• Business entity • Time period • Going concern • Realisation • Value equals costs • Conservatism (Prudence) • Dual aspect • Consistency • ‘Accruals’ or • Materiality ‘matching’ concept The dual aspect of accounting transactions Sum of assets = Sum of liabilities Total assets = Current assets + Fixed assets + + Investments + Patents and other deferred revenue expenditure Total liabilities = Capital + Reserves + Loans + Expenses not paid for or provisions + Creditors for materials/goods/services Dual aspect of accounts (contd.) What is the dual aspect of accounting transaction? Any accounting transaction affects not one accounting head but two accounting heads. Example - Creditor outstanding is paid by means of cheque drawn on current account with a bank. The level of creditors comes down due to this payment (liabilities) while the level of bank balance also comes down (assets) Dual effect of accounting transaction- examples (contd.) You introduce capital and pay off bank liability with that amount Effect - The capital that has been introduced increases the liability to the owners while the reduction in bank liability reduces bank borrowing to the same extent. Dual effect of accounting transaction (contd.) - examples Income already received, but a part of it or whole of it pertains to the next accounting period - income received in advance You have an outstanding debtor to the extent of Rs. 1 lac. The outstanding bill gets paid and you deposit the cheque in your current account. Effect - The outstanding debtors reduce to nil (asset) and the current account balance gets increased by Rs.1lac (another asset) Dual effect of accounting transaction - examples (contd.) You make payment of a car repairs bill in cash. Effect - Expenditure for the year increases - Expense account is affected Cash account is affected as cash has been given out. Dual effect of accounting transaction- examples (contd.) Rent income is received in cash. Effect - Income level goes up for the accounting period Since cash has been received the cash balance also goes up. Thus in all the examples that we have seen, two account heads invariably get affected. That is why it is called double entry book-keeping. Accrual system of accounting • Accounting period is of importance for recognising an expense or income. Whether cash has been spent or come in is of no consequence • As a result of this, we have four important account heads in the balance sheet of the company at the end of the accounting period Accrual system of accounting The important account heads in the balance sheet arising out of the accrual system of accounting are: • Expense already met, but a part of it or whole of it pertains to the next accounting period - pre-paid expense Accrual system of accounting • An expense pertaining to the current accounting period but not yet met - it has to be booked as an expense during this period. Called by different names, provision, accrued expenses etc. • An income pertaining to the current accounting period but not yet received - it has to be booked as an income during this period. Called accrued income.