VISHISHT SCHOOL OF MANAGEMENT, INDORE UNIT-1 Introduction to Accounting

ACCOUNTING
Accounting is an art of identifying, classifying, recording, summarizing and interpreting business transactions of financial nature. The process of accounting contains the following steps: All financial transactions which have documentary evidence are identified as accounting transactions. The elements of the transactions are classified as assets, liabilities, capital, revenue and expense. These transactions are recorded in the appropriate books of accounts. Income statements are prepared to ascertain profit or loss of the business during accounting period. Position statements are prepared to ascertain assets and liabilities of the business. Finally, results of the business transactions are communicated. Definition of Accounting : - In the words of Smith and Ashburne, "Accounting is a means of measuring and reporting the results of economic activities. In the opinion of Bierman and Derbin, "Accounting may be defined as the identifying, measuring, recording and communicating of financial inform ation." Difference between Book-Keeping and Accountancy Book-keeping is the part of accountancy. Accounting is concerned with the initial records, ledger accounts, trial balance and also with the preparation of financial statement to ascertain profit or loss of the business. The value of assets and liabilities are also reported. The results of the business are also interpreted in terms of ratios and statements. Book-keeping as an initial and integral part of accounting is restricted to initial records i.e., journal, subsidiary books, ledger and trial balance. Book-keeping is the art of preparing original or initial books of accounts, whereas accounting is concerned with the recording, reporting and interpreting the results of the business. In this way, book-keeping is an essential part of accounting. Both Book-keeping and Accounting are complementary and supplementary to each other, but even then they are different in the following respects: -

Point Difference 1. Objective

of

Book-Keeping

Accounting

The objective of book-keeping is The objective of accounting is to to prepare original books of record, analyze and interpret the accounts. It is restricted to journal, business transactions. subsidiary books and ledger accounts only.
Mr. Robin Neema (Asst. Professor- Finance) Contact on: - robin@vsom.in, robin.neema@gmail.com

The statement is prepared at the end of the accounting year and reflects the true position of assets and liabilities of the business on a particular date. Mr. vary from firm to firm.neema@gmail. robin. business transactions. INDORE UNIT-1 Introduction to Accounting 2. Every entry is supported by authentic vouchers.We prepare personal ledger accounts of all the parties. Replacing Memory: . Professor. clerical work is involved in medium level and even top level it. Balance Sheet of the business. accounting The methods of reporting and of In concepts and conventions are interpretation in accounting may followed. Scope It has limited scope and is It has wider scope as compared to concerned with the recording of book-keeping. Level of Work 4. business 6. It is restricted to low level of It is concerned with low level. Assessing the performance of the business: .robin@vsom. This is why. Accounting records these transactions in writing and thus it is no t necessary that the business should memorize all the transactions. as such it is quite impossible to memorize each and every transaction. so it has to Dependence depend upon accounting which makes it more meaningful and purposeful 5.Accounting keeps proper and systematic record of all business transactions. 2. work. Low level clerks prepare the accounts. Robin Neema (Asst. Principles Accountancy book-keeping.Financial position of the business is displayed through position statement i. Assisting in realization of debts: .VISHISHT SCHOOL OF MANAGEMENT.Finance) Contact on: . We can send the debtors their statement of accounts and thus enable them to verify entries and also to make early payment of the amount due. Accounting is based upon bookkeeping which is its initial and vital part.com . 3. medium level report it and top level interpret it. Mutual Book-keeping is only art of recording transactions.Accounting records can also be used as evidence in the court to substantiate the claim of the business.e. T hese records are based on documentary proof.in. Income statements are prepared with these records and we are able to know the profit earned and the loss suffered by the business. Results of the It does not show the net result of the financial position of business. the court accepts these records as evidence. It depends upon book keeping. The account can also be used to prove the claim of the business against the debtors in the court. It tells us about the profit earned and also about the assets and liabilities of the business. varied and complex. 5. management. Assessing the financial status of the business: .Business transactions are innumerable. 3. Accounting shows the net result of the business. The personal account shows the exact amount due from the debtors. SIGNIFICANCE OF ACCOUNTING 1. Documentary evidence: . 4.

Causes responsible for the poor performance are identified and efforts are made to remove them.Accounting reveals the actual performance of the business in terms of production.At the end of accounting period. also known as position statement. Comparison reveals deviation in terms of weaknesses and plus points. The purpose of accounting is summarized a s under: 1. liabilities. we prepare position statement. Afterwards pr ofit and loss account is prepared to calculate net profit or net loss. cap ital.VISHISHT SCHOOL OF MANAGEMENT. Professor. cheating takes place. Causes responsible Mr. so that requisite information may be obtained a glance from the books of accounts. It can also be compared with the previous performance.The proper accounting system and effective arrangement of internal check prevents leakage of goods and cash. profit. Depiction of the Financial Position: . Calculation of Profit or loss: .One of the main objectives of accounting is to calculate the profit or loss of the business.in. expenses. assets. Preventing and detecting frauds: . Income statements are prepared with the help of trial balance.Accounting is useful to the management in various ways. Accounting facilitates in the calculation of the consideration for which the business should be sold. loss. so it is necessary that business transactions must be recorded in the books of accounts with their documentary proof. Maintaining proper record of business: . sales. accounting helps in detection of these losses and also fixes responsibility for it.com . The proper accounting of these transactions will enable the business to evaluate its performance by preparing income and position statements. Providing effective control over the business: . theft or embezzlement is made and fraud is committed.The position statement of the business shows the value of assets and liabilities of the business. we prepare Trading Account. Proper accounting prevents employees from committing fraud.The main purpose of accounting is to identify business transactions of financial nature and enter them into appropriate books of accounts. and ascertain Gross Profit or Loss. cost of production and the book value of sundry assets. Business transactions are classified as. Actual performance can be compared with the desired performance or with the performance of previous years. revenue.Finance) Contact on: . Helpful to management: . 2. PURPOSE OR OBJECTIVE OF ACCOUNTING It is impossible for the business or the management of the enterprises to memories of all the business transactions. At the end of accounting period. INDORE UNIT-1 Introduction to Accounting 6.robin@vsom. and accordingly passed through book. Balance sheet is said to be a mirror. It enables the management to assess the achievement of its performance. Robin Neema (Asst. 8. is the source to evaluate the performance of the business in terms of profit.neema@gmail. The actual performance can be compared with the planned or des ired performance of the business. The value of assets and liabilities are depicted in the balance sheet. 7. Accounting in this way. reflecting the true position of assets and liabilities on a particular date. The weaknesses of the busi ness can be identified and corrective measures can be applied to remove them. 3. 4. The accounting records should be made properly and systematically. Facilitating the sale of the business: . robin. In c ase. We can calculate the 'Net Worth' of the business on the basis of these stateme nts.

5.e. 4. Accounting in this way. lenders. The management may be biased and feed manipulative information to prove its point of view. INDORE UNIT-1 Introduction to Accounting for better performance are reinforced.Finance) Contact on: . LIMITATIONS OF ACCOUNTING 1. It records only the quantitative aspect of our transactions.Accounting records only those transactions which are financial in nature. Inexactness: . Accounting makes information available to all these interested parties. we show the value of our assets in the balance at its book value not at the market value. Ignorance about the present value of business: .com .While maintaining books of accounts we follow going concern concept i. discount on issue of share etc. Mr. determine the method of depreciation and maintain various reserves and provision in any way. they like.Accounting assesses profit or loss of the business on the basis of both the real and assumed estimates.robin@vsom. Different firms have their own different methods. in this way. these days is a social institution. 5. fails to show the present sale value of the business. Government policies. Manipulation: . Showing valueless assets: .Business. preliminary expenses. Certain very important information such as competency of the management. These assets are goodwill. such as creditors. change in the economic and political situations. investors. 3. In addition to the owners of the business various groups. enables the management to adopt effective control over the business. Transactions of non-financial nature do not find place in accounting. patents. Incomplete information: . Robin Neema (Asst. This may be done by omitting certain accounts.VISHISHT SCHOOL OF MANAGEMENT. Professor. With this principles in view.neema@gmail.in. researchers. so the results of the business will change with the change in the practice. the business will be carried on for indefinite period. under -estimating or over-estimating the value of assets. Accountants make the valuation of stock. robin.There are certain assets which do not have real value but they are shown in our Balance Sheet. Accounting. increasing or decreasing the amounts of certain accounts. as desired by the owners of the business. Sometimes certain assets may be valueless in the market but we continue to show it in the books of accounts.Accounting results are based upon the information supplied to it. government and even workers and consumers have an interest in the performance of business. Showing these assets in the books of accounts makes its result doubtful. are not recorded in Accounting. Making information available to various groups: . competitions in the market and change in consumers preferences etc. 2. Accountants can show the result of business . though they affect the financial soundness of the business.

revenue Business transactions as such refer to business activities involving transfer of money or goods or services between two parties or two accounts. interest to capital and salary to organization. Proprietors are adventurous persons who make arrangement of land. 5. It may be between January 1st to December 31 of the same year or July 1st of the year to June 30th of the next year or between two Diwalis or even financial year i. INDORE UNIT-1 Introduction to Accounting BASIC ACCOUNTING TERMINOLOGY 1. Accounting Year Book of accounts are closed annually. Every activity of financial nature having documentary evidence. Special features of Business Transactions are as under: a. b. Professor. April 1st to March 31st of the next year. wages bill. It may be a receipt. rent to land. capital. These documentary proo fs in support of the transactions are termed as vouchers.Finance) Contact on: . Business Transactions The economic event that relates to a business entity is called business transaction. c. cash memo. revenue. Robin Neema (Asst. Vouchers Accounting transactions must be supported by documents. There is no legal restriction about the accounting year of sloe proprietorship and partners hip firm. If expenses exceed revenue the deficit is a loss to be borne by the proprietor. Different accounts are debited and credited in the entry with the same amount. Companies must adopt financial year as their accounting year. monetary term causing effect on assets. salaries bill. robin.neema@gmail. the principle "every debit has got its corresponding credit" is adopted. capital and organization. The only restriction is that the accounting period must consist of 12 months. it is known as profit. The proprietor is rewarded with profit fo r the risk undertaken by him. 3. invoice.robin@vsom. Business transactions must be presented in numerical monetary terms.VISHISHT SCHOOL OF MANAGEMENT. Entry An entry is the systematic record of business transactions in the books of accounts. labour. d. liabilities. They may adopt the accounting year of their choice. 4.com . While passing entries. if there remains any surplus. They pay wages to labour. After meeting all the expenses of business. 2. liabilities. They invest their funds into the business as capital. capital. Proprietor: An individual or group of persons who undertake the risk of the business are known as "Proprietor". Business transactions must cause an effect on assets. deeds or any document as an evidence of transaction Mr.e. capable of being presented in numerical. Business transactions must be supported by documentary evidence. and expenses is termed as Business Transactions. Business transactions must be financial in nature.in.

com . 6. The money is blocked in fixed assets and not available to meet the current liabilities.These assets are acquired for long term use in the business. R.Finance) Contact on: . INDORE UNIT-1 Introduction to Accounting having taken place. Fixed or Tangible Assets: . In the words of Prof. Professor. Plant & Mr. The contents of vouchers are date. purpose of the payment. No firm can declare itself as insolvent. Sufficient funds are required for purchasing good and incurring direct and in direct expenses. Assets are the economic resources of an enterprise which can be expressed in monetary terms.in. 9. Insolvent All business firms who have been suffering losses for the last many years and are not even capable of meeting their liabilities out of their assets are financially unsound. It may be in kind also. Capital should need not necessarily be in cash. Capital is classified as fixed capital and working capital: a. 8. Current assets and current liabilities constitute working capital.The amount invested in acquiring fixed assets is called fixed capital. These assets increase the profit earning capacity of the business. Assets The valuable things owned by the business are known as assets. Vouchers are also used for verification and auditing of business records. Land & Building. Solvent Solvent are those persons and firms who are capable of meeting their liabilities out of their own resources. If the funds realized fall short of the liabilities creditors are paid proportionately. Capital It is that part of wealth which is used for starting a business and for further production and thus capital consists of all fixed and current assets. Working Capital: . They are not meant for sale. b. These are the properties owned by the business.The part of capital available with the firm for day -to-day working of the business is known as working capital. payment made and cancelled the voucher. Anthony. Fixed Capital: . Solvency shows the financial soundness of the business. 7.robin@vsom. They facilitate accounting. "Assets are valuable resources owned by a business which were acquired at a measurable money cost" Classification of Assets a. Only the court can declare the business firms as insolvent if it is satisfied that the continuation of the firm will be against the interest of the public or creditors. amount paid. Operational expenses are met with working capital.VISHISHT SCHOOL OF MANAGEMENT. In case of solvency. Expenditure on these assets is not regular in nature.neema@gmail. Vouchers are the basis of accounting records. payment passed by competent authority. robin. Solvent firms have sufficient funds and assets to meet proprietors' and creditors' claim. Robin Neema (Asst. N. the assets of the business are sold and liabilities paid with the funds realized from the sale assets.

INDORE UNIT-1 Introduction to Accounting Machinery. also known as circulating. Current Assets: . In accoun ting. we use the term stock widely as opening and closing stock. Current or Short Term Liabilities: . Professor. Loose Tools etc. Stock The goods available with the business for sale on a particular date is termed as stock. the value of goods on the opening day of the accounting year is known as opening stock. It varies i. fluctuating. and Outstanding Expenses etc. b. Creditors. Liabilities Liabilities are the obligations or debts payable by the enterprise in future in the form of money or goods. which do not have physical form. are some of the examples of fixed assets.Liabilities payable within a year are termed as current liabilities. Fixed or Long Term Liability: . for more than one year. Loans. the value of goods on the closing day of the accounting year will be closing stock.robin@vsom. patents. They do not have any real value . robin. 11. in which the business deals. bills receivables. Furniture. Liabilities can be classified as under: a. Bank Overdraft. Fixtures & Fittings. In case of manufacturing enterprises stock is classified as under: Mr. USA.These liabilities are paid after a long period. increases or decreases and goes on changing. It is the proprietors and creditors claim against the assets of the business.e.neema@gmail. Fictitious or Intangible Assets: . Furniture will be goods for the firm dealing in furniture but it will be an asset for the firm dealing in stationery. are its example. cash at bank. Vehicles.VISHISHT SCHOOL OF MANAGEMENT. are some of the examples of current assets. In case of business which is being carried on for the last so many years. are current liabilities. Goods Articles purchased for sale at profit or processi ng by the business or for use in the manufacture of certain other goods as raw material are known as goods. Americans use the term 'merchandise' for goods. 10. In the words of Institute of Certified Public Accountants. b.These assets. In other words. preliminary expenses. 12. stock.Finance) Contact on: . c. or floating assets change their values constantly. advertising suspense are some of the example of fictitious assets. Bills Payable. debtors.com . Robin Neema (Asst. they are not the real assets but they are called assets on legal and technical ground. The business should have sufficient assets to meet its lia bility. In the same way. Goodwill. Capital. copyrights. The value of these liabilities goes on changing. trademarks.Fictitious assets are those assets. Cash in hand. "Current assets include cash and other assets or resources.in. commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating circle of th e business". Actually.. Mortgage etc. goods are the commodities. loss on issue shares.

the firm has to either purchase finished goods for sale or purchase raw material for the manufacture of the article. are not the purchases in accounting terminology as these assets are not m eant for sale.Manufactured and finished goods ready for sale are known as stock of finished goods. Robin Neema (Asst. Purchases of assets.VISHISHT SCHOOL OF MANAGEMENT.Raw material required for manufacturing of the product in which the business deals is know n as stock of Raw material. 16. Creditors are the Mr. which is returned to the seller. This return may be due to unnecessary. because it is the return of goods outside the business. Purchases returns are also known as returns outward. It includes both cash and credit sales. being sold by the firm. The acquisitions of these articles are purchases.com . Work-in-progress: . sales means the sale of goods. never the sale of assets sales should have a r egular feature. purchase return is deducted from purchases. It may also result. 13. also known as retu rns inward is deducted from sales.Finance) Contact on: . the firm is a service institution and the payment for service still remains to be realized. beneficiaries of the services will also be known as "debtors" 18. In accounting terminology. Sales return. Purchases In its routine business. c. 14. INDORE UNIT-1 Introduction to Accounting a. Professor. in order to calculate net sales.neema@gmail. excessive and defective supply of goods. In order to calculate net purchases. b. Cotton in case of cotton mill is its example. The sellers of goods on credit to the firm are known as its creditors for goods. This return may also be due to excessive. Finished cloth is its example. It is immaterial whether goods have been purchased for cash or on credit. Stock of Raw Material: . unnecessary and defective supply of goods or violation of terms of agreement. Sales Return or Returns Inward It is that part of sales of goods which is actually returned to us by purchasers. Sales The ultimate end of the goods purchased or manufactured by the business is their sales. Stock of Finished Goods: . They still owe to the business. 17. 15.in.It is the stock of partly finished or partly manufactured goods just as price of thread and unfinished cloth in case of cotton mill. if the supplier violates the terms and conditions of the order and agreement. In case. Purchase Return or Return Outward It is that part of the purchases of goods.robin@vsom. robin. Creditors In addition to cash purchases the firm has to make credit purchases also. Debtors The term "Debtors" represents the persons or parties who have purchased goods on credit from us and have not paid for the goods sold to them.

When we sell goods on credit. which become a part of Bills Payables.Finance) Contact on: . Robin Neema (Asst. revenue is also used to mean receipt of rent. Expenditures are incurred to ac quire assets of the business. We accept bills drawn by certain creditors. 23. Amount received from sale of assets or borrowing loan is not revenue. 25. Payment for these goods and services is called "expense" 24. Professor. sellers are known as creditors. Receivables Receivable means. The firm has to use certain goods and services to produce articles sold by it. Certain debtors accept bills drawn by us and become part of bills receivable.neema@gmail. They will continue to remain the creditors of the firm so far the full payment is not made to them. It is shown at the liabilities side of the Balance Sheet. In wider sense.VISHISHT SCHOOL OF MANAGEMENT. It is the benefit to be derived in future.com . robin. Losses may be classified as normal and abnor mal. Losses of goods due to theft or fire. 19. Expense Expenses are cost incurred by the business in the process of earning revenues.in. Normal loss is due to the inherent weakness in the Mr. Generating income is the foremost objective of every business. Payables Payable means. Expenditure Expenditure is the amount of resources consumed. or flood or storm or accidents are termed as 'losses' in accounting.robin@vsom. what the business has to pay to outside parties. purchasers are known as debtors. It is the account spent for the purchase of assets. These are shown at the assets side of the Balance Sheet. what busi ness has to receive from outside parties on revenue account. commission and discoun t etc. 20. The total of debtors and Bills receivable is known as Receivables. Revenue Revenue in accounting means the amount realized or receivable from the sale of goods. INDORE UNIT-1 Introduction to Accounting liability of the business. Drawings Amount or goods withdrawn by the proprietor for his private or personal use is termed as Drawing. When we purchase goods on credit. Use of business car for domestic use or use of business premises for residential purpose is also drawing. The total of creditors and Bills Payable is termed as Payables. Acquiring personal assets with business funds is also drawing. It is long term in nature. 21. The cost of using business assets for private or domestic use is also drawing. 22. Losses Losses are unwanted burden which the business is forced to bear.

INDORE UNIT-1 Introduction to Accounting commodities.Accounting data must be prepared and presented to honour the legal formalities of various acts and government legislations. prepares ledger accounts and reports the result of past performance. Robin Neema (Asst. theft and accidents.VISHISHT SCHOOL OF MANAGEMENT.  Helping decision making: .robin@vsom. storm.The management is required to formulate future policies and take important decision.in. 27. sales. Gain Change in the net worth due to change in the form and pl ace of goods and holding of assets for a long period. It must concern routine activities of the business.Accounting data of the past is also used to forecast the future possibilities and performance. A rough estimate of future production. Professor. concerning their interest. It must relate to the business of the current year.  Controlling of performance: . Profit/Income Excess of Revenue over expense is termed as income. Income must be regular in nature. which have already occurred. profit and value of assets are made on the basis of accounting information. flood.The actual performance of the business is compared with the desired performance and deviations.Finance) Contact on: . accounting period is supposed to consist of 12 months. 26. robin. We do not record possibilities and expectations  Forecasting future performance: . The various users of accounting information use accounting data for making their own decisions. such a provisions of Income tax Act. fire. if any are ascertained. FUNCTIONS OF ACCOUNTING DATA Accounting data performs the following functions:  Measurement of past performance: . The decision making process needs accounting information as source documents. sales tax act. Partnership and Companies acts et Mr. whether realized or unrealized is termed as gain. Abnormal loss on the other hand.neema@gmail.  Honouring legal commitments of the business: .com .accounting keeps proper record of all economic events. is an extra ordinary loss due to earthquake. Here. We identify the areas of weaknesses and apply remedial measures. It is shown at the credit side of profit and loss A/c. We record and report only those economic events.

Legally. important are not recorded in the books of accounts. business viewpoint is taken into consideration. " Mr. It will not be a liability if proprietor's viewpoint is taken. Accounting Entity Assumption Business is assumed to have distinct entity i. capital. Professor. industrial and fiscal policies of the government. plant and machinery. While making decision regarding assets.com . existence other than the existence of its proprietors and other business units. 3. which are financial in nature. Every business enterprise must adopt these assumptions. Robin Neema (Asst. change in economic. liability. The efficiency of the management. The capital introduced by the proprietor in its own business is considered liability fro m business point of view. we identify and record only those business transactions. howsoever. a sole proprietor or the partners of a partnership firm are not separate from their business units but in accounting the business units are assumed to have d istinct entity. INDORE UNIT-1 Introduction to Accounting CONCEPTS. change in consumer's preferences and fashion etc. We evaluate the value of the commodities in terms of money and accordingly reco rd them in the books of accounts. There is never any accounting record in metres.neema@gmail. harmonious relationship between workers and management. Accounting transactions must have their monetary value. 2.Finance) Contact on: . 1.e. kilogram and quintals. the business purchase fixed assets like land and building. In all the accounting records.robin@vsom. we have amount column showing rupees and paise. This is why. Recording transactions in terms of money makes the information more meaningful. litres. we would have hired these assets and not purchased.VISHISHT SCHOOL OF MANAGEMENT. " The enterprise is normally viewed as a going concern that is as continuing in operation for the foreseeable future. We have to record business transactions from firm's point of view and never from the viewpoint of proprietors. because they cannot be evaluated in t erms of money. we assume that the business will be carried on indefinitely.in. According to International Accounting Standard. If the assumption of going concern may not have been there. vehicles and furniture etc. BASIC ASSUMPTIONS/CONCEPTS These assumptions are the foundation of systematic and proper accounting. revenue and expense. The qualitative aspect of the business. Going Concern Assumption While recording business transactions in the books of accounts. CONVENTIONS AND PRINCIPLES 1. robin. vitally affect the performance of the business but are not recorded in the books of accounts because these qualitative aspects cannot be measured in terms of money. popularly known as pillars upon which the sound structure of accounting stands. Money Measurement Assumption In accounting.. The worth of the transaction must be measured in terms of money.

The management studies the information presented by accounting. Robin Neema (Asst. INDORE UNIT-1 Introduction to Accounting 4. capital and liabilities. which can also be expressed as under: Assets = Liabilities + Capital 1. In case of companies. This period may a calendar year i. ana lyses them and thus identifies its plus and minus point. Liabilities: . In this way.robin@vsom. Verifiable Objectivity Assumption The assumption of verifiable objectives means that every business record must be based and supported by documentary evidence.Capital is that part of wealth.VISHISHT SCHOOL OF MANAGEMENT. This is evident when we study the accounting term i.Finance) Contact on: .e. invoices. robin. BASIC PRINCIPLES (a) Principle of Dual Aspect Every business transaction has double effect. In the context of dual concept capital supplies necessary funds to the business to purchase certain assets.in. Income tax and sales tax authorities have also an interest in the results of business and thus accounting year assumptions helps them in assessing the tax of the firm for the year. Capital: . 1 st April to 31st March of the next year. Remedial measures are adopted to remove the causes responsible for the weaknesses of the firm.e. an assessment year i. assets. 1st Jan. We do not pass any entry or make any posting in the subsidiary books unless there is a voucher for it. It also shows the value of assets and liabilities of the business on the closing date of the accounting period.e. 1.neema@gmail. bills.com .These are the valuable articles owned by the business. of the year. The business can make effective plans for the future and decide the most suitable line of action. cash memos. Accounting Period Assumption The assumption of accounting period facilitates the business in assessing its worth after a year. Receipts. In order to make accounting meaningful. accounting period concept may also be known as accounting year concept. The relationship between assets and liabilities and capital is at present known as Accounting Equation. Accounting reports profit or loss of the business. accounting concept cannot be ignored by any business house. accounting year must be the financial year i. 2. There are two sides of every transaction. 12 months.Capital invested by the proprietor falls short so the business has to borrow funds and thus the loan on the one si de of the liability of the firm and on the other side it will be in the form of cash or other assets. to 31st Dec. useful and legal. 2. 1st April to 31st March of the next year or even Diwali to Diwali but always restricted to one year i. if any are reinforced. Plus points.. Professor.e. Proprietorship and partnership should not exceed twelve months.e. which is used for fu rther production. It has been an established fact that no business can be carried on without assets. (i) Assets: . salary Mr.

robin. The principle is called historical. Verifiability. accounting should be definite. This basis of ascertaining revenue is adopted. Professor. when sales basis and cash basis fail to identify revenue. when we should assume revenue to have been earned. all the payment received or receivable is not the revenue. In the same way.VISHISHT SCHOOL OF MANAGEMENT. According to accounting period assumption revenue must be concern with the specific accounting period. so he prefers to determine his revenue on the basis of the work completed by him during the year. The principle explains. Historical approach of presenting as sets and liabilities has clear advantage over other approaches of valuation. INDORE UNIT-1 Introduction to Accounting bills and deeds are some of the vouchers used as documents for recording business transactions.Finance) Contact on: . b) Cash Basis: .com . where transfer of goods to the consignee.Revenue is supposed to be realized for part of work completed. because it is reliable. Revenue will result only there is an exchange of title to goods or services and payment is received or receivable. Principle of Historical Cost According to this principle all business transactions must be recorded in the books of accounts at their monetary cost of acquisition. Sale of goods or realization of sales proceeds is not the criteri a according to production basis. 3.neema@gmail. c) Production Basis: . because the balance of assets and liabilities is carried forward from year to year at its acquisition cost. The contractor engaged in construction of a multi -storeyed building is not paid the full value of work completed by him during the accounting period. We can determine the revenue as realized on the following basis: a) Sales Basis: . as in the case of assignment. entries and postings in the books of accounts are checked with reference to the vouchers by auditors.Sales is supposed to be complete when title of goods is passed to the buyer and payment or promise to make payment is received from him in exchange. The use of historical cost as the basis provides verifiable and objective accounting information. verifiable and definite. revenue determined on production basis.Revenue is supposed to have been realized when actual payment is received. Aft er accounting of the transaction. The principle explains that mere transfer or possession is not sale. irrespective of increase or decrease in the market value of assets. The cash basis is adopted when there is doubt regarding realization of the payment. Mr. Robin Neema (Asst. the agent is not a sale.in. It will enable us to identify the period for which the revenue has been earned. verifiable and free from manipulation and personal bias. 'revenue' is the amount received or receivable from the sale of goods. The concept of verifiable objectives is always followed by all the accountants.robin@vsom. Principle of Revenue Recognition In accounting terminology. Objectivity of the documents means that these vouchers contain facts presented in an unbiased way. They neither show favour nor prejudice to either the party making payment or the party receiving the payment. According to the principles of objectivity. here means examination or the scrutiny of the documents before they are recorded in the books of accounts. In construction works. 2.

3. In this case.Finance) Contact on: . if it would have been disclosed. Business is a going concern. According to this principle income can be ascertained by matching revenue of the business with its costs. Disclosure of material facts does not mean leaking out the business secrecy. certain unimportant items are left and some of them are merged with other items.00.000 = Rs. if it is mentioned that the cost of goods sold is Rs. Sales of Rs. but disclosing all information of proprietors' and investors' interest. It should be honestly prepared.VISHISHT SCHOOL OF MANAGEMENT. sales is given. Materiality here means the information. The result of these efforts was the introduction of the principle of matching cost and revenue. but in practice accounting information need to be useful. The intention is not to over burden accounting with information but present facts without any malifide intention. According to this principle.com . nature and traditions of the business. concise and intelligible. It requires that the accounting information must be reliable. It does not mean that accounting should b e over-burdened with information. Net income will be calculated after deducting selling and distribution expenses fr om the gross income. Rs. which would have changed the results of the business. 7. Professor. In the above information regarding sales. comparable. 5.in.000 . Modifying Principle of Consistency It is also known as convention of consistency. Principle of Full Disclosure The principle is also known as convention of full disclosure.00.robin@vsom.4. Robin Neema (Asst. This is why.000 is revenue of the business but not the profit.00. free from any bias.000. We require cost of goods sold to calculate profit. we apply the modifying principles of materiality. MODIFYING PRINCIPLES Basic assumptions and basic principles of Accounting are used as operating guidelines for preparing financial statements. consistent and intelligible.00. consistency. Important conclusions are drawn by comparing accounting statements of the Mr. The principle of materiality is a modifying principle because the material information for one business unit may not be m aterial for the other. INDORE UNIT-1 Introduction to Accounting 4.Rs. timeliness and industry practice to make the accounting information more meaningful. robin. 16. conservation. It has to continue indefinitely. Principle of Matching Cost and Revenue Reasonable profit is the object of every business enterprise. The whole business structure is based upon the desire to earn profit. 20. It has been the duty of accountants all over the world to evolve principle of calculating exact and accurate profit. We cannot determine profit or loss if only one information i. Materiality will differ with the size. 6.000 is the gross income.00.neema@gmail. Accounting must disclose all material information. Figure should not be manipulated. 16.e. favour or prejudice. Certain unimportant information may be avoided and other may be merged with important information. 20. relevant. In order to achieve this objective basic accounting assumptions and principles need to be modified. we shall compare and match the sales (revenue) with the cost of goods sold (expense) and the result will be gross income. Modifying Principle of Materiality Accounting should disclose all the material information.

Robin Neema (Asst. before the information loses its capacity to influence decisions. robin. Modifying Principle of Substance Over Form According to this principle accounting must communicate the material. Modifying Principle of Cost Benefit Accounting to the principle it should be ensured that the cost of applying the particular principle should not exceed the benefits derived from it. It means that the form should not be used as escape goat to conceal substantial information i. Modifying principles of timeliness means supplying relevant and reliable information to the decision makers both internal and external timely i. It accounts for all the prospective losses but leaves aside all the prospective profits.Finance) Contact on: . useful. Accounting records must be made at the earliest possible. and substantial information to all those who are directly or indirectly interested in its information. 10. Prudence in financial statements demands that we should avoid uncertainties and ma ke sufficient provisions for unforeseen losses. first served' i.e. While recording these transactions into books of accounts. which are not very relevant. We record business transactions in order and sequence of dates.robin@vsom. we follow the policy of 'first come. 9. The delay in recording may result misplacement of vouchers. the fact should be disclosed with reasons. embezzlement and even fraud.com .neema@gmail. the substance of the importance should not be lost in the maintenance of legal form and format of presentation.VISHISHT SCHOOL OF MANAGEMENT. The accountants should not sacrifice the substance of the information over its form and format. transactions taking place on 1st January will be recorded before the recording of the transaction of 2 nd January. if the methods and practice of recording and presentation of accounts does not change. It ignores prospective and expected income but highlights even the distant possibilities of losses. manipulation. INDORE UNIT-1 Introduction to Accounting current year with statement of the previous years. Modifying Principle of Timeliness This is one of the latest conventions of accounting. Mr. It means that the information collected and reported must be relevant and reliable. Professor. Accounting is criticized for adopting the policy of conservatism It does not accord equal treatment to prospective losses and prospective profits. If the business deviates from the previous practices and changes method. Accurate comparisons can be made. misappropriation.in. The convention of consistency does not mean that the business cannot switch over to better and up-to-date methods. It stresses that undue heavy expenses must not be incurred in supplying information.e. 11. The business transactions of the particular day should preferable be recorded the same day.. 8.e. According to this principle business transactions should be recorded in such way that profits should not be over stated. The principle means "appropriate recording of business transactions at appropriate or proper time". Modifying Principle of Prudence (Conservatism) The business according to this principle adopts a very safe policy.

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