Money Measurement In accounting, only business transactions and events of financial nature are recorded. The proprietor is treated as a creditor to the extent of his capital and all the business transactions are recorded in the books of accounts from the business stand point. For example, in case of a Sole Proprietor concern, the proprietor is treated to be separate and distinct from the business, which he controls. Accounting Entity According to this assumption, a business is considered as a unit or entity apart from its owners, creditors and others. viz., 365 days or 52 weeks or 1 year is considered as the accounting period. Thus, it is essential to close the accounts at regular intervals. Going Concern As per this assumption, the business will exist for a long period and transactions are recorded from this point of view.Īccounting Period The users of financial statements required periodical reports to ascertain the operational and the financial position of the business concern. This method is usually not considered to be in conformity with accounting principles and is, therefore, used only in select situations such as for very small businesses. Expenses are booked when they are actually paid, rather than when incurred. The cash basis of accounting is a method wherein revenue is recognised when it is actually received, rather than when it is earned. For example, a seller bills the buyer at the time of sale and treats the bill amount as revenue, even though the payment may be received later. Accrual Under Accrual method of accounting, the transactions are recorded when earned or incurred rather when collected or paid i.e., transactions are recorded on the basis of income earned or expense incurred irrespective of actual receipt or payment. This concept serves as the basis for finding accurate profit for a period which can be distributed to the owners. Matching Concept As per this concept, Matching of the revenues earned during an accounting period with the cost associated with the respective period to ascertain the result of the business concern is carried out. It reduces the possibilities of inflating incomes and profits. This concept is vital for determining income pertaining to an accounting period. As per this concept, unearned or unrealised revenue is not taken into account. Revenue Realisation According to Revenue Realisation concept, revenue is considered as the income earned on the date, when it is realised. Some of these concepts are briefly described in the following sections. A number of principles, concepts and conventions are developed to ensure that accounting information is presented accurately and consistently. The Assets and liabilities are taken to Balance sheet and the Income and Expenses accounts are posted to Profit and Loss Account.ġ.1.2 Golden Rules of AccountingReal Accounts Debit Credit What Comes in What Goes out Personal Accounts The Receiver The Giver Nominal Accounts Expenses and Losses Incomes and Gainsġ.1.3 Accounting Principles, Concepts and ConventionsThe Accounting Principles, concepts and conventions form the basis for how business transactions are recorded. Assets Liabilities Income Expenses The above classification is the basis for generating various financial statements viz., Balance Sheet, Profit & Loss A/c and other MIS reports. For example, Salary Account Dividend Account Sales Accounts can be broadly classified under the following four groups. Suppliers Customers Lenders Nominal accounts Nominal Accounts are Accounts which relate to incomes and expenses and gains and losses of a business concern. For example, Land Building Goodwill Purchases Cash Personal Accounts Personal Accounts are Accounts which relate to persons.
Real accounts include tangible and intangible accounts. Real Accounts Real Accounts are Accounts relating to properties and assets, which are owned by the business concern. Financial statements will be useful to the following parties: Suppliers Customers Employees Banks Suppliers of equipments, buildings and other assets Lenders Ownersġ.1.1 Types of AccountsThere are basically three types of Accounts maintained for transactions : Real Accounts Personal Accounts Nominal Accounts Lesson ObjectivesOn completion of this lesson, you will be able to understand Principles and concepts of Accounting Double Entry System of Accounting Financial Statementsġ.1 IntroductionAccounting is a process of identifying, recording, summarising and reporting economic information to decision makers in the form of financial statements.