Uf44/199773

By: CA Vipul Vora VPA 09420251647

BASICS OF ACCOUNTING

Accounting Concepts:
1. Entity Concept: For accounting purpose the "business" is treated as a separate entity
from the proprietor. This is concept helps in keeping in private afairs of the proprietor away
from the business affairs. Thus, if a proprietor invests Rs. 1,00,000 /- in the business, it is
deemed that the proprietor has given Rs. 1,00,000/-as loan to the business.

2. Dual Aspect Concept: This is the basic concept of accounting. As per this concept, every
business transaction has a dual effect. For example, if Sandeep starts business with cash
of Rs. 1,00,000 /- there are two aspects of the transaction: "Asset Account" and "Capital
ACcOunt The business gets asset (cash) of Rs. 1,00,000 /- and on the other hand the
business owes Rs.1,00,000/-to Sandeep as her capital. This can be expressed in the form
of an equation as follows:

Capital (Equity) Cash (Asset)

Rs. 1,00,000/- Rs. 1,00,000/-

If the business increases the assets by purchase of building Rs.50,000 on credit and
borrowing Rs. 30,000/-, the equation would be

Equities (Liabilities) Assets

Capital (+) Creditor (+) Loan Cash (+) Building

Rs. 1,00,000 (+) 50,000 (+) 30,000 Rs. 1,30,000 (+) 50,000
Thus, at any point of time the total assets are equal to total liabilities.
3. Going Concern Concept (Continuity of Activity): It is assumed that the business
concern will continue for a fairly long time, unless and until it has
entered in to a state of
liquidation. It's as per this assumption, that the accountant does not take into account the
sale value of assets while valuing them.
Similarly, depreciation on assets is provided on
the basis of expected lives of the assets rather than
on their market value. Since the
concern is to be kept continuously alive for a
long period of time, financial and accounting
policies are directed towards maintaining such continuity activity.
of
4. Periodicity Concept: Accounts are prepared for a fixed period i.e. for a
etc. Only the transactions entered in a year, for a quarter
of that period. particular period can be recorded in the accounts
5. Cost Concept: All the assets are recorded at cost and not at the market value. An
exception to this is the stock of the business.
at cost or net According to AS -2, Closing Stock is valued
realizable value whichever is less.

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By: CA Vipul Vora VPA 07447799773
420251647
when it is realized. The wn
6. Realization Concept: Income is accounted only
to receive from customer zed"
means either cash is received or a legal obligation n
held.
7. Accrual Concept: Accrual concept means folloWing the mercantile system of accounti
It means that all the income which is earned
and all the expenses which are incuro
the last date of the accounting period is accounted for, irrespective oT whether it received
or paid respectively.
8. Matching Principle: It means that in case any income is credited to P&L AVc, then all the
corresponding expenses which have been incurred for earning that income should he
debited to P&L AlC. Similarly if any expense is debited to P&L AC, then the corresponding
income should be credited to P&L A/c.
9. Money Measurement Concept: Only those transactions can be recorded in accounts
which have a monetary implication.
Accounting Conventions:
1. Conservatism/ Prudence Convention: An accountant needs to be conservative i.e.
all expensesor losses should be provided for; if there is any possibility of its
OcCurrence. But income would be only provided for if the accountant is certain of its
earning
2. Materiality Convention: All material items (i.e. important items) should be properly
disclosed in the financial statements.
3. Disclosure Convention: Every information which is
disclosure of true and fair view of the final accounts should important
for the proper
be disclosed.
4. Consistency Convention: Same
followed
accounting policies and principles should be
consistently every year. The policies may be changed incase of
for the betterment of the
or
organization. legal binding
Fundamental Accounting Assumptions:
There are three fundamental accounting assumptions:
1. Accrual Concept.
2. Going Concern Concept.
3 Consistency Convention.
Classification of Accounts
The ledger accounts may be classified as under:
1. Personal Accounts.
2. Impersonal Accounts.
a) Real or Property Accounts.
b) Nominal or Fictitious Accounts.
 VPA 07447799773
By: CA Vipul Vora VPA 09420251647
Thus, Accounts may be of three kinds:
Personal Accounts
i) Real Accounts
ii) Nominal Accounts
etc. These
of individuals, firms, companies,
sOnal Accounts: These are the accounts For recording transactions,
these
cOunts may be of creditors, debtors, bankers' etc.
accounts are treated as "Personal Accounts".
These
which relate to otherthan persons.
personal Accounts: These are the accounts
are again divided into further two types, viz:
or possessions of
a) Real Accounts: These are the accounts of properties, assets
the businessman.
the businessman. These accounts represent the belongings of
or asset. Real
A separate account is maintained for each class of the property
Accounts may assume the following:
I. Tangible Real Accounts: These accounts consists of assets and properties
which can be seen, touched, felt, measured, purchased and sold (i.e perceived
by senses)
I. Intangible Real Accounts: These accounts consists of assets and properties
which cannot be seen, touched, felt but they are capable of measurement in
terms of money. Eg: Goodwill
b) Nominal Accounts: These are accounts of expense or losses and gains or
incomes. These accounts are called fictitious accounts as they do not represent
any tangible asset. A separate account is maintained for each head of expense or
loss or gain or income. For example, interest account, commission account,
discount account.
Accounting Rules:
Debit the receiver
Personal Account
Credit the giver.
Real Account Debit what comes in
Credit what goes out.
Nominal Account Debit the expenses & losses
Credit the incomes &gains.
SIGNIFICANCE OF DEBIT AND CREDIT
Debit in personal account
I. fthe account is new, debit implies that the person whose account is being debited has
become debtor of the business.
I. If the account is already there and the person whose account is being debited as
already a debtor of the business, the new debit implies that the due from that person
has increased.
. If the account of the person who is a creditor of the business is debited, the debit
implies that the amount due to that person has decreased by the amount of debit.
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By: CA Vipul Vora VPA 07447799773
09420251647
Credit in personal account
the person wnose account is being credited
I f the account is new, credit implies that
has become creditor of the business.
credited it will mean that the amount which
. If the account of a creditor of a business is
the amount of the fresh credit.
IS due to that person has increased by that the amount for which the
I1. Credit in the account of a debtor of the business signifies
debtor was liable to the business has diminished by the amount of the credit entry.
Debit in real accounts
A debit in real account means that either the value of the asset whose account is being debited
has increased or the business has acquired more of that asset.
Credit in real accounts
A credit in the real accounts implies that either the value of the asset whose accounts is being
credited has decreased or the business has disposed off part or the whole of the asset.
Debit in nominal accounts
A debit in nominal accounts signifies that there has been an expense or loss of the amount of
the debit or some income or profit has diminished by the amount of the debit.
Credit in nominal accounts
A credit in nominal accounts implies that there has been an income or a profit of the amount.
It can be summarized as follows:
Transaction Debit/ Credit
Increase in asset Debit
Decrease in Asset Credit
Increase in income Credit
Decrease in income Debit
Increase in expense Debit
Decrease in expense Credit
Increase in liability Credit
Decrease in liability Debit
ACCOUNTING CYCLE
The process of accounting cycle consists of the following steps:
I. Analysis of transactions.
II. Journalizing the transactions.
I. Ledger Posting.
V. Balancing of each ledger account.
V. Preparation of a Trial Balance.
VI. Recording of adjustment
VII. Posting of adjustment entries
VIlI. Recording of closing entries
IX. Preparation of financial statements.
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 By: CA Vipul Vora VPA 07447799773
VPA 0942025164
TYPES OF DISCOUNT
Cash Discount
indn allowance to the debtor in order to recover the debts eartier. It is allowed in order to
a octhe debtor to make the payment immediately or within a stipulated period. Obviously
thedscount is allowed when payment is received and a cash discount is received when
the
payment is made early.
Trade Discount
A Irade discount is an allowance made by the whole seller to the retailer in order to enable
the retailer to sell at list prices and to earn a reasonable margin of profit. It is provided wnen
the purchase is made in bulk
quantity.
For Example:

Goods worth Rs.1,00,000 sold to Sanket less 10% trade discount.

Inthistransaction. Sanket has to pay only Rs. 90,000 (Rs. 1,00,000 less Rs. 10,000 T.D.) as
he is allowed a 10% trade discount. But trade discount does not
appear in the books of account
as this amountisalready deducted in the invoice. Therefore, whether trade discount is allowed
or received, it will not appear in the books of accounts.

Capital and Revenue Items

The main purpose of accounting is to ascertain the true results of the business in terms of
profit and loss during a particular accounting period. The profit or loss of a business can be
ascertained by matching business revenues against the cost of the same period. Therefore, a
clear understanding between capital and revenue (expenditures and receipts) is necessary for
the correct ascertainment of profit or loss. It may be noted that revenue items are included
only in income statement or profit or loss account and capital items form part of balance sheet
figures. Let us examine the features of capital and revenue items in the accounting parlance.

Capital and Revenue Expenditures

Before the preparation of final accounts, it is essential to understand clearly the distinction
between the capital and revenue expenditures. Capital expenditure is that expenditure which
results in acquisition of an asset or which resuts in an increase in the earning capacity of
a business. Another test of a capital expenditure is that the benefit of such expenditure lasts
for a long period of time. Obvious examples of capital expenditures are land, buildings,
machinery., furniture, patents, etc.
Expenditure which does not result increase in capacity or in reduction of day to day expenses
is not capital expenditure, unless there is a tangible asset to show for it. All sums spent up to
the point an asset ready for use should also be treated as capital expenditure.

Expenses whose benefit expires within the year of expenditure and which are incurred to
maintain the earning capacity of existing assets are termed as revenue expenditure. Amounts
paidfor wages, salary, carriage of goods, repairs, rent and interest, etc., are items of revenue
expenditure.

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By: CA Vipul Vora VPA
PA O447799773
094202516
The following are the points of distinction between capital expenditure and revenie

expenditure:
) Capital expenditure is incurred in acquiring or improving permanent assets which are not
meant for resale. But revenue expenditure is a routine expenditure incurred in the normal
course of business.
(i) Capital expenditure seeks to improve the earning capacity of the business whereas
revenue expenditure purposes to maintain the earning capacity of the business.

(iit) Capital expenditure is normally a non-recurring outlay but revenue expenditure is usually
a recurring item.

(iv) Capital expenditure produces benefits over several years. Hence only a small part is
charged to income statement as depreciation and the rest appears in the balance sheet
But revenue expenditure is consumed within an accounting year and the entire amount is
charged to the (current year's) income statement. Hence it does not appear in the Balance
Sheet. Deferred revenue expenditure is however an exception to this rule.

Deferred Revenue Expenditure

There are certain expenses which may be in the nature of revenue but their benefit may not
be consumed in the year in which such expenditure has incurred; rather the benefit may
extend over a number of years. All such expenditures are basically the nature of revenue
expenditure, e.g. heavy advertising expenditure incurred introducing a new line or developing
a new market. Charges of these expenses are deferred because such expenses benefit more
than one accounting period. Moreover profits a particular year should not be unduly
affected. The matching principle demands this. The basis of charge should usually be
proportionate to the benefit consumed/reaped.

Thus, deferred revenue expenditure is revenue in character but

() the benefit of which is not exhausted in the same year, or

(i) is applicable either wholly or in part of the future years, or
(ii) is accidental with heavy amount and it is not prudent to charge against the profit of one
year.

Comparison between Capital Expenditure and Deferred Revenue Expenditure

The main feature of capital expenditure is that results in a benefit
which will accrue to
the business enterprise for a long time, say 10 or 15
years. Deferred revenue
expenditure also results in a benefit which will accrue in future period but
3 to 5 years. generally for
The capital expenditure
or the
resulting asset
is usually
capable of being reconverted
into cash though may be at a loss. This is not possible in the
case of deferred
expenditure. revenue

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 VPA 07447799773
By: CA Vipul Vora VPA 09420251647

OBJECTIVES OF ACCOUNTING
he objectives of accounting are as follows:
.Systematic recording oftransaction
2. Ascertainment of results of above recorded transaction
3. ascertainment of the financial position of the business
4. Providing information to the users for rational decision-making
5. To know the
solvency position

FUNCTIONS OF ACcOUNTING
The main functions of accounting are as follows:
1. Measurement
2. Forecasting
3. Decision-making
4. Comparison & Evaluation
5. Control
6. Government Regulation and Taxation

SUB-FIELDS OF ACcOUNTING
The various sub-fields of accounting are:
1. Financial Accounting
2. Management Accounting
3. Cost Accounting
4. Social Responsibility Accounting
5. Human Resource Accounting

USERS OF ACCOUNTING INFORMATION

Following are the various users of accounting information:
1. Invertors
Employees
Lenders
Suppliers
5. Customers
6. Gov rnment and their agencies
7. Public

FUNDAMENTAL ACcOUNTING ASSUMPTIONS

There are three fundamental accounting assumptions:
() Going Concern
(i) Consistency
in) Accrual

FINANCIAL STATEMENTS
Thefollowing are the important qualitative characteristics of the financial statements:
1. Understandability
2. Relevance
3. Reliability
4. Comparability

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By: CA Vipul Vora VPA
VPA 07447799773
094202516
5. Materiality
. Faithful Representation
7. Substance Over Form
8. Neutrality
9. Prudence
10. Ful, fair and adequate disclosure
11. Completeness

LIST OF ACCOUNTING STANDARDS

STANDARD
SI. No. of the TITLE OF THE ACCOUNTING
No Accounting
Standards (AS) Disclosure of Accounting Policiees
AS 1

2. AS 2 (Revised) Valuation ofInventories

3. AS 3 (Revised) Cash flow Statement

4. AS 4 (Revised) Contingencies and Events Occurring after the Balance Sheet Date

5. AS 5 (Revised) Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies

. AS 6 Abolished

. AS 7 (Revised) Accounting for Construction Contracts

8. AS 9 Revenue Recognition

9.
9. AS 10 (Revised)|Property, Plant and Equipment

10. AS 11 (Revised) The Effects of Changes in Foreign Exchanges Rates

11. AS 12 Accounting for Government Grants

12. AS 13 Accounting for Investments

13. AS 14 Accounting for Amalgamations

14. AS 15 (Revised) Employee Benefits

15. AS 16 Borrowing Costs

16. AS 17 Segment Reporting

17. AS 18 Related Partly Disclosure

18. AS 19 Leases

19. AS 20 Earnings Per Share

20. AS 21 Consolidated Financial Statement

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By: CA Vipul Vora VPA 07447799773
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21. AS 22 Accounting for Taxes on Income

Consolidated Financial
22. AS 23 Accounting for Investments in Associates in
Statements

23. AS 24 Discontinuing Operations

24. AS 25 Interim Financial Reporting
25. AS 26 Intangible Assets

26. AS 27 Financial Reporting of Interests in Joint Ventures

27. AS 28 Impairment of Assets

28. AS 29 Provisions, Contingent Liabilities& Contingent Assets.