accountingconceptsconventionsprinciples-100627121320-phpapp01
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AccountingConcepts,
Conventions &Principles
Dr. Jatin Pancholi
Website: http://www.jatinpancholi.com
Dr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a management situation. The
handling of a management situation requires personal guidance by a professional. To obtain copies, request
permission to reproduce and to send feedback, please contact on website http://www.jatinpancholi.com . Those
wishing to co-author next edition of this handout may also contact.
http://www.jatinpancholi.com/http://www.jatinpancholi.com/ -
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Information
analysis
Information
identificationInformation
reporting
Information
recording
Accounting Information
System
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MEANINGS
1. Concepts
2. Conventions
3. Principles
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CONCEPTS
1. Accrual Basis
2. Going Concern
3. Prudence (Conservatism)4. Balance Sheet Equation
(Equivalence)
5. Accounting Period
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CONCEPTS(2)
(1) Accruals concept : revenue and
expenses are taken account of when they
occur and not when the cash is received or
paid out;
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CONCEPTS(3)
(2) Going concern : it is assumed that the business
entity for which accounts are being prepared is
solvent and viable , and will continue to be in
business in the foreseeable future; (3) Prudence concept : revenue and profits are
included in the balance sheet only when they are
realized (or there is reasonable 'certainty ' of
realizing them) but liabilities are included when
there is a reasonable 'possibility' of incurring
them. Also called conservation concept.
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CONCEPTS (4)
(4) Accounting equation : total assets of an
entity equal total liabilities plus owners'
equity ;
(5) Accounting period : financial records
pertaining only to a specific period are to be
considered in preparing accounts for that
period
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CONVENTIONS
1. Historical Costs
2. Monetary measurement
3. Separate Entity4. Realisation
5. Materiality
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PRINCIPLES
1. Understandability
2. Relevance
3. Consistency4. Comparability
5. Reliability
6. Objectivity
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ACCOUNTING EQUIVALENCE
Assets = Owners Equity +
Outside Liabilities
A = OE + OL
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BALANCE SHEET
BS is a position statement.
BS describes
the financial position of assets & liabilities
of the firm
as on a particular date
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DEFINITION: BS
Balance Sheet is defined as
a statement of the financialposition
of an enterprise
as at a given date, which exhibitsassets, liabilities, capital, etc.
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HORIZONTAL FORM OF BS
LIABILITIESAmount
()
ASSETSAmount
()
Capital XXFixed Assets-Land,
Bldg,XX
Loan taken XX Current Assets
Current Liabilities Cash / Bank B/s XX
Outstanding Expenses XXAccounts Receivable
(Debtors)XX
Bank Overdraft XX Bills Receivable) XX
Accounts Payable
(Creditors)XX Inventories (Stock) XX
XYZ XYZ
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VERTICAL FORM OF BSSOURCES OF FUNDS Amount () py Amount () cy
Share Capital AA XX
Reserves & Surplus AA
Secured Loans AA XX
Unsecured Loans AA XX
ABC XYZAPPLICATION OF FUNDS Amount () py Amount () cy
Fixed Assets Gross Block
- DepreciationAA XX
InvestmentAA XX
Current AssetsCurrent Liabilities AA XX
Loans & Advances AA XX
Miscellaneous Expenditure AA XX
ABC XYZ
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A = OE + OLAssets are properties or economic
resources owned by a business. They areexpected to provide future benefits to the
business.
Liabilities are
obligations of thebusiness. They
are claims
against the
assets of the
business.
Equity is the
owners claim on
the assets of the
business. It is theresidual interest in
the assets after
deducting
liabilities.
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A = OE + OL
LIABILITIESAmount
ASSETSAmount
Capital XX Fixed Assets-Land, Bldg, XX
Loan taken XX Current Assets
Current Liabilities Cash / Bank B/s XX
Outstanding Expenses XXAccounts Receivable
(Debtors)XX
Bank Overdraft XX Bills Receivable) XX
Accounts Payable (Creditors) XX Inventories (Stock) XX
XYZ XYZ
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A = OE + OL
SOURCES OF FUNDSAmount
py
Amount
cyShare Capital AA XX
Reserves & Surplus AA
Secured Loans XX
Unsecured Loans XXXX
APPLICATION OF FUNDSAmount
() py
Amount
() cy
Fixed Assets Gross Block
- Depreciation
Investment
Current AssetsCurrent Liabilities
Loans & Advances
Miscellaneous Expenditure
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The accounts involved are:
(1) Cash (asset)
(2) Owners Equity (equity)
Owners of Scox Company contributed20,000 cash to start the business.
PROOF: A = OE + OL
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owners'
Capital
(1) 20000 20000
20000 0 0 0 0 20000
20000 = 20000
Owners of Scox Company contributed20,000 cash to start the business.
Transaction Analysis
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Theaccounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis
Purchased supplies paying 1,000cash.
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Assets = Liabilities +
Owners'
Equity
Cash Supplies EquipmentAccountsPayable
NotesPayable
Owner's'Capital
(1) 20000 20000
(2) -1000 1000
19000 1000 0 0 0 20000
20000 = 20000
Transaction Analysis
Purchased supplies paying 1,000cash.
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis
Purchased equipment for 15,000cash.
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment AccountsPayable NotesPayable Owners'Capital
(1) 20000 20000
(2) -1000 1000
(3) -15000 15000
4000 1000 15000 0 0 20000
20000 = 20000
Transaction Analysis
Purchased equipment for 15,000cash.
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The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis
Purchased Supplies of 200 andEquipment of 1,000 on account.
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owners'
Capital
(1) 20000 20000
(2) -1000 1000
(3) -15000 15000
(4) 200 1000 1200
4000 1200 16000 1200 0 20000
21200 = 21200
Purchased Supplies of 200 andEquipment of 1,000 on account.
Transaction Analysis
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owners'
CapitalBal. 4000 1200 16000 1200 20000
4000 1200 16000 1200 0 20000
21200 = 21200
Transaction AnalysisThe balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now lets look at transactions
involving revenues and expenses.
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis
Rendered consulting servicesreceiving 3,000 cash.
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Assets = Liabilities +
Owner's
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal. 4000 1200 16000 1200 20000
(5) 3000 3000
7000 1200 16000 1200 0 23000
24200 = 24200
Rendered consulting servicesreceiving 3,000 cash.
Transaction Analysis
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The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction Analysis
Paid salaries to employees, 800cash.
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Assets = Liabilities +
Owner's
Equity
Cash Supplies EquipmentAccountsPayable
NotesPayable
Owner'sCapital
Bal. 4000 1200 16000 1200 20000
(5) 3000 3000
(6) -800 -800
6200 1200 16000 1200 0 22200
23400 = 23400
Paid salaries to employees, 800cash.
Transaction Analysis
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The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis
Borrowed 4,000 from SBI
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Assets = Liabilities +
Owner's
Equity
Cash Supplies EquipmentAccountspayable
NotesPayable
Owner'scapital
Bal. 4000 1200 16000 1200 20000
(5) 3000 3000
(6) -800 -800
(7) 4000 400010200 1200 16000 1200 4000 22200
27400 = 27400
Borrowed 4,000 from SBI
Transaction Analysis
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Financial Statements
Prepare the Financial Statements reflectingthe transactions we have recorded.
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Scoxs net
income is thedifference
between
Revenues and
Expenses.
The net income
of 2,200increases
Scoxs equity
by 2,200.
Revenues:
Consulting revenue 3000
Expenses:
Salaries expense 800
Net income 2200
Scox Company
Income Statement
For Month Ended March 31, 2001
Income Statement
Owners' equity, 1st April 2000 0
Plus: Investment by owners 20000
Net income 2200
Owners' equity, 31st March 200 22200
Scox Company
Statement of Changes in Owners' Equity
For Month Ended March 31, 2001
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Accounts payable 1200 Cash 10200
Notes payable 4000 Supplies 1200
Total liabilities 5200 Equipment 16000Owners' equity 22200
Total liabilities
and owners'
equity 27400 Total asset 27400
AssetsLiabilities & Owners' Equity
Scox Company
Balance Sheet
March 31, 2001
Balance Sheet
Owners' equity 0
Investment by owners 20000
Net income 2200
Owners' equity, March 31 2001 22200
Scox Company
Statement of Changes in Owners' Equity
For Month Ended March 31, 2001The balance sheet
reflects Scoxsfinancial position at
March 31 2001
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DOUBLE ENTRY SYSTEM
A = OE + OL
In the double-entry accounting system,every transaction is recorded by equal
amounts of debits and credits.
Debit = Credit
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ACCOUNTANTS LIFE
A = OE + OL
ASSETS
Debitfor
Increase
Creditfor
Decrease
EQUITIES
Debitfor
Decrease
Creditfor
Increase
LIABILITIES
Debitfor
Decrease
Creditfor
Increase
Debit Credit
ASSETS
+ -
LIABILITIES
- +
Debit Credit
EQUITIES
- +
Debit Credit
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ACCOUNTING CYCLE
1. Business Transaction
2. Transaction is recorded in document(Voucher / Receipt)
3. Analyze the transactionlocation ?
4. Journal Entry
5. Ledger Accounts (or T account)6. Trial Balance
7. Balance Sheet, P&L A/c, Cash Flow
Statement
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Balance Sheet
P & L A/c
Cash Flow
Prepare a trial
balance
Post to the
ledgerJournal Entry
Source
documentsTransactionAnalyze
ACCOUNTANTS ROUTINE
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Post to the
ledger
Source
documents
Journal EntryPrepare a trial
balance
Balance Sheet
P & L A/c
Cash Flow
TransactionAnalyze
ACCOUNTANTS ROUTINE
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TRANSACTION-1
Chirag started business with cash 30,000.The accounts involved are:
(1) Cash (asset)(2) Owners Equity (equity)
Assets = OE + OL
Cash Supplies Equipment
Accounts
Payable
Notes
Payabl
Owners'
Capital
(1) 30000 30000
30000 0 0 0 0 30000
30000 = 30000
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TRANSACTION-1
Chirag started business with cash
30,000.The accounts involved are:
(1) Cash (asset)(2) Owners Equity (equity)
JOURNAL ENTRY Page 1Date Particulars LF Debit Credit
2001
Dec. 1 Cash 30,000
To Capital 30,000
Investment by owner
Debit Credit
EQUITIES
- +Debit Credit
ASSETS
+ -
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TRANSACTION-1 - LEDGER
JOURNAL ENTRY Page 1Date Particulars LF Debit Credit
2001
Dec. 1 Cash 30,000
To Capital 30,000Investment by owner
Capital(1) 30,000
Cash(1) 30,000
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Thank You Now, was that debits tothe left or credits to the
left?
I sure wish I had paidmore attention in class!
Dr. Jatin Pancholi
Website: http://www.jatinpancholi.com
Dr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a management situation. The
handling of a management situation requires personal guidance by a professional. To obtain copies, request
http://www.jatinpancholi.com/