Present By,

Mr. V. GURUMOORTHIAssistant Professor

Department of Commerce.

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PRINCIPLES OF ACCOUNTANCY / BUSINESS ACCOUNTING

Contents….1. History of Accounting2. Book keeping3. Accounting Meaning4. Steps of Accounting5. Types of Accounting6. Golden Rules7. Accounting Cycle8. Accounting concepts & Conventions9. Journal10. Ledger11. Trial Balance12. Final Accounts2

History:It has evidence in 4-th Century in

Artha Sasthiram Wrote by Gowdilya.

After 14-th Century, Established certain procedures in Accounting system by Italian Merchant Luco Pacioli.

He Introduced Double Entry System at 1494.

He is a Father of Accounts.3

BOOK KEEPING

It is concerned with the

Recording of Business

Transaction in a systematic

manner.

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ACCOUNTING

Meaning:Accounting, the term refers “art of recording, classifying and

summarizing and interpretation of the business

transaction in a significant manner and in terms of money”.

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TYPES OF ACCOUTS

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Real A/c

Nominal A/c

PERSONAL IMPERSONAL

Natural personArtificial personRepresentative person

Tangible AssetsIntangible Assets

ExpensesIncomes

I. Personal Accounts:Accounts of persons with whom with business has

dealings are known as personal accounts.

A) Natural Persons: Owner, Debtors(Customer), Creditors(Suppliers).

B) Artificial Persons: Bank, Institution, Company, Government.

C) Representative Persons: Out Standing(O/s), Prepaid Expenses.

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II. IMPERSONAL ACCOUNTSOther than the personal accounts known as

Impersonal Accounts.

Real Accounts: All assets of the company.Tangible Assets: It can be see, touch, feel. Such as, Land,

Building, Cash, Bank balance.. ect., Intangible Assets: It can’t see, touch, feel. Such as, Copy

Right, pattern rights, Good will, Trade mark.

Nominal Accounts: All Expenses and Incomes. Such as, Salary paid, Rent paid, Interest received.

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GOLDEN RULESACCOUNTS DEBIT

ASPECTSCREDIT

ASPECTS

Personal Account

Receiver Giver

Real Account

What comes in

what goes out

Nominal Account

Expenses/Losses

Incomes/Gains

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OBJECTIVES OF ACCOUNTING

To maintain accounting records.To Ascertain true profit or loss.To Find out correct financial positions.To provide information to Users.

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ADVANTAGE OF ACCOUNTING

Maintaining Systematic recordsPreparation of financial statementsAssessment of progressAid to decision makingFull fill Statutory requirementsInformation to interested groupsEvidence in courtsTaxation ProblemsMerger of firms.

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Accounting Concepts and Conventions

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ACCOUNTING CONCEPT

The term ‘concept’ is used to connote accounting postulate, that is necessary assumptions and conditions upon which accounting is based.

These are the theories on how and why certain categories of transactions should be treated in a particular manner.

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Such as,1. The entity Concept2. The money measurement concept3. Going concern concept4. Dual aspect concept5. Accounting period concept6. Realization concept7. Cost concept8. Matching concept9. The accounting Equation Concept10. Objective evidence concept

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• The business and its owner(s) are two separate entities

1. BUSINESS ENTITY CONCEPT

Capital (Liability)Capital (Liability)

Drawings (Asset)Drawings (Asset)

The Books Of Accounts are prepared from the point of view of the business…… Hence,

It is assumed that the entity is a going concern, i.e., it will continue to operate for an indefinitely long period in future and transactions are recorded from this point of view.

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2. GOING CONCERN CONCEPT

In accounting, a record is made only of those transactions or events which can be measured and expressed in terms of money.

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3. MONEY MEASUREMENT CONCEPT

Non monetary transactions are not recorded in accounting.

For measuring the financial resultsmeasuring the financial results of a business periodically, the working life of an undertaking is split into convenient short periods called accounting period.

4. ACCOUNTING PERIOD CONCEPT

An asset acquired by a concern is recorded in the books of accounts at historical cost historical cost (i.e., at the price actually paid for acquiring the asset). The market price of the market price of the asset is ignored.asset is ignored.

5. COST CONCEPT

Historical Cost Of

Market Value Of

For Every Debit, there is

a CreditEvery transaction Every transaction should have a should have a two- two- sided effectsided effect to the to the extent of same extent of same amount..amount..

6. DUAL-ASPECT CONCEPT

For Example:Cash Sales Rs. 10,000

Profit is earned when goods or services are provided/ transferred to customers. The revenue should be recognized only when it is legally due and realizable.

7. REALISATION CONCEPT

The matching principle ensures that revenues and all their associated expenses are recorded in the same accounting period. Hence, the Outstanding and prepaid expenses and incomes have to be properly adjusted.

8. MATCHING CONCEPT

9. ACCOUNTING EQUATION CONCEPT

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10. OBJECTIVE EVIDENCE CONCEPT

All accounting entries must be based on objective evidence. It

refers, verifiability, reliability and absence of bias.

Accounting Convention

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ACCOUNTING CONVENTIONS

Accounting Conventions are the common practices which are universally followed in recording and presenting accounting information of business. It helps in comparing accounting data of different business or of same units for different periods.

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Such as,

Convention of MaterialityConvention of Full DisclosureConvention of ConservatismConvention of Consistency

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Only those transactions, important facts and items are shown which are useful and material for the business. The firm need not record immaterial and insignificant items.

1. MATERIALITY

Financial Statements and their notes should present all information that is relevant and material to the user’s understanding of the statements.

2. FULL DISCLOSURE

Accountant should always be on side

of safety. FOR uncertainty

3. CONSERVATISM

For Example

• Making Provision for Bad Making Provision for Bad and Doubtful Debtsand Doubtful Debts• Showing Depreciation on Showing Depreciation on Fixed Assets, but not Fixed Assets, but not appreciation… appreciation…

The accounting practices and methods should remain consistent from one accounting period to another.

Whatever accounting practice is followed by the business enterprise, should be followed on a consistent basis from year to year.

4. CONSISTENT

For For ExamplExampl

ee

JOURNAL

Journal is the books of accounts, where all day-to-day business activities are recorded in chronological order i.e. date – wise.

Hence it is called as Day Book, Primary Book.43

JOURNAL FORMAT

DATE PARTICULARS LF DEBIT Rs [Dr]

CREDIT Rs [Cr]

YearMonthDate

Name of account to be debited. To, Name of account to be credited.[Narration]

*****

*****

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LEDGER

Ledger the term refers, Posting the journal entry in separate books.

It has ‘T’ FormatLeft hand side Dr &

Right hand side Cr.45

LEDGER FORMAT

Dr Name of Account CrDt. PARTICULAR Rs Rs. Dt. PARTICULAR Rs. Rs.

To, Name of credit A/c

**** **** By, Name of debit A/c

**** ****

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TRIAL BALANCE

A listing of all accounts with balances at the end of the accounting period after all transactions have journalized and posted.

Purpose…….1. to determine that debits = credits,2. to identify accounts to be adjusted.

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TRIAL BALANCE FORMAT

SL NO

PARTICULARS LF DEBIT BALANCE

RS

CREDIT BALANCE

RS

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JOURNAL, LEDGER, & TRIAL BALANCE1. Transactions are analyzed

and recorded in journal.

2. Transactions are posted from journal to ledger.

3. Trial balance is prepared.

Trial Balance

Documents Journal

Journal Ledger

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FINAL ACCOUNTS

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TRADING ACCOUNT

It is prepared for a specific period to know the trading results of the business.

It is mainly prepared to ascertain the gross profit or gross loss….

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Dr Trading Account for the year ended …………. Cr

Particular Amount Amount Particulars Amount Amount

To Opening Stock xxx By Cash Sales xxx

To Cash Purchase xxxLess: Sales Return xxx

Less: Purchase Return xxx By Net Sales xxxx

To Net Purchase xxxx By Closing Stock xxx 1

Direct Expenses

To Wages xxx

To Carriage Inward xxx

To Factory Lighting xxx

To Fuel, Coal, Oil xxx

To Duty on Import of Material xxx

To Octroi duty xxx

To Gross Profit * C/d xxx By Gross Loss * C/d xxx

xxxx xxxx52

PROFIT AND LOSS A/C

It is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice versa.

It prepared in order to calculate the net profit or net loss of the business.

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Dr Profit and Loss Account for the year ended …………. Cr

Particulars Amount Amount Particulars Amount Amount

To Gross Loss* B/d xxx By Gross Profit* B/d xxx

Office & Administrative Expenses:

To Salaries xxx By Rent Received (Tenants) xxx

Add: Outstanding Expenses xxx 2 xxxx

To Rent & Rates and Taxes xxx

Less: Pre Paid Expenses xxx 3 xxxx

To Office Lighting xxx

To Printing & Stationery xxx

To Insurance Premium xxx

To Postage & Telegram xxx

To Telephone Charges xxx

To Audit Fees xxx

To General Expenses xxx

To Legal Charges xxx

To Miscellaneous Expenses Paid xxx54

Dr Profit and Loss Account for the year ended …………. Cr

Particulars Amount Amount Particulars Amount Amount

Selling & Distribution Expenses:

To Salaries to Sales Staff xxx

To Commission Charges(paid) xxx By Commission Received xxx

To Advertising Charges xxx

To Carriage Outward xxx

To Packing Expenses xxx

To Bad Debts old xxx

Add: Further Bad Debts xxx 4

Add: New Provision For Bad & Doubtful

debts % Value (Debtor x %)xxx 5

xxxx

Less: Old Provision for bad debts xxx xxxx

To Provision For Discount on Debtors xxx 6 By Provision For Discount on Creditors xxx 7

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Dr Profit and Loss Account for the year ended …………. Cr

Particulars Amount Amount Particulars Amount Amount

Financial Expenses:

To Interest on Capital xxx 8 By Interest on Drawings xxx 9

To Interest on loans xxx By Interest on Investment xxx

To Trade Discount Allowed xxx By Trade Discount Received xxx

To Cash Discount Allowed xxx By Cash Discount Received xxx

By Interest on Debenture xxx

Maintenance Expenses:

To Depreciation on Fixed Assets xxx10

To Repair & Maintenance xxx

Extraordinary Expenses:

To Loss by Fire(Not covered Insurance) xxx

To Loss on of assets xxx By Profit on of assets xxx

To Net Profit* C/d xxx By Net Loss* C/d xxx

xxxx xxxx56

BALANCE SHEETIt is prepared with a view to measure the

correct financial position of a business enterprise on a certain fixed date.

It is a statement containing all the unclosed balances of “REAL” & “PERSONAL” accounts.

Capital + Liabilities = Assetsor

Asset- Liabilities = Capital57

BALANCE SHEET AS ON…...

Liabilities AmountAmoun

tAssets Amount Amount

Fixed Liabilities: Fixed Assets:

Capital xxx Plant & Machinery xxx

Add: Interest on Capital xxx Less: Depreciation % xxx

Add: Net Profit xxx Land & Building xxx

xxx Furniture & Fixtures xxx

Less: Drawings xxx Motor Car xxx

Interest On Drawings xxx 9

Net Loss xxx xxx xxxx

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BALANCE SHEET AS ON…...

Liabilities Amount Amount Assets Amount Amount

Current Liabilities: Current Assets :

Bank Over draft Liquid Assets:

Bills Payable Cash in Hand xxx

Provision for taxation Cash at Bank xxx

Outstanding Expenses xxx 2

Pre received incomes

Short-term advantages & Loans

Income tax payable

Trade Creditors xxx

Less: Provision for Discount on Creditors (Creditors x % Value) xxx 7

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BALANCE SHEET AS ON…...

Liabilities Amount Amount Assets Amount Amount

Floating Assets

Inventories (Stock) xxx 1

Investment (Short-term)

Bills Receivable

Pre paid expenses xxx 3

Outstanding Incomes

Trade Debtors xxx

Less: Further / New Bad Debts xxx 4

New Provision for Bad & Doubtful debts xxx 5

Provision For Discount on Debtors xxx 6 xxxx xxxx60

BALANCE SHEET AS ON…...

Liabilities Amount Amount Assets Amount Amount

Long Term Liabilities: Intangible Assets:

Loan From Bank xxx Good Will xxx

Debentures xxx Patents xxx

Dividend payable xxx Copy Right xxx

Fictitious Assets:

Miscellaneous Expenses xxx

xxxx xxxx

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