise.

2) Concept at reporting stage

 These are concepts to be observed at the reporting stage ie the time of
preparation of final accounts from the transactions recorded in the books of
account. They are
a) Matching cost against Revenue concept.
Accounting records at the same time and at the same period not only the income
but all the expenses incurred to earn the income. Thus it matches the income
with the cost incurred to earn it before showing any profit or loss of that activity.
b) Accrual concept.
Accounting is normally done on accrual basis. Ie income and expenses are
recorded as and when they become due and not as and when they are actually
paid and received. However this concept is not followed by Banks to day.
Banks recognize interest income on loans only when cash is received from
the borrower.
c) Going concern concept.
Accounting presumes that the business will exist for a long time and its owners
are not desirous of closing it.
d) Accounting period concept.
When accounts are prepared generally for a period of 12 months in India, this
period is normally 1st April to 31st March of the next colander year. This concept is
important as it provides a cut off for measurement of profits in the otherwise
continues business process.
3) Accounting conventions.
This is an accepted accounting principle. The following are the Accounting
conventions.
a) Consistency,
Accounting systems should be consistent Let us say a company is adopting
straight line method of depreciation then it should follow the same method
consistently all the years.
b) Disclosure.
Significant accounting systems should be disclosed while preparing accounts.
c) Conservatism.
All future losses should be accounted in the year itself. But all the expected
income are not accounted for till realization.
d) Materiality
A good accounting practice should disclose all the material events, policies
etc used in the preparation of financial statement.

Double entry system.

Every business transactions involves transfer of money from one account to another
and thus the transfer necessarily involves two accounts in opposite directions. The
Double entry systems of Book Keeping records both aspects of every transaction and
therefore follows the rule that every debit must have a corresponding credit and vice
versa. This rule helps to check the arithmetical accuracy of records by preparing the
Trial Balance statement. Accounts maintained under the single entry system record only
one aspect of the transaction and the record is therefore incomplete.

Certain rules must be observed in recording transactions under double entry system.
The two elements of every transaction must be grouped under three types of accounts
and each type of account has its ru8le for recording the debit and credit aspect of the
transaction.

The two principal type of accounts are one personal accounts and other Impersonal accounts. Personal
accounts are subdivided into a) Real or asset accounts and b) nominal accounts. Personal account
contains record of transaction with a person that could be an individual group or society banks etc. Real
accounts are accounts of properties or assets and contain a record of purchases and sales of the
properties or assets like land building goods cash etc. Nominal accounts are accounts of expenditure and
income and record gains and losses. The accounting rules to be followed for the three types of accounts
are.

Type of Accounts Rules of entry.

Debit Credit.
Personal Receiver Giver
Real What comes in What goes out
Nominal Expenses and losses Incomes and gains.
The following are the most important aspects in any double entry accounting system,

Trial Balance,
Trading Account and Profit and Loss Account,
General Ledger
Capital,
Assets,
Liabilities,
Creditors,
Debtors,
Sales,
Purchases,
Drawings,
Purchase
Returns,
Sales Returns,
Stock, Income,
Expenses etc.,
 Various Assumptions viz Accounting Entry, Money Measurement, Accounting
period, Going concern.
Basic concepts like Double Entry, Revenue Realization concept, Historical cost
concept, Period matching concept, Full disclosure concept, Evidence concept
etc.,
Modifying principles like Cost benefit, consistency, materiality, etc.,
Double entry concept like Debit Aspect, Credit Aspect
Golden rules of Accountancy viz

Type of Accounts Rules of entry.

Debit Credit.
Personal Receiver Giver
Real What comes in What goes out
Nominal Expenses and Incomes and gains.
losses

Some questions with answers on Accountancy

Write down Journal entries.
1) Mr Rama gives a cheque to LIC for Rs 1000/- in his SB account. The cheque is
presented by LIC who are also having a current account with your branch.

DEBIT- SB Account of Rama-------Rs1000

CREDIT- Current account of LICRs1000

2) Mr.Naren deposits Rs 2000 in his RD account

Debit --------- cash a/c Rs2000

Credit ----------RD a/c Rs2000

3) M/s Varma &co remit cash Rs 10000 into their current a/c.

Debit------------------cash a/c Rs10000

Credit----------------- Current a/c of Varma & co Rs10000

4) John gives a cheque for Rs 500 in his SB account and wants cash

Debit-----SB a/c of John Rs 500

Credit-----cash a/c Rs500

1) VOC College maintain SB a/c. issues a cheque for RsTwo Lakhs with
instructions to credit SB accounts of ten Lecturers a/c with Rs20000 each.
 Here we have to debit VOC College a/c with Rs 2 Lakhs and credit the SB a/c of
10 Lecturers with Rs20000/ each. In this one transaction gives rise to 11
changes.

1) A company may give instruction to debit their current a/c and credit salary for
1000 employees. Here one debit may give rise to 1000 credits under Double
Entry.

2) Mr .Navin remits Rs 1025 for buying a Demand Draft payable at Chennaii.

Debit Cash Rs1025/
Credit NBO Rs1000/
Credit Commission (Exchange) on DDS issued Rs 25/

3) The Bank want to buy a Tube light for your branch at a cost of Rs 150/
Debit- Charges Expenditure A/c-Rs150/
Credit cash a/c Rs 150/(The bills from the shop should be attached to the Debit
voucher. Later on all entries may undergo Inspection or Audit. This is Evidence).

In all the above, one transaction have given rise to many changes in
different accounts also.

Case study on preparation of a Balance sheet.

From the following particulars extracted from the books of accounts of M/s XYZ PAC at
the close of the year ended 31.3.2010 prepare a Balance Sheet as on that date in order
of liquidity.
 Particulars Amount in
Rs
Savings Deposit 50000

Business Premises 25000

Furniture and Fixtures 8000

Sundry Debtors 1200

Sundry Creditors 1500

Current Deposit 15800

Bills purchased 9700

Investments 10,000
Cash on Hand 250

Balance with SBI 1500

Term Deposit 11050
Cash Credit 6000
Term Loan 16700
Solution of Balance sheet case study

Balance Sheet of XYZ PAC as on 31.3.2010.

Liability Amount Asset Amount

in Rs in Rs
Savings Bank 50000 Cash in Hand 250
account

Balance with 1,500

SBI

Current Deposit 15800 Investment 10,000

Account.
Term Deposit 11050 Loans and 16,700
advances
Sundry 1500 Cash Credit 6,000
Creditors
Bills 9,700
purchased
Sundry 1,200
 Debtors
Business 25,000
premises
Furniture and 8,000
Fixtures
Total 78350 Total 78350

Questions with Answers for few questions.

1) Dual aspect concept means recording of ------------ effect of a transaction (Ans

Double)
2) In Business transactions are --------- is the common unit of measurement (Ans
Money)
3) Single entry system of recording transactions in Books is not a scientific one.
True or false (Ans True. )
4) Account in the name of Shri Mukesh is ----- Account (Ans Personal)
5) Motor car account is --------- (Ans Real )
6) debit what comes in is the rule for real accounts as per Golden Rule of
Accountancy
True or false ( Ans True)
7) In respect of personal; accounts the rule is debit the receiver and credit the giver.
True or false (ans True)
8) In Double entry accounting system all transactions are recorded in cash book.
True or false
(Ans True) .
9) Bank account is a personal account True or false (Ans True)
10)Journal is Book of original entry. True or false (Ans True)
11) Accounting refers to the art of recording the business transactions in an
analytical form. True or false Ans True
12)Accountancy and book keeping are the same True or false Ans False.
 13)In -------- method of accounting profit represents excess of receipts over
expenditure. Ans Cash
14)Ledger is the ----- book of accounts. Ans Principal
15)Every entry must be posted into ------ Ans ledger
16)The difference between the two sides of account is called --- Ans Balance
17)A person who owes some thing is called ----- Ans Debtor.
18)A person to whom some thing is owed is called --- Ans Creditor.
19)The left hand side of the account is called ---- Ans Debit side
20)The right hand side of the account is called ---- Ans credit side
21)A debit in the nominal account denotes --- Ans Expenses.
22)Balancing of all the accounts must be done at end of ---- Ans Same day.
23)Total of debit side is greater than credit side. This means Ans Debit balance

Questions with Answers

Questions Answers.
Book keeping means System of maintaining book of
accounts.
Accounting Includes Book keeping
balancing of books /accounts ,
preparation of final accounts
and drawing conclusion.
Cost accounting Process of accounting for cost
Management Accounting Concerned with supply of
useful information to the
Management to enable to take
useful decision.
Business entity Business is treated as a
separate entity from the
owners/ proprietor.
Money measurement All business transactions are
measured in terms of money.
Objective evidence Bills , Cash memo Cheque book
, vouchers etc are objective
evidence for recording an entry.
Dual aspect Each transactions have two
effect.
Going concern Business entity has indefinite
 life of existence.
Journal Book of original entry.
Journalising The process of recording
transactions in a journal.
Capital account is ---- Account Personal Account
Amount invested in business Capital.
by its owner is known as
A book which contains all Ledger
accounts
A process of transferring Posting
transactions from Journal into
ledger account
A statement as on a particular Trial Balance
date showing all the ledger
balances.

Test.

1) Dual aspect concept means recording of ------------ effect of a transaction

2) In Business transactions are --------- is the common unit of measurement
3) Single entry system of recording transactions in Books is not a scientific one.
True or false
4) Account in the name of Shri Mukesh is ----- Account
5) Motor car account is ---------
6) debit what comes in is the rule for real accounts as per Golden Rule of
Accountancy
True or false
7) In respect of personal; accounts the rule is debit the receiver and credit the giver.
True or false
8) In Double entry accounting system all transactions are recorded in cash book.
True or false .
9) Bank account is a personal account True or false
10)Journal is Book of original entry. True or false

11) Question on Trial Balance.

On 31st march , the total d ebit and Credit sides of various ledger accounts and receipts and
payment sides of Cash and Bank column of cash book of Shri Baghavan Das were as under

Total of Debit Name of the Total of Credit

side. account. side.
10,000 Bhagavan Das 1,35,000
Capital
 25,000 Drawings
15000 Stock on 31.3 2011
1,90,000 Purchases 4,000
Nil Purchase returns 18,000
6,000 Sales 2,45,000
13,000 Sales returns --
12,000 Expenses nil
3,05,000 Customers 2,50,000
2,00,000 Suppliers 2,35,000
1,00,000 Car -
2,81,000 Central Bank 2,75,000
43,000 Cash 38,000
You are asked to prepare a Trial Balance of Shri Baghavan Das as on that date.

Answers to the Test questions.

1) Dual aspect concept means recording of ------------ effect5 of a transaction (Ans

Double)
2) In Business transactions are --------- is the common unit of measurement (Ans
Money)
3) Single entry system of recording transactions in Books is not a scientific one.
True or false (Ans True. )
4) Account in the name of Shri Mukesh is ----- Account (Ans Personal)
5) Motor car account is --------- (Ans Real )
6) debit what comes in is the rule for real accounts as per Golden Rule of
Accountancy True or false ( Ans True)
7) In respect of personal; accounts the rule is debit the receiver and credit the giver.
True or false (ans True)
8) In Double entry accounting system all transactions are recorded in cash book.
True or false (Ans True) .
9) Bank account is a personal account True or false (Ans True)
10)Journal is Book of original entry. True or false (Ans True)

Solution. Gross Trial Balance as on 31.3.2011

Name of the account LF Debit Credit.

Bhagavan Das 10,000 1,35,000
Capital
Drawings 25,000 --
Stock on 31.3 2011 15000 --
Purchases 1,90,000 4,000
Purchase returns --- 18,000
Sales 6,000 2,45,000
Sales returns 13,000 --
Expenses 12,000 ---
Customers 3,05,000 2,50,000
Suppliers 2,00,000 2,35,000
Car 1,00,000 -
Central Bank 2,81,000 2,75,000
Cash 43,000 38,000
Total 12,00,000 12,00,000