acing concepts

8/3/2019 Acing Concepts

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ConceptsBusiness Entity Concept : Business is treated as a unit separate from its owners,

managers and others

Dual Aspect Concept Every financial transaction has two aspects to it in the

form of debit and credit

Going Concern Concept Any enterprise is expected to continue for an indefinite

period


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ConceptsAccounting Period Concept Income is measured at regular intervals of time called

the accounting period

Money Measurement Concept Every transaction has to be recorded in terms of money

alone. Non financial transactions are not recorded

Cost Concept Asset is recorded at the purchase price and the cost is

the basis for all subsequent accounting for the asset.


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ConceptsMatching of Cost and Revenue Concept Revenue is recorded at the time of realization and all

related expenses are matched with the respective revenues

Verifiable Objective Evidence concept Every transaction recorded must have supporting

business documents that are verifiable and unbiased.

Realisation Concept Revenue is treated as realised when the actual sales is

effected by transfer of goods and a promise to pay is made


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ConceptsAccrual Concept Transactions are recorded as and when they occur and

not when payment or receipt is made.


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ConventionsDisclosure Accounts must be honestly prepared and disclose all

material information

Materiality A transaction is recorded when it is believed that its

knowledge would influence the decision maker

Consistency Accounting practices and methods to remain unchanged

over a long period of time

Conservatism Playing safe Reporting and providing for losses and

not for profits


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The Classes of Accounts

Assets A future economic benefit acquired by apast or present transaction

Liabilities A legal obligation to undertake atransaction in future

Income Amount of money received or earned forsale of goods, services or from financial investment

Expenditure Economic cost incurred for runningthe business operations


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The Basics for Accounting rules

Dual aspects Debit and CreditDerived from Latin Debitum (due for) and Credere

(due to) Every transaction has a debit and credit aspect


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The impact of transactions

Increase or decrease in asset valueIncrease or decrease in liabilities valueIncurring a new expenseEarning a new income


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The rules for each impact

IMPACT RULE

Increase in asset value Debit the asset account

Decrease in asset value Credit the asset account

Increase in liability value Credit the liability account

Decrease in liability value Debit the liability accountIncrease in expense Debit the expense account

Increase in income Credit the income account


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The rules for each impact

Lets try applying the rules for a few business

transactions Purchase of machinery for cash

Purchase of furniture from supplier on credit terms

Payment of salaries to employees in cash

Income received from customers for servicesprovided


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Foundation for Accounting???

Choose the right option

Journal Entries

Debits and Credits

Types of Accounts


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Accounting Equation

None of these actually!

The right answer is..

The Accounting Equation!!!!
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Starting a Business

What do u need to start a business?

a) Money

b) Building

c) Furniture

d) Equipments

All compactly called Assets
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Starting a Business

How do u get the Assets ?

Choice 1: Own Money called Capital

Choice 2: Borrowed Money calledLiabilities


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The Equation

Buy Assets with Capital and

Liabilities

Assets = Capital + Liabilities


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The Accounting Equation

The secret is to remember the

maxim

Every financial transaction satisfiesthe Accounting Equation


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Sample Transactions

Txn Capital Liabilities AssetsCapitalbrought in

+ (Capital) + (Cash)

Loan fromBank

+ (Loan) + (Cash)

Buy Assets + (Asset)- (Cash)


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More Sample TransactionsTxn Capital Liabilities AssetsPurchase goodsfor resale

+ (Goods)- (Cash)

Sell Goods forProfit

+(Profit)

- (Goods)+ (Cash)

Sell Goods forLoss

-(Loss)

- (Goods)+(Cash)

Repay Loan - - (Cash)


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Try these..

Ram started business with Rs.50,000 cash Purchased for business Furniture Rs.2,000;Building Rs.10,000 and goods for trade Rs.

10,000 Paid rent for Rs.400 Bought goods on credit for Rs. 2,000


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Try these too..

Ram sold goods costing Rs. 3,000 for Rs.4,000 Goods bought for Rs. 5,900 sold for Rs.

8,000 on credit Paid Commission Rs. 700; Salary Rs. 1,000,Electricity bill Rs. 150 and MiscellaneousExpenses Rs. 250

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