BINAYAK ACADEMY,

Gandhi Nagar 1st Line, Near NCC Office,

Berhampur
JOURNAL
Books of Original Entry
The books in which a transaction is recorded for the first time from a source document are
called Books of Original Entry or Prime Entry. Journal is one of the books of original entry in
which transactions are originally recorded in a chronological (day-to-day) order according
to the principles of Double Entry System.
Journal
Journal is a date-wise record of all the transactions with details of the accounts debited
and credited and the amount of each transaction.
Expenseslanation:
1. Date: In the first column, the date of the transaction is entered. The year and the
month is written only once, till they change. The sequence of the dates and months should
be strictly maintained.
2. Particulars: Each transaction affects two accounts, out of which one account is
debited and the other account is credited. The name of the account to be debited is
written first, very near to the line of particulars column and the word Dr. is also written at
the end of the particulars column. In the second line, the name of the account to be
credited is written, starts with the word To, a few space away from the margin in the
particulars column to the make it distinct from the debit account.
3. Narration: After each entry, a brief expenseslanation of the transaction together with
necessary details is given in the particulars column with in brackets called narration. The
words For or Being are used before starting to write down narration. Now, it is not
necessary to use the word For or Being.
4. Ledger Folio (L.F): All entries from the journal are later posted into the ledger
accounts. The page number or folio number of the Ledger, where the posting has been
made from the Journal is recorded in the L.F column of the Journal. Till such time, this
column remains blank.
5. Debit Amount: In this column, the amount of the account being debited is written.
6. Credit Amount: In this column, the amount of the account being credited is written.
Steps in Journalising
The process of analysing the business transactions under the heads of debit and credit
and recording them in the Journal is called Journalising. An entry made in the journal is
called a Journal Entry.
Step 1 - Determine the two accounts which are involved in the transaction.
Step 2 - Classify the above two accounts under Personal, Real or Nominal.
Step 3 - Find out the rules of debit and credit for the above two accounts.
Step 4 - Identify which account is to be debited and which account is to be credited.
Step 5 - Record the date of transaction in the date column. The year and month is written
once, till they change. The sequence of the dates and months should be strictly
maintained.
Step 6 - Enter the name of the account to be debited in the particulars column very close
to the left hand side of the particulars column followed by the abbreviation Dr. in the same
line. Against this, the amount to be debited is written in the debit amount column in the
same line.
Step 7 - Write the name of the account to be credited in the second line starts with the
word To a few space away from the margin in the particulars column. Against this, the
amount to be credited is written in the credit amount column in the same line.
Step 8 - Write the narration within brackets in the next line in the particulars column.
1

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
Step 9 - Draw a line across the entire particulars column to separate one journal entry
from the other.

LEDGER
In the Journal, each transaction is dealt with separately. Therefore, it is not possible to
know at a glance, the net result of many transactions. So, in order to ascertain the net
effect of all the transactions relating to a particular account are collected at one place in
the Ledger.
A Ledger is a book which contains all the accounts whether personal, real or nominal,
which are first entered in journal or special purpose subsidiary books.
According to L.C. Cropper, the book which contains a classified and permanent record of
all the transactions of a business is called the Ledger.
The ledger that is normally used in a majority of business concern is a bound note book.
This can be preserved for a long time. Its pages are consequently numbered. Each account
in the ledger is opened preferably on a separate page. If one page is completed, the
account will be continued in the next or some other page. But in bigger concerns, it is not
practical to keep the ledger as a bound note book, Loose-leaf ledger now takes the place
of a bound note book. In a loose-leaf ledger, appropriate ruled sheets of thick paper are
introduced and fixed up with the help of a binder. Whenever necessary additional pages
may be inserted, completed accounts can be removed and the accounts may be arranged
and rearranged in the desired order. Therefore, this type of ledger is known as Loose-leaf
Ledger.
Utility
Ledger is a principal or main book which contains all the accounts in which the
transactions recorded in the books of original entry are transferred. Ledger is also called
the Book of Final Entry or Book of Secondary Entry, because the transactions are
finally incorporated in the Ledger. The following are the advantages of ledger.
i. Complete information at a glance: All the transactions pertaining to an account are
collected at one place in the ledger. By looking at the balance of that account, one can
understand the collective effect of all such transactions at a glance.
ii. Arithmetical Accuracy: With the help of ledger balances, Trial balance can be
prepared to know the arithmetical accuracy of accounts.
iii. Result of Business Operations: It facilitates the preparation of final accounts for
ascertaining the operating result and the financial position of the business concern.
iv. Accounting information: The data supplied by various ledger accounts are
summarised, analysed and interpreted for obtaining various accounting information.

POSTING
The process of transferring the entries recorded in the journal or subsidiary books
to the respective accounts opened in the ledger is called Posting. In otherwords,
posting means grouping of all the transactions relating to a particular account at
one place. It is necessary to post all the journal entries into various accounts in the
ledger because posting helps us to know the net effect of various transactions
during a given period on a particular account.
Balancing an Account
Balance is the difference between the total debits and the total credits of an account.
When posting is done, many accounts may have entries on their debit side as well as
credit side. The net result of such debits and credits in an account is the balance.
2

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
Balancing means the writing of the difference between the amount columns of the two
sides in the lighter (smaller total) side, so that the grand totals of the two sides become
equal.

Subsidiary Book
In a business most of the transactions are related to receipt and payment of cash, sale of
goods and purchase of goods. Hence separate books are maintained for recording these
transactions. The journal is subdivided into different books. These books are known as
Subsidiary Books. These are the books of prime or original entry. All transactions are first
recorded in the subsidiary books and then posted to the ledger.
(1) Purchases book : It records only the credit purchase of goods .Cash purchase of goods
are not recorded in this book as these will be recorded in the cash book. Credit purchase of
assets will be recorded in the journal proper and not in the purchase book.
The Purchase Book shows the names of the parties from whom goods have been
purchased on credit. These parties are known as creditors. The Creditors accounts will be
credited individually for the respective amounts shown in the purchase book. The total of
the Purchase Book at the end of the month will be posted to the debit of the Purchase A/c
in the ledger. Transactions are recorded in the Purchases book on the basis of the
Purchases invoices that is inward invoice.
(2) Sales Book: It records only the credit sale of goods. Cash sale of goods are recorded in
the Cash Book and not in the Sales Book. Credit sales of assets will be recorded in the
Journal Proper and not in the Sales Book.
The names appearing in the Sales Book are of those parties to whom goods are sold. They
are the debtors. The accounts of these debtors have to be debited with the respective
amounts. The total of the Sales Book shows the credit sales made during the period and
this amount is posted at the end of the month to the credit of Sales A/c in the ledger.
Transactions are recorded in the Sales book on the basis of the sales invoices that is
outward invoice.
(3) Sales Returns Book or Returns inward Book: If customers return the goods sold to
them, it is recorded in the Sales Return Book or the Return Inward Book. The debtors A/c is
credited with the respective amount and the total amount the sales returned goods is
posted to the debit of the Sales Return A/c in the ledger. When the goods are returned by
the customer a credit note is issued to them. Transactions are recorded in the Sales Return
Book on the basis of the credit notes. A credit note is issued by the creditor (Seller) to the
debtor (Buyer). *Return of Cash Sales and Cash Purchases will be recorded through the
Cash Book.
(4) Purchase Returns or Returns outward Book: When we return the goods purchased to
the suppliers it is recorded in the Purchase Return Book or the Return Outward Book. The
Creditors A/c is debited with the respective amount and the total amount the Purchase
Return Book is posted to the credit of the Purchase Return A/c in the ledger. When the
goods are returned to the supplier a debit note is issued to them. Transactions are
recorded in the Purchase Return Book on the basis of the debit notes. Debit notes are
issued by the debtor (Buyer) to the creditor (Seller).
(5) Bills Receivable Books: If the firm business draws a number of bills on its customers
then a separate book may be kept to record these bills drawn. Posting will be done to
individual Party A/c on the Credit Side and at the end of the month the total of Bills
Receivable book will be posted to Bills Receivable A/c on the Debit side. This book records
only bills drawn. No other transaction related to Bills i.e. dishonour / endorsed / honoured
will be recorded in this Book.
(6) Bills Payable Book: If the business frequently accepts bills drawn by suppliers then a
separate book may be maintained to record these bills accepted. Posting is done to
individual party A/c on the debit side and total of Bills Payable Book at the end of the
3

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
month is credited to Bills payable A/c. No other transaction other than bills accepted is
recorded in this book.
(7) Cash Book All cash & Bank Transaction are recorded in this Book eg. Cash Purchases,
Cash Sales, Purchase or sale of Asset for cash, expensesenses paid, incomes received,
money received, and money paid.
(8) Petty Cash Book Day to Day Petty (small) expensesenses paid in cash are recorded in
this book.
(9) Journal Proper: If there is no special book meant to record a transaction, it is recorded
in the journal (proper). The following types of entries are recorded in this book.
(a) Opening entries: When books are started for the new year, the opening balance of
assets and liabilities are journalized.
(b) Closing Entries: At the end of the year transfer of balances from one account to
another account.
(c) Rectification entries: If an error has been committed, it is rectified through a journal
entry.
(d) Transfer entries: Transfer of Expensesenses & Income to Profit & Loss A/c.
(e) Adjusting Entries: At the end of the year amount of expensesenses or income may
have to be adjusted. i.e. outstanding / Prepaid / Pre-received.
(f) Entries on dishonour of Bills: If Bill is accepted and it is not paid on the due date a
journal entry will be necessary to record the non payment or dishonour.
(g) Miscellaneous entries
(a) Credit purchase of Assets. / Credit Sale of Assets
(b) An allowance to be given to the customers or a charge to be made to them after
the issue of the invoice
(h) Entries for drawing & accepting of Bills (If Separate books are not maintained)
(i) Bad Debts w/off on the customer becoming insolvent.
(J) Effects of accidents such as loss of property by fire.
(k) Transfer of net profit to capital account.
CASH BOOK
A cash book is a special journal which is used to record all cash receipts and cash
payments. The cash book is a book of original entry or prime entry since transactions are
recorded for the first time from the source documents. The cash book is a ledger in the
sense that it is designed in the form of a cash account and records cash receipts on the
debit side and cash payments on the credit side. Thus, the cash book is both a journal
and a ledger. Cash Book will always show debit balance, as cash payments can
never exceed cash available. In short, cash book is a special journal which is used for
recording all cash receipts and cash payments.
Advantages
1. Saves time and labour: When cash transactions are recorded in the journal a lot of
time and labour will be involved. To avoid this all cash transactions are straight away
recorded in the cash book which is in the form of a ledger.
2. To know cash and bank balance: It helps the proprietor to know the cash and bank
balance at any point of time.
3. Mistakes and frauds can be prevented: Regular balancing of cash book reveals the
balance of cash in hand. In case the cash book is maintained by business concern, it can
avoid frauds. Discrepancies if any can be identified and rectified.

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
4. Effective cash management: Cash book provides all information regarding total
receipts and payments of the business concern at a particular period. So that, effective
policy of cash management can be formulated.
Kinds of Cash Book
The various kinds of cash book from the point of view of uses may be as follow:
Kinds of cash book
I

II

III

IV
Single column

Double column

Triple column

Petty

cash
cash book

cash book

cash book

book
a) With discount and
cash columns
b) With cash and
bank columns

with discount, cash

and bank columns

Single Column Cash Book

Single column cash book (simple cash book) has one amount column in each side. All cash
receipts are recorded on the debit side and all cash payments on the credit side. In fact,
this book is nothing but a Cash Account. Hence, there is no need to open cash account in
the ledger. The format of a single column cash book is given below.
Format
Debit Side
Single Column Cash Book of................
Credit Side

Expenseslanation:
i. Date: This column appears in both the debit and credit side. It records the date of
receiving cash at debit side and paying cash at credit side.
ii. Particulars: This column is used at both debit and credit side. It records the names of
parties (personal account), heads (nominal account) and items (real account) from whom
payment has been received and to whom payment has been made.
iii. Receipt Number (R.N): This refers to the serial number of the cash receipt.
iv. Voucher Number (V.N) : This refers to the serial number of the voucher for which
payment is made.
5

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
v. Ledger Folio (L.F): This column is used in both the debit and credit side of cash book.
The ledger page (folio) of every account in the cash book is recorded against it.
vi. Amount: This column appears in both sides of the cash book. The actual amount of
cash receipt is recorded on the debit side. The actual payments are entered on the credit
side.
Balancing:
The cash book is balanced like any other account. The total of the receipt (debit side)
column will always be greater than the total of the payment column (credit side). The
difference will be written on the credit side as By Balance c/d. In the beginning of the
next period, to show the cash balance in hand, the balance amount is recorded in the
debit side as To balance b/d.
Double Column Cash Book
The most common double column cash books are
i. Cash book with discount and cash columns
ii. Cash book with cash and bank columns.
i. Cash Book with discount and cash columns
On either side of the single column cash book, another column is added to record discount
allowed and discount received. The format is given below.
Format
Double Column Cash Book
(Cash book with Discount and Cash Column)
Debit
......................................
Credit

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

It should be noted that in the double column cash book, cash column is balanced like any
other ledger
account. But the discount column on each side is merely
totalled. The total of the discount column on the debit side shows the total discount
allowed to customers and is debited to Discount Allowed Account. The total of the discount
column on the credit side shows total discount received and is credited to Discount
Received Account.
Triple Column Cash Book
Large business concerns receive and make payments in cash and by cheques. Where cash
discount is a regular feature, a Triple Column Cash Book is more advantageous. This cash
book has three amount columns (cash, bank and discount) on each side. All cash receipts,
deposits into bank and discount allowed are recorded on debit side and all cash payments,
withdrawals from bank and discount received are recorded on credit side.

Bank Reconciliation Statement

The balance of the bank column in the double or triple column cash book represents the
customers cash balance at bank. It should be the same as shown by his bank pass book
on any particular day. For every entry made in the cash book if there is a corresponding
entry in the pass book(maintained by the banker) or vice versa, the bank balance will be
the same in both the books.
However, it must be noted that the cash book and the pass book are maintained by two
different parties and hence it is not certain that entry in one book will always have a
corresponding entry in the other.
Normally entries in the cash book should tally (agree) with those in the pass book and the
balances shown by both the books should be the same. But in practice, the balances
generally differ. In case of disagreement in the balance of the cash book and the pass
book, the need for preparing Bank Reconciliation Statement arises.
Definition

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
Bank reconciliation statement is a list in which the various items that cause a
difference between bank balance as per cash book and pass book on any given date are
indicated.
Need and Importance
After tracing the various items of difference, a bank reconciliation statement is prepared.
The following are its advantages in which lies its importance.
i. The errors that might have taken place in the cash book in connection with bank
transactions can be easily found.
ii. Regular preparation of bank reconciliation statement prevents frauds.
iii. It indirectly imposes moral check on the accounting staff.
iv. By the preparation of bank reconciliation statement, uncredited cheque can be
detected and steps can be taken for their collection.
Causes of disagreement between the balance shown by the cash book and the
balance shown by the pass book
1. Cheques paid into bank but not yet collected
The cheques paid into bank for collection but not credited into the account of the
customer, because the cheque is
i. Not collected and credited till that date.
ii. Collected but the bank staff has forgotten to make entry.
iii. Collected but credited to wrong account.
iv. Dishonoured.
v. Collected for No.I account but credited to No.II account of the same customer.
As soon as the cheques are sent to the bank, entries are made in the debit side of the
cash book (bank column). But, usually bank credit the customers account only when they
have received payment from the bank concerned, in other words, when the cheques have
been collected.
Hence, there will be a time gap between the depositing of the cheques and the collection
by the bank.
For example, Bharat Company Limited deposited a cheque on March 28, 2003 for a sum of
Rs.3,000. The cheque was collected on April 4, 2003. In case the bank sends a statement
of account upto March 31, 2003, there will be a difference of Rs 3,000 between the
balance shown by the cash book and the pass book.
2. Cheques issued but not yet presented for payment
The cheques issued but not debited customers account may be because the cheque is
i. not cashed till date.
ii. not presented till date.
iii. presented but dishonoured for some reasons or other.
iv. lost by the party to whom the cheque was issued.
v. cashed out of No.I account but wrongly debited to No.II account of the same
customer.
In all of the above cases, the entry in the cash book is made immediately on the issue of
cheque but naturally the entry will be made by bank only when the cheque is presented
for payment. Thus there will be a gap of some days between the entry for issue of cheque
in the cash book and the entry for payment made in the pass book.
For example, Bharat Company Limited issued a cheque in favour of Mr.Krishna on March
28, 2003 for a sum of Rs.5,000. The cheque is presented for payment at the bank on April
4, 2003. In case, bank sends a statement of account upto March 31, 2003, there will be a
8

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
difference of Rs.5,000 between the balance as shown by the cash book and the balance as
shown by the pass book.
3. Amount credited by the banker in the pass book without the immediate
knowledge of the customer
The following are some of the examples for the above statement
i. The bank might have collected rent, dividend, bills of exchange, interest etc., due for the
customer as per standing instructions.
ii. Some debtors might have directly paid into bank.
iii. Bank credits interest on the credit balance of the customers account.
iv. The banker has wrongly credited this account instead of some other account.
In all the above cases, the entry will be first entered in the pass book. The customer will
know this only after he verifies the entries in the pass book. So there may be a time gap of
some days before the customer includes entries made in the pass book.
For example, the bank has credited Bharat Company Limiteds account for interest
amounting to Rs.500 on March 31, 2003. The bank prepares and sends a statement of
account on March 31, 2003.
If the customer receives the statement of account on April 4, 2003, there will be a
difference of Rs 500 bewteen the balance shown by the cash book and the balance shown
by the pass book.
4. Amounts debited by the banker in the pass book without the immediate
knowledge of the customer
The following are some of the examples for this.
i. The banker has recorded bank charges, interest on overdraft etc.
ii. The banker has paid insurance premium, subscription for periodicals, etc. on behalf of
the customer as per the standing instructions.
iii. The banker has wrongly debited this account instead of some other account.
iv. The banker has paid the bills payable of the customer as per standing instructions.
v. Dishonour of a cheque deposited and discounted bills receivable
In all the above cases, the entry will be first entered in the pass book of the customer. And
the customer will know only after he verifies the entries in the pass book or statement of
account. So there may be a time gap of some days before the customer includes the
entries made in the pass book.
For example, the bank has debited Bharat Company Limiteds account for its charges
amounting to Rs. 250 on March 31, 2003. In case, the bank sends a statement of account
upto March 31, 2003, there will be a difference of Rs.250 between the balance as per the
cash book and the balance as per the pass book.
For example, A cheque for Rs.5,000 dishonoured on March 28, 2003. In case, the bank
sends a statement of account upto March 31, 2003 there will be a difference of Rs.5,000
between the balance as shown by the cash book and the balance as shown by the pass
book.
After tracing the various items of differences, a Bank reconciliation statement is prepared
by starting with the balance shown by any of the two books. But in actual practice, a Bank
reconciliation statement is prepared by the customer starting with the balance as per cash
book and will ensure that the balance as per pass book is arrived at.
Bank overdraft is an amount drawn over and above the actual balance kept in the bank
account. This facility is available only to the current account holders. Interest will be
charged for the amount overdrawn i.e., overdraft. The Cash book will show a credit
balance i.e., unfavourable balance. The pass book will show a debit balance.
9

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
Reasons of difference between cash book & pass book balance:

Cheque issued but not presented for payment: When cheque are issued then
immediately make entry in the cash book. The cheque issued can be presented for
payment to the bank within six month from the date of cheque as per banking law. The
cheques are presented for payment after the expensesiry of the above period then
payment is refused by the bank. This cheque is also known as stale cheque. It is
possible at the time when the balances of the two books are being compared, thus more
chances of causing a disagreement b/w the two balances.

Cheque paid into the bank but not yet cleared: As soon as the cheques are
deposited into the bank, the immediately entry is passed in the cash book. This will make
entry in pass book only when cheques are cleared. It is possible at the time when the
balances of the two books are being compared, thus more chances of causing a
disagreement b/w the two balances.

Interest allowed by the bank: Bank might have credited the account of the
customer with the interest and may have made the entry in the pass book. It is possible
that the entry of such interest may not have been made by the customer in the cash book,
thus causing a disagreement b/w the two balances.

Interest and Bank charges debited by bank: Sometime bank charges interest
from the customer then immediately entry in the pass book but not in cash book. So, in
this case when check the balance b/w cash and bank book then disagreement b/w the two
balances. So, it is the main reason to create difference b/w two books.

Interest, dividend collected by the bank: sometime interest on government

security or dividend on share is collected by the bank and is credited to customer account.
If the entry does not appear in the cash book then balance will differ.

Direct payment by bank: Sometimes, understanding instruction from the clients

certain payment like insurance premium, club fees instalment etc. are made by the
bank. Then this entry is recorded only in the pass book. This entry is made in the cash
book only when the necessary intimation to that effect is received from the bank by the
client. The entries in the cash and pass book may be on different dates.

Direct payment into the bank by a customer: Sometimes, our customer

deposit money direct into the account in the bank. It is only recorded in the pass book not
in the cash book. It is possible at the time when the balances of the two books are being
compared, thus more chances of causing a disagreement b/w the two balances.

Dishonour of bill discounted with the bank: Sometimes, customer gets their
bills discounted with the bank. If the bank is not able to get payment of these bills on the
due date. It will debit the customer account with the amount of the bills together with the
nothing charges if any. The customer will pass the entry in the cash book only. When
balances of the two books are being compared, thus more chances of causing a
disagreement b/w the two balances.

Dishonour of cheque: When the received cheques are deposited into bank, these
are immediately recorded in the cash book. As a result cash book balance is increased. But
10

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
the deposited cheque is dishonoured due to lack of funds or due to other reasons. Bank
does not credit the amount of the depositor; as a result disagreement b/w the two
balances.

Error and omissions: If any error is committed either by the bank or by a

customer in the cash book while recording a transaction in their respective books, it
causing a disagreement b/w the two balances. the error may be:
1.

Undercast/overcast of receipt side or payment side.

2.
3.

Bank charges omitted from the banks or recorded twice in the books.
Wrong carry forward of cash book balance.
Format
The format of Bank Reconciliation Statement when bank balance as per cash book is taken
as the starting point.
Bank Reconciliation Statement as on ..
Particulars

Amoun
t

Amount
`

`
A

Balance as per Cash Book

Add: Cheques issued but not presented for payment

***

Interest credited by bank but not recorded in cash book

***

Debtors directly paid into bank but not recorded in cash

book

***

Wrong credit by banker

***

C
D

***

***

Collections by banker as per customer standing

instructions

***
Total (B)

***
***

(Total A + B)
Less: Cheques deposited but not credited by the bank

***

Dishonoured cheques appeared in the pass book but not

entered in the cash book

***

Bank charges as per pass book

***

Wrong debit by banker

E

***
***
***

Payments as per standing instructions

Total (D)
Balance as per pass book ( C- D )

11

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

Accounting Concepts and Conventions

ACCOUNTING CONCEPT
Accounting Concept defines the assumptions on the basis of which Financial
Statements of a business entity are prepared. Certain concepts are received assumed and
accepted in accounting to provide a unifying structure and internal logic to accounting
process. The word concept means idea or nation, which has universal application.
Financial transactions are interpreted in the light of the concepts, which govern accounting
methods. Concepts are those basis assumption and conditions, which form the basis upon
which the accountancy has been laid. Unlike physical science, Accounting concepts are
only results of broad consensus. These accounting concepts lay the foundation on the
basis of which the accounting principles are formulated.
Now we shall study in detail the various concepts on which accounting is based.
The following are the widely accepted accounting concepts.
1)
Entity Concept:- Entity Concept says that business enterprises is a separate
identity apart from its owner. Business transactions are recorded in the business books of
accounts and owners transactions in this personal back of accounts. The concept of
accounting entity for every business or what is to be excluded from the business books.
Therefore, whenever business received cash from the proprietor, cash a/c is debited as
business received cash and capital/c is credited. So the concept of separate entity is
applicable to all forms of business organization.
2)
Money Measurement Concept:- As per this concept, only those transactions,
which can be measured in terms of money are recorded. Since money in the medium of
exchange and the standard of economic value, this concept requires that these
transactions alone that are capable of being measured in terms of money be only to be
recorded in the books of accounts. For example, health condition of the chairman of the
company, working conditions of the workers, sale policy ect. do not find place in
accounting because it is not measured in terms of money.
3)
Cost Concept:- By this concept, the value of assets is to be determined on the
basic of historical cost. Transactions are entered in the books of accounts at the amount
actually involved. For example a machine purchased for Rs. 80000 and may consider it
worth Rs. 100000, But the entry in the books of account will be made with Rs. 80000 or
the amount actually paid. The cost concept does not mean that the assets will always be
shown at cost. The assets may be recorded at the time of purchase but it may be reduced
its value be charging depreciation.
Many assets de not have acquisition cost. Human assets of an enterprise are an
example. The cost concept fails to recognize such assets although it is a very important
asset of any organization.
4)
Going Concern Concept:- According to this concept the financial statements are
normally prepared on the assumption that an enterprises is a going concern and will
continue in operation for the foreseeable future. Transaction are therefore recorded in
such a manner that the benefits likely to accrue in future from money spent. It is because
of this concept that fixed assets are recorded at their original cost and depreciation in a
systematic manner without reference to their current realizable value.
5)
Dual aspect Concept:- This concept is the care of double entry book-keeping.
Every transaction or event has two aspect. If any event occurs, it is bound to have two
effect. For Rs.50000, on the other hand stock will increase by Rs.50000 and other liability
will increase by Rs.50000. similarly is X starts a business with a capital of Rs. 50000, while
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
on the other hand the business has to pay Rs. 50000 to the proprietor which is taken as
proprietors Capital.
6)
Realization Concept: - It closely follows the cost concept any change in value of
assets is to be recorded only when the business realize it. i.e. either cash has been
received or a legal obligation to pay has been assumed by the customer. No Sale can be
said to have taken place and no profit can be said to have arisen. It prevents business firm
from inflating their profit by recording sale and income that are likely to accrue, i.e.
expensesected income or gain are not recorded.
7)
Accrual Concept:- Under accrual concept the effect of transaction and other
events are recognized on mercantile basic. When they accrue and not as cash or a cash
equivalent is received or paid and they are recorded in the accounting record and reported
in the financial statements of the periods to which they relate financial statement
prepared on the accrual basic inform users not only of past events involving the payment
and receipt of cash but also of obligation to pay cash in the future and of resources that
represent cash to be received in the future. For Example:- Mr. Raj buy clothing of Rs.
50000,a paying cash Rs. 20000 and sells at Rs. 60000 of which customer paid only Rs.
40000. So his revenue is Rs. 60000, not Rs. 40000 cash received. Expenses. Or Cash is Rs.
50000, not Rs. 20000 cash paid. So the accrual concept based profit is Rs. 10000
(Revenue- Expenses.)
8)
Accounting Period Concept:- This is also called the concept of definite periodicity
concept as per going concept on indefinite life of the entity is assumed for a business
entity it causes inconvenience to measure performance achieved by the entity in the
ordinary causes of business. Therefore, a small but workable fraction of time is chosen out
of infinite life cycle of the business entity for measure the performance and loading at the
financial position 12 months period is normally adopted for this purpose accounting to this
concept accounts should be prepared after every period & not t the end of the life of the
entity. Usually this period is one calendar year. In India we follow from 1 st April of a year to
31st March of the immediately following years. Now a day because of the need of
management, final accounts are prepared at shorter intervals of quarter year or in some
cases a month such accounts are know an interim account.
9)
Matching Concept:- In this concept, all expenses. Matched with the revenue of
that period should only be taken into consideration. In the financial statements of the
organization. If any revenue is recognized that expenses. Related to earn that revenue
should also be recognized. This concept as it considers the occurrence of expenses. And
income and do not concentrate on actual inflow or outflow of cash. This leads to
adjustment of certain items like prepaid and outstanding expenses, unearned or accrued
income.
It is not necessary that every expenses. Identity every income. Some expenses are
directly related to the revenue and some are directly related to sale but rent, salaries etc.
are recorded on accrual basis for a particular accounting period. In other words periodicity
concept has also been followed while applying matching concept.
10)
Objective Concept:- As per this concept, all accounting must be based on
objective evidence. In other words, the transactions recorded should be supported by
verifiable documents. Only than auditors can verify information record as true or
otherwise. The evidence should not be biased. It is for this reasons that assets are
recorded at historical cost and shown thereafter at historical lass depreciation. If the
assets are shown on replacement cost basis, the objectivity is lost and it become difficult
for auditors to verify such value, however, in resent year replacement cost are used for
specific purpose as only they represent relevant costs. For example, to find out intrinsic
value of share, we need replacement cost of assets and not the historical cost of the
assets.
ACCOUNTING CONVENTIONS
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
The term Accounting Conventions refers to the customs or traditions which are
used as a guide in the preparation of accounting reports and statements. The conventions
are derived by usage and practice. The accountancy bodies of the world may charge any
of the convention to improve the quality of accounting information accounting conventions
need not have universal application. Following are important accounting conventions in
use:
1)
Convention of consistency:- According to this convention the accounting
practices should remain unchanged from one period to another. It requires that working
rules once chosen should not be changed arbitrarily and without notice of the effect of
change to those who use the accounts. For example, stock should be valued in the same
manner every year. Similarly depreciation is charged on fixed assets on the same method
year after year. If this assumption is not followed, the fact should be disclosed together
with reasons.
The principle of consistency plays its role particularly when alternative accounting
methods is equally acceptable. Any change from one method to another method would
result in inconsistency; they may seem to be inconsistent apparently. In case of valuation
of stocks if the company applies the principle at cost or market price whichever is less
and if this principle accordingly result in the valuation of stock in one year at cost and the
market price in the other year, there is no inconsistency here. It is only an application of
the principle.
An Enterprise should change its accounting policy in any of the following circumstances
only.
(i) To bring the books of accounts in accordance with the issued accounting
standard.
(ii) To compliance with the provision of law.
(iii) When under changed circumstances it is felt that new method will reflect more
true and fair picture in the financial statement.
2)
Convention of Conservatism:- This is the policy of playing sale game. It takes
into consideration all prospective losses but leaves all prospective profits financial
statements are usually drawn up on a conservative basis anticipated profit are ignored but
anticipated losses are taken into account while drawing the statements following are the
examples of the application of the convention of conservatism.
(i)
Making the provision for doubtful debts and discount on debtors.
(ii) Valuation of the stock at cost price or market price whichever is less.
(iii) Charging of small capital items, like crockery to revenue.
(iv) Showing joint life policy at surrender value as against the actual amount paid.
(v) Not providing for discount on creditors.
3)
Convention of Disclosure:- Apart from statutory requirement, good accounting
practice also demands that significant information should be disclosed in financial
statements. Such disclosures can also be made through footnotes. The purpose of this
convention is to communicate all material and relevant facts concerning financial position
and results of operations to the users. The contents of balance sheet and profit and loss
account are prescribed by law. These are designed to make disclosures of all materials
facts compulsory. The practice of appending notes relative to various facts and items
which do not find place in accounting statements is in pursuance to the convention of full
disclosure of material facts. For example;
(a) Contingent liability appearing as a note.
(b) Market value of investments appearing as a note.
The convention of disclosure also applies to events occurring after the balance
sheet date and the date on which the financial statement are authorized for issue. Such
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
events include bad debts, destruction of plant and equipment due to natural calamities,
major acquisition of another enterprises, etc. such events are likely to have a substantial
influence on the earnings and financial position of the enterprises. Their not-disclosure
would affect the ability of the users for evaluations and decisions.
4)
Convention of Materiality:- According to this conventions, the accountant should
attach importance to material detail and ignore insignificant details in the financial
statement. In materiality principle, all the items having significant economics effect on the
business of the enterprises should be disclosed in the financial statement.
The term materiality is the subjective term. It is on the judgment, common sense
and discretion of the accountant that which item is material and which is not. For example
stationery purchased by the organization though not used fully in the concept. Similarly
depreciation small items like books, calculator is taken as 100% in the year if purchase
through used by company for more than one year. This is because the amount of books or
calculator is very small to be shown in the balance sheet. It is the assets of the company.

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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

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