Amity Business School

Amity Business
School
MBA Class of 2012,
Semester I
ACCOUNTING FOR
MANAGEMENT
Module I

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ACCOUNTING
PRINCIPLES

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DUAL ASPECT CONCEPT

According to this concept,
transaction has a dual effect.

every

business

This system of recording transactions based on

this principle is called as Double Entry System.
Thats why the two sides of the balance sheet are
always equal and the following accounting
equation will always hold good at any point of
time:
Assets =
Equation)

Liabilities

Capital

(Accounting
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ACCOUNTING CONVENTIONS

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FULL DISCLOSURE

All significant information relating to the

economic affairs of

the enterprise should be

completely disclosed. In other words, there should

be sufficient disclosure of information which is of
material interest to the users of the financial
statements such as proprietors, present and
potential creditors, investors and others.

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CONSISTENCY
Accounting principles and methods should
remain consistent from one year to another.
These should not be changed from year to year,
in order to enable the management to compare
Profit & Loss A/c and Balance sheet of different
periods and draw important conclusion about the
working of the enterprise.
But this principle of consistency should not be
taken to mean that it does not allow a firm to
change the accounting methods according to
changed circumstances of the business.
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MATERIALITY
This principle is an exception to the principle of
full disclosure. According to this principle, items
having an insignificant effect or being irrelevant
to

the

user

need

not

be

disclosed.

These

unimportant items are either left out or merged

with

other

items,

otherwise

accounting

statements will be unnecessarily overburdened.

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CONSERVATISM OR
PRUDENCE
All anticipated losses should be recorded in the
books of accounts, but all anticipated or
unrealized gain should be ignored. In other words,
it is a policy of playing safe.
Provision is made for all known liabilities and
losses even though the amount can not be
determined with certainty.
Anticipate no profits but provide for all
possible losses
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DOUBLE ENTRY SYSTEM

Every transaction has two aspects. Double entry
system is a system which recognizes and records
both the aspects of transactions.
Eg: For example: if Mr X starts a business with
capital of Rs 10,000.

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ACCOUNTING EQUATION
Accounting Equation means that the total of
assets will be equal to the total of liabilities side
Expressing as an equation
Assets = Liabilities + Capital
Example:
Mr Y commenced business with capital of Rs. 50,
000.
Assets = Liabilities + Capital
Cash = Liabilities + Capital
50, 000 =
Nil
+ 50, 000

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Mr Y purchased goods from Mr Z on credit for Rs.

20, 000
Assets =
Liabilities
+
Capital
Goods = Creditors
20, 000 = 20, 000
+
0
Govind purchased furniture for cash Rs. 2, 000.
Goods worth Rs 5000 sold for cash of Rs 5000
Goods worth Rs 5000 sold on credit for Rs 5000
Goods costing Rs. 15, 000 sold on credit for Rs.
18, 000.

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Illustration:
Show the Accounting equation on the basis of
the following transactions:
Amit commenced business with cash
90, 000
Purchased goods on Credit
15, 000
Bought goods for cash
12,
000
Withdrew cash for private use from business
5,000
Paid
Salary
10,000
Paid to Creditors
10,
000

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