PRINCIPLES OF ACCOUNTING
Principles of Accountancy
The principles which are used in accountancy can be divided into two elements. The accounting concepts and conventions are treated as the basic two elements of principles of accountancy. Nearly eight major concepts are adopted in accountancy. Three major conventions are used in accountancy.
While recording the business transactions in books of accounts, the concepts are to be considered at appropriate situation, Concepts are first and foremost in accountancy. In English, alphabets are important. Accounting concepts are foremost in accountancy.
Business Entry Concept
Business is separated from its owner. Owner is treated as a principle creditor of the business. Business owes to the owner for the amount of capital invested in business by him. Even though business is owned by the proprietor, it is a separate entity. All accounting processes are done in the point of view of business. If a transaction happens, it is treated as a transaction of business which is separated from it is owner. Business pays profit, interest on capital in turn of the capital invested in business by the owner.
A proprietor of a business buys some furniture for his own house to decorate it. He may have paid it from the cash balance of business. In this situation, the payment is treated as a drawing by the owner from his capital for the payment of his personal expenses from the point of view of business.
When the concept is not followed, the personal transactions of proprietor of business are mixed up with his business tractions. By the result of such mixture, confusion may arrive in accounting treatment. This concept is introduced to segregate the personal transactions of owner from his business transactions.
To distinguish the owner of business from other creditors, his investment amount in business is treated as capital A/c. When he takes some amount of cash from business for his personal use, it is treated as Drawing A/c.
A person starts a business of selling garments. He got success in his business. His name was replaced as business man and proprietor of garment concern. He got a special range in his circle. He became acquainted in his area.
One person starts a business then he becomes as a business man and he is known as a proprietor of the business. A person gets his all credit of business man, proprietor by the business which is started by him. Business lends him the name of credit to him. So it has its own value. Therefore the business is treated as first and foremost and a separate entity.
In his book, luca pacioli stated that the capital is a creditor as per Cash received and Cash received is debtor as per capital. The second sentence of cash received is debtor is confusing one and please ignore it.
Illustration:
A invests Rs10000/- in his business of selling glossary items.
Rs.10000/- is the capital amounted lent in business by Mr.A. Therefore Capital A/c is credited as it is treated that A is a creditor. Business is getting the credit amount from Mr.A and A is not investing in his own business from accounting point of view.
Money Measurement Concept
“Money” is the medium of exchange. Common measure of value of an economy is money. All goods and services of a country can be exchanged by the medium of money. All goods and services are measured in the value of money.
All transactions in a business is based on the monetary exchange. All transactions must result in the transfer for money or money’s worth. The transactions which can be measured in terms of money can only be recorded in books of accounts.
Some transactions and assets are not recorded in the books of accounts because they cannot be measured in terms of money. There may be a strike. Because of strike, some losses occur. The strike is a great loss to business in terms of work force, work process, etc. Strike cannot be measured in terms of money so strike is not recorded as loss in books of accounts. A best manger is the asset of a business. He cannot be accounted because he cannot be measured in terms of money.
Currency is the measuring unit of money. When transactions are occurred between two countries, multiple currencies are involved in it but they are converted into the currency of native country of the business and then it is accounted in native currency.
Illustration
A manager takes a decision of changing the market strategy.
This cannot be measured in terms of money therefore it cannot be accounted in books of accounts. It is ignored in accounting.
Going Concern Concept
Business is existed for infinite period of life. Business continues its operation for indefinite period of future. It is not considered to curtail the operation of business are a period in its life times. Business is a going concern. It is assumed the life of business is infinite. Business is considered to be existed for a long life.
An asset is valued to be used in future time also. Assets are assumed to use in future. Current changes in the value of assets are ignored, because assets are assumed to be used in foreseeing future times.
Illustration
Mr. A buy a furniture for business use for the value of Rs.250000/-.
Balance Sheet
Liabilities Rs. Assets Rs.
Capital 320000 Furniture
Cash in hand 250000
70000
Total 320000 Total 320000
Periodicity Concept
It is assumed that a business has infinite period of life, when going concern concept is assumed. Life of a business has infinite period of time. The performance of a business or financial position of a business cannot be ascertained by following going concern concept. After the end of life of a business, we can ascertain the financial position and result of a business while applying the going concern concept.
As per periodicity concept, entire life of a business is split into small portion of period of time. The financial position or performance of business is ascertained at the end of every small portion of period of time under periodicity concept. The whole lifetime of a business is spilt into 6months, 9months, 1year, or 15months. For the every sub periods like 6months, 9months, etc., performance of a business or result of a business is ascertained during its life time.
The periodicity concept gives life to the accrual concept and matching concept.
Accrual Concept
All expenses and incomes are recorded in the books of accounts, when they arise or accrue or become due. The cash payment for expenses and cash receipt for incomes may have made or not, but the incomes and expenses are recorded, when they become due. All incomes and expenses which relate to the financial year are recorded in the books of accounts, even though cash payment or cash receipt for the expenses or incomes is not made.
Illustration
Mr. x sells to Mr. y the goods worth Rs.100000/-. Mr. y who pays Rs.80000/- in cash promises to pay the remaining Rs.20000/-.
In the books of accounts, Rs.100000/- is recorded as sales. Accrual concept is followed in this case.
Periodicity concept is base for accrual concept. While preparing books of accounts, its accounted in accrual basis. When life time of business is split into sub periods as per periodicity concept, incomes and expenses are treated as accrued on the basis of relating period. At the end of accounts, incomes and expenses which relate to that period are accounted on accrual basis. The income or expenses which relate to that period are accounted on accrual basis.
When cash is received after accrual of income, such incomes are called as accrued incomes.
When cash is received before accrual of income, such incomes are called as accrued incomes.
When cash payment is made after accrual of expenses, such expenses are called as outstanding expenses.
When cash payment is made before accrual of expenses, such expenses are called as prepaid expenses.
Accrued income, income received in advance, outstanding expenses, and prepaid expenses are raised because of accrual concept.
Cost Concept
The assets are valued at the historical cost. When the assets are purchased, they are accounted at value of cost of purchase (historical cost) at the time of purchase. The current changes in the value of assets in market are not considered for accounting purpose. The cost concept is based on the going concern concept. As per going concern concept, the current changes in assets are ignored because the assets are value at the assumption of using it for long period i.e. more than one year.
In accounting tradition, accounting follows cost concept to value the assets in business. Assets are revalued at specific situations but it does not update the value of assets to its market value. In some circumstances, assets are revalued at market prices but they are done at once only in that situation. In admission of a new partners into a partnership firm, assets are revalued at market price.
Illustration
A purchases a furniture costs Rs.100000/- at 1.04.2012 but the market value of the furniture is Rs125000/- at 31.03.2013. Accountant records the furniture at the cost of Rs.100000/- at 1.04.2012 and keep remained the value at Rs.100000/- at 31.03.2013.
Realisation Concept
It is based on cost concept. The changes in value of assets are recorded only when the assets are realized in the market for sale. Assets are recorded in cost concept basis. They are recorded, while selling, in the books of accounts by following realization concept.
Illustration
X purchases a machine for Rs.200000/- at 01.01.2002 and sold the asset at Rs.150000/- in the market for second hand sale. The Accountant records the asset at the cost of Rs.200000/-. When the asset is sold, he records the loss of Rs.50000/- in profit and loss A/c therefore it is assured that the asset is realized in the value of Rs.150000/-.
Cost - Loss = Realised Value
200000 - 50000 = 1500000.
Dual Aspect Concept
All transactions have two aspects. The aspects are 1) Receiving aspect, 2) Giving aspect. Transactions are based on the theory that there will be no gain without any scarification in business transactions. Something is given to get something in business transactions. The giving aspect is credited and receiving aspect is debited.
Illustration
On 1st January, 2012, Ms. X &co., has bought 100 books from prodigy publish for Rs.2000/-.
Here lost Rs.2000/- to get 100 books. Ms. X & co., purchases 100 books. Purchase of 100 books is receiving aspect. Ms. X & co., pays Rs.2000/- to get the 100 books. Payment of Rs.2000/- is giving aspect. Purchase of 100 books is to be debited and payment of Rs.2000/- is to be credited. Therefore Purchase A/c is debited and Cash A/c is credited in the books of accounts.
Journal
Date particulars Debit Credit
January 1 Purchase A/c Dr 2000
2012 To Cash A/c 2000
(Being purchase of
100 books from prodigy
Publish)
As per Dual Aspect Concept, Debit must tally with credit. All debit accounts have its equal credit accounts in books of accounts. Some equations are formed to prove it, as per accounting equation approach. The equation is explained below.
Capital + Liabilities+(all incomes – all expenses) = Assets
Assets – Liabilities+(all incomes – all expenses) = Capital
Assets - Capital = Liabilities+(all incomes – all expenses)
All debit accounts i.e. Assets equalized the all credit accounts i.e. Liabilities and Capital.
Illustrations
Rahim puts Rs.100000/- as capital into his concern Rahim & C0. The furniture are bought for Rs.50000/-. Electricity charges, Salary, Maintenance, etc comes to Rs.10000/-. Purchase of Goods Rs.10000/-. Sales made for Rs.22000/-. Rs.8500/- is payable to ram & co., for credit purchase, creditors. Rs.10000/- is receivable from Saleem & co., for credit sales, debtors. Cash remains as Rs.52000/-
Capital + liabilities = Assets
Capital + Creditors+ (sales – purchase – expenses) = Furniture + Cash + Debtors
100000 + 8500+(32000-18500-10000)=50000+52000+10000
100000+8500+3500=50000+52000+10000
112000 = 112000
As per traditional approach of accountancy, all assets are tallied with all liabilities in balance sheet. All accounts are classified into real, personal, nominal A/c. Nominal accounts which are shown in trading and profit and loss account, are closed and transferred to capital A/c, a liability. So all debit accounts tally all credit accounts.
Principles of Accountancy
The principles which are used in accountancy can be divided into two elements. The accounting concepts and conventions are treated as the basic two elements of principles of accountancy. Nearly eight major concepts are adopted in accountancy. Three major conventions are used in accountancy.
While recording the business transactions in books of accounts, the concepts are to be considered at appropriate situation, Concepts are first and foremost in accountancy. In English, alphabets are important. Accounting concepts are foremost in accountancy.
Business Entry Concept
Business is separated from its owner. Owner is treated as a principle creditor of the business. Business owes to the owner for the amount of capital invested in business by him. Even though business is owned by the proprietor, it is a separate entity. All accounting processes are done in the point of view of business. If a transaction happens, it is treated as a transaction of business which is separated from it is owner. Business pays profit, interest on capital in turn of the capital invested in business by the owner.
A proprietor of a business buys some furniture for his own house to decorate it. He may have paid it from the cash balance of business. In this situation, the payment is treated as a drawing by the owner from his capital for the payment of his personal expenses from the point of view of business.
When the concept is not followed, the personal transactions of proprietor of business are mixed up with his business tractions. By the result of such mixture, confusion may arrive in accounting treatment. This concept is introduced to segregate the personal transactions of owner from his business transactions.
To distinguish the owner of business from other creditors, his investment amount in business is treated as capital A/c. When he takes some amount of cash from business for his personal use, it is treated as Drawing A/c.
A person starts a business of selling garments. He got success in his business. His name was replaced as business man and proprietor of garment concern. He got a special range in his circle. He became acquainted in his area.
One person starts a business then he becomes as a business man and he is known as a proprietor of the business. A person gets his all credit of business man, proprietor by the business which is started by him. Business lends him the name of credit to him. So it has its own value. Therefore the business is treated as first and foremost and a separate entity.
In his book, luca pacioli stated that the capital is a creditor as per Cash received and Cash received is debtor as per capital. The second sentence of cash received is debtor is confusing one and please ignore it.
Illustration:
A invests Rs10000/- in his business of selling glossary items.
Rs.10000/- is the capital amounted lent in business by Mr.A. Therefore Capital A/c is credited as it is treated that A is a creditor. Business is getting the credit amount from Mr.A and A is not investing in his own business from accounting point of view.
Money Measurement Concept
“Money” is the medium of exchange. Common measure of value of an economy is money. All goods and services of a country can be exchanged by the medium of money. All goods and services are measured in the value of money.
All transactions in a business is based on the monetary exchange. All transactions must result in the transfer for money or money’s worth. The transactions which can be measured in terms of money can only be recorded in books of accounts.
Some transactions and assets are not recorded in the books of accounts because they cannot be measured in terms of money. There may be a strike. Because of strike, some losses occur. The strike is a great loss to business in terms of work force, work process, etc. Strike cannot be measured in terms of money so strike is not recorded as loss in books of accounts. A best manger is the asset of a business. He cannot be accounted because he cannot be measured in terms of money.
Currency is the measuring unit of money. When transactions are occurred between two countries, multiple currencies are involved in it but they are converted into the currency of native country of the business and then it is accounted in native currency.
Illustration
A manager takes a decision of changing the market strategy.
This cannot be measured in terms of money therefore it cannot be accounted in books of accounts. It is ignored in accounting.
Going Concern Concept
Business is existed for infinite period of life. Business continues its operation for indefinite period of future. It is not considered to curtail the operation of business are a period in its life times. Business is a going concern. It is assumed the life of business is infinite. Business is considered to be existed for a long life.
An asset is valued to be used in future time also. Assets are assumed to use in future. Current changes in the value of assets are ignored, because assets are assumed to be used in foreseeing future times.
Illustration
Mr. A buy a furniture for business use for the value of Rs.250000/-.
Balance Sheet
Liabilities Rs. Assets Rs.
Capital 320000 Furniture
Cash in hand 250000
70000
Total 320000 Total 320000
Periodicity Concept
It is assumed that a business has infinite period of life, when going concern concept is assumed. Life of a business has infinite period of time. The performance of a business or financial position of a business cannot be ascertained by following going concern concept. After the end of life of a business, we can ascertain the financial position and result of a business while applying the going concern concept.
As per periodicity concept, entire life of a business is split into small portion of period of time. The financial position or performance of business is ascertained at the end of every small portion of period of time under periodicity concept. The whole lifetime of a business is spilt into 6months, 9months, 1year, or 15months. For the every sub periods like 6months, 9months, etc., performance of a business or result of a business is ascertained during its life time.
The periodicity concept gives life to the accrual concept and matching concept.
Accrual Concept
All expenses and incomes are recorded in the books of accounts, when they arise or accrue or become due. The cash payment for expenses and cash receipt for incomes may have made or not, but the incomes and expenses are recorded, when they become due. All incomes and expenses which relate to the financial year are recorded in the books of accounts, even though cash payment or cash receipt for the expenses or incomes is not made.
Illustration
Mr. x sells to Mr. y the goods worth Rs.100000/-. Mr. y who pays Rs.80000/- in cash promises to pay the remaining Rs.20000/-.
In the books of accounts, Rs.100000/- is recorded as sales. Accrual concept is followed in this case.
Periodicity concept is base for accrual concept. While preparing books of accounts, its accounted in accrual basis. When life time of business is split into sub periods as per periodicity concept, incomes and expenses are treated as accrued on the basis of relating period. At the end of accounts, incomes and expenses which relate to that period are accounted on accrual basis. The income or expenses which relate to that period are accounted on accrual basis.
When cash is received after accrual of income, such incomes are called as accrued incomes.
When cash is received before accrual of income, such incomes are called as accrued incomes.
When cash payment is made after accrual of expenses, such expenses are called as outstanding expenses.
When cash payment is made before accrual of expenses, such expenses are called as prepaid expenses.
Accrued income, income received in advance, outstanding expenses, and prepaid expenses are raised because of accrual concept.
Cost Concept
The assets are valued at the historical cost. When the assets are purchased, they are accounted at value of cost of purchase (historical cost) at the time of purchase. The current changes in the value of assets in market are not considered for accounting purpose. The cost concept is based on the going concern concept. As per going concern concept, the current changes in assets are ignored because the assets are value at the assumption of using it for long period i.e. more than one year.
In accounting tradition, accounting follows cost concept to value the assets in business. Assets are revalued at specific situations but it does not update the value of assets to its market value. In some circumstances, assets are revalued at market prices but they are done at once only in that situation. In admission of a new partners into a partnership firm, assets are revalued at market price.
Illustration
A purchases a furniture costs Rs.100000/- at 1.04.2012 but the market value of the furniture is Rs125000/- at 31.03.2013. Accountant records the furniture at the cost of Rs.100000/- at 1.04.2012 and keep remained the value at Rs.100000/- at 31.03.2013.
Realisation Concept
It is based on cost concept. The changes in value of assets are recorded only when the assets are realized in the market for sale. Assets are recorded in cost concept basis. They are recorded, while selling, in the books of accounts by following realization concept.
Illustration
X purchases a machine for Rs.200000/- at 01.01.2002 and sold the asset at Rs.150000/- in the market for second hand sale. The Accountant records the asset at the cost of Rs.200000/-. When the asset is sold, he records the loss of Rs.50000/- in profit and loss A/c therefore it is assured that the asset is realized in the value of Rs.150000/-.
Cost - Loss = Realised Value
200000 - 50000 = 1500000.
Dual Aspect Concept
All transactions have two aspects. The aspects are 1) Receiving aspect, 2) Giving aspect. Transactions are based on the theory that there will be no gain without any scarification in business transactions. Something is given to get something in business transactions. The giving aspect is credited and receiving aspect is debited.
Illustration
On 1st January, 2012, Ms. X &co., has bought 100 books from prodigy publish for Rs.2000/-.
Here lost Rs.2000/- to get 100 books. Ms. X & co., purchases 100 books. Purchase of 100 books is receiving aspect. Ms. X & co., pays Rs.2000/- to get the 100 books. Payment of Rs.2000/- is giving aspect. Purchase of 100 books is to be debited and payment of Rs.2000/- is to be credited. Therefore Purchase A/c is debited and Cash A/c is credited in the books of accounts.
Journal
Date particulars Debit Credit
January 1 Purchase A/c Dr 2000
2012 To Cash A/c 2000
(Being purchase of
100 books from prodigy
Publish)
As per Dual Aspect Concept, Debit must tally with credit. All debit accounts have its equal credit accounts in books of accounts. Some equations are formed to prove it, as per accounting equation approach. The equation is explained below.
Capital + Liabilities+(all incomes – all expenses) = Assets
Assets – Liabilities+(all incomes – all expenses) = Capital
Assets - Capital = Liabilities+(all incomes – all expenses)
All debit accounts i.e. Assets equalized the all credit accounts i.e. Liabilities and Capital.
Illustrations
Rahim puts Rs.100000/- as capital into his concern Rahim & C0. The furniture are bought for Rs.50000/-. Electricity charges, Salary, Maintenance, etc comes to Rs.10000/-. Purchase of Goods Rs.10000/-. Sales made for Rs.22000/-. Rs.8500/- is payable to ram & co., for credit purchase, creditors. Rs.10000/- is receivable from Saleem & co., for credit sales, debtors. Cash remains as Rs.52000/-
Capital + liabilities = Assets
Capital + Creditors+ (sales – purchase – expenses) = Furniture + Cash + Debtors
100000 + 8500+(32000-18500-10000)=50000+52000+10000
100000+8500+3500=50000+52000+10000
112000 = 112000
As per traditional approach of accountancy, all assets are tallied with all liabilities in balance sheet. All accounts are classified into real, personal, nominal A/c. Nominal accounts which are shown in trading and profit and loss account, are closed and transferred to capital A/c, a liability. So all debit accounts tally all credit accounts.
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