Principle of Accounting

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 Definition:

• Accounting is the Business language And it is

viewed as a communication process

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• This process covers three aspects:
• Input
• Process
• Output

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• Input in the form of Economic transactions
and Events

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 Process in Accounting
• Process includes the following:
• Recording
• Classifying
• Summarizing
• Analyzing
• Interpreting
• Communicating

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• Recording: Recording of business transactions
is the first and basic function of accounting.
Recording is originally done in a book called
‘journal’

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 Meaning of Classifying
• Classifying: The recorded transactions are
classified on the basis of the homogeneity in
their nature. The recorded data is classified
with a view to bring transactions of similar
nature to one place. The work of classification
is done in the book known as ‘ledger’

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• Summarizing: It is the presentation of the
classified data in a way, which is
understandable and useful to the various
users of accounting information. This process
leads to the preparation of Financial
Statements

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 Analyzing
• Analysis and Interpretation: The summarized
financial data are analyzed and interpreted in
such a way that the end users can make
meaningful judgment about the financial
position and operational result of the business

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 Communication
• Communication: After having meaningfully
analyzed and interpreted, the accounting
information has to be communicated in
proper form to the proper person

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: Users of Accounting Information
• Users are:
• Owners (share holders/sole traders/partners)
• Providers of finance(Bank/Creditors)
• Managers
• Employees
• Prospective investors
• Government
• Employers
• Citizen

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 ANALYSING AND RECORDING OF
BUSINESS TRANSACTIONS
• Business concern has to record its
transactions according to well devised system.
Book keeping (in elementary stage) and
Accounting (in advanced stage) is the name
given to such system

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 Double Entry System
• Whether bookkeeping tasks are performed manually
by a bookkeeper or electronically by clerks, one thing
remains the same: every business transaction involves
at least two accounts. This is known as double entry
bookkeeping (or "double entry accounting"). Double
entry bookkeeping requires that for each transaction,
one (or more) account must be debited, and one (or
more) account must be credited.
• When both the aspects of a transaction are recorded
then this system is known as Double entry system.

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 Recording of Transactions
• In order to record the transaction, either of
the two approaches can be followed:-
• Traditional approach, or
• Accounting Equation Approach/ Modern
approach

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 Traditional Approach
1.Classification Of Accounts
a) Personal accounts
b) Real accounts
c) Nominal accounts
2.Basic Rules-”Golden rules of Accounting”
a) For Personal accounts Debit the receiver and credit
the giver
b) For Real accounts Debit what comes in and Credit
what goes out
c) For nominal accounts Debit all expenses and Credit all
incomes and gains

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 Modern Approach
1. Classification of Accounts
• The classification of accounts consists of two
types of accounts: (1) balance sheet accounts,
and (2) income statement accounts. Account
categories are generally listed in the following
standardized order:
Assets
Liabilities
Stockholders' (or Owner's) Equity/Capital
Revenues
Expenses

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 Explanation of Accounts
Asset Account
• These accounts relate to tangible or intangible
real assets.
• Land a/c, Building a/c, Cash a/c, goodwill &
patents a/c

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Liabilities Account
• These accounts relate to the financial
obligations of an enterprise towards outsiders.
• Trade creditors, outstanding expenses, long
term & short term loans.

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.Capital Account
• This a/c relate to owner of the enterprise.
• Capital a/c, Drawing A/c

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Revenue Account
• These accounts relate to the amount charged
for goods sold, services rendered or
permitting others to use enterprise resources
yielding interest, royalty or dividend.
• Sales a/c, Discount recd, dividend recd, royalty
recd, interest recd.

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Expenses Account
• These accounts relate to the amount incurred
or lost in the process of earning revenue.
• Purchase, Royalty paid, Interest payable.

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 2.Double Entry Rules
Classification of Accounts Increase Decrease
Assets account Dr. Cr.
Liabilities account Cr. Dr.
Capital account Cr. Dr.
Revenue account Cr. Dr.
Expenses account Dr. Cr.

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 Journal Entries (Recording of
Transactions)
• Meaning of Journal
A Journal is a book in which transactions are
recorded in the order in which they occur i.e. in
chronological order. A Journal is called a book of
prime entry (Also called of original entry) because
all business transactions are entered first in this
book. The process of recording a transaction in
Journal is called Journalizing. An entry made in
Journal is called a Journal Entry

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Steps in Journalizing
Ascertain what accounts are
involved in a transaction?

Ascertain what is the nature of the

accounts involved?

Ascertain which rule of Dr. and Cr. Is

applicable for each of the accounts
involved?

Ascertain which account is to be

debited and which is to be credited?

Make entry

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 . FORMAT OF JOURNAL
Date Particulars L.F Amount (Dr.) Amount(Cr.)
1 2 3 4 5

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 Question
• Do the following events represent business
transactions?
• An employee is dismissed from his job.
• The owner of the business withdraws cash from
the business for his personal use.
• Goods are purchased on credit.
• The owner of the firm dies.
• A prospective employee is interviewed.
• Goods are ordered for delivery for next month.
• Land is purchased for cash.
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 Classify the following accounts:
1. According to traditional approach
2. According to modern approach

Capital bought in Drawings A/c Building purchased Purchases A/c

Sales A/c Carriage inward paid Carriage outward paid Cash received

Cash paid Interest paid Interest received Commission paid

Commission received Discount allowed Discount received Conveyance charges

Sales promotion Entertainment expenses Subscription paid Subscription received

expenses
Light ,power and Telephone and postage Repairs incurred Insurance premium paid
electricity
Bad debts written off Bad debts recovered Printing and stationery Wages and salaries

Furniture and fixtures Bank A/c Sales return Purchases return

Bank overdraft Out standing salary A/c Pre paid rent A/c Interest received in
advance A/c
Interest accrued A/c Travelling charges A/c Current A/c of a partner Loan A/c Of a partner
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Accounting Problems

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 Subsidiary Books
• For a business having a large number of
transactions it is practically impossible to
write all transactions in one journal
• The main journal is sub-divided in such a way
that a separate book is used for each category
or group of transactions which are repetitive
in nature and sufficiently large in number.

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 . Kinds of Subsidiary Books
• The number of subsidiary books may vary
according to the requirements of each business.
The following are the special purpose subsidiary
books.
• Cash book
• Sales day book
• Purchases day book
• Sales return book
• Purchase return book
• Journal Proper

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 . CASH BOOK
• In any business concern, there will be a
number of transactions relating to cash. All
cash transactions i.e. cash receipts and cash
payments of the business are recorded
separately in the cash book. Cash book is a
subsidiary book in which all cash receipts and
all payments are recorded. It plays a double
role of journal as well as ledger

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 . Classification of Cash Book
• Single column cash book
• Double column cash book
• Triple column cash book
• Petty cash Book

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. Simple Cash Book (or) Single Column
Cash Book
• A simple cash book is a cash book which
contains only one column for recording cash
on either side. All cash receipts are recorded
in left hand side i.e. receipt side and all
payments are recorded in the right hand side
i.e. payments side. It is like a Cash Account.

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 Format of Single Cash Book

Debit Side Credit Side

Date Particulars L.F. Amount Date Particulars L.F. Amount

(Rs.) (Rs.)

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 Purchase Book
• It records credit purchase of goods.
• Goods means the merchandise in which the
firm deals in

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 Sales Book
• It records credit sale of goods.
• Goods means the merchandise in which the
Firm deals in.

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 Purchase return Book
• It records goods returned to supplier to whom
goods have been purchased on credit terms.

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 Sales return book
• It records goods returned by customer to
whom goods have been sold on credit terms.

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 : Ledger

• 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.

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 .
Format of Ledger

Date Particulars J.F Amount Date Particulars J.F. Amount

1 2 3 4 1 2 3 4

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 . 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

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 Procedure of posting
• I. Procedure of posting for an Account which has been debited in the
journal entry.
•
• Step 1 - Locate in the ledger, the account to be debited and enter the date
of the transaction in the date column on the debit side.
•
• Step 2 - Record the name of the account credited in the Journal in the
particulars column on the debit side as “To..... (Name of the account
credited)”.
•
• Step 3 - Record the page number of the Journal in the J.F column on the
debit side and in the Journal, write the page number of the ledger on
which a particular account appears in the L.F. column.
•
• Step 4 - Enter the relevant amount in the amount column on the debit
side.

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 Procedure of posting -------
• II. Procedure of posting for an Account which has been credited in the
journal entry.
•
• Step 1 - Locate in the ledger the account to be credited and enter the date
of the transaction in the date column on the credit side.
•
• Step 2 - Record the name of the account debited in the Journal in the
particulars column on the credit side as “By...... (Name of the account
debited)”
•
• Step 3 - Record the page number of the Journal in the J.F column on the
credit side and in the Journal, write the page number of the ledger on
which a particular account appears in the L.F. column.
•
• Step 4 - Enter the relevant amount in the amount column on the credit
side

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 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

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 Balancing
• 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

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 Significance of Balancing
• There are three possibilities while balancing
an account during a given period. It may be a
debit balance or a credit balance or a nil
balance depending upon the debit total and
the credit total.

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 Trial Balance
• A trial balance can be defined as a “statement
of balances or total of debits and credits of all
the accounts in the ledger on a particular date
prepared to test the arithmetic accuracy of
the books kept under Double Entry System.

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 . Rules of preparing the trial balance
• While preparing the trial balance from the given list of
ledger balances, following rules should be taken in to care:-
•
• The name of the business firm is written on the top of the
statement with Trial Balance. Under this we write the date
on which Trial Balance is prepared.
• The balances of all assets accounts, expenses accounts,
losses accounts, drawings accounts and cash and bank
balances are placed in the debit column of trial balance.
• The balances of all liabilities accounts, income accounts,
profit accounts, capital account are placed in credit column
of the trial balance.
• After placing the balances of debit and credit total of both
the side should be reconciled/tallied/balanced

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 Format of Trial Balance:
S.No Name of the Amount(Dr.) Amount(Cr.)
Account

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 : Financial Statements
• . MEANING, NEEDS AND IMPORTANCE OF
FINANCIAL STATEMENTS:
• To find out the profitability of the business (i.e.
profit or loss), we prepare Income Statement
(Trading and Profit and Loss Account). Similarly, to
evaluate financial position of the business, a
statement called Balance Sheet is prepared. In
addition to these, a ‘Statement of Changes in
Owner’s equity (CAPITAL)’ is also prepared, to
know the present capital of the business. These
statements are collectively known as Financial
Statements or Final Accounts

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 INCOME STATEMENT
• Income statement sometimes called “Profit
and Loss Statement” considers all such
expenses and revenues and gives the net
profit made or loss suffered by a business
during a particular period

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 BALANCE SHEET / STATEMENT OF
FINANCIAL POSITION
• Balance Sheet is not an account but only a
statement containing the assets and liabilities
and the capital of a business on a particular
date.

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 INCOME STATEMENT
• Gross Profit/ Gross loss
• The profit arising out of trading alone is called
Gross Profit and if there is loss, it is called
Gross Loss. Gross profit is the excess of Sales
over the Cost of goods sold. If the values of
sales are less than the cost of goods sold then
it is called as Gross Loss

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 Calculation of Gross Profit / Gross
Loss
• Gross profit = Net sales – Cost of goods sold.

• Net sales = Total sales – Sales return.

• Cost of goods sold = Opening stock + Net purchases +

Direct expenses – Closing stock.

• Net purchases = Total purchases – Purchase return.

• Gross loss = Cost of goods sold – Net sales.

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 Net Profit
• The Net profit is the amount the business
earned for the owner during an accounting
year.
• Net Profit = Gross profit + Indirect Income –
Indirect expenses

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 . STATEMENT OF CHANGES IN
OWNER’S EQUITY
• It is a statement which reports information
about how Owner’s equity changes over the
reporting period. It is to be noted that excess
of assets over liabilities represent capital of
the business.

• Capital will be increased with the amount

of profit earned and will be decreased when
there is loss and drawings

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STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)
• A balance sheet is a statement of assets and
liabilities of business prepared with a view to
ascertain the financial position of the business
as on a particular date.
• Balance sheet is based on the equation: Assets
= Liabilities + Owner’s equity

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 Characteristics of Balance Sheet:

• A balance sheet is a statement and not an

account.
• It is prepared on a particular date to show the
assets and liabilities on that date.
• It gives the financial position of the business
as on a particular date.
• Its agreement is a clear proof of the
arithmetical accuracy of the accounts.

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