Accounting Concepts AND IMPORTANT QUESTONS

The following are the generally accepted Accounting Assumptions. 1) a) Concepts at the recording stage. These are concepts to be observed at the recording stage of transaction i8n books of account. They are discussed in brief below. Business Entity Concept. Accounting treat business as different from the person who owns it. Without such a distinction the affairs of the business would be mixed up with private affairs of the owners and the true picture of the financial position of the business and its profit will not be available. Dual Aspect Concept. Each transaction in accounts has two aspects which are expressed as Debits and Credits and are recorded in the books of the account accordingly. This principle is the Core of Double Entry System of Book Keeping and if it is observed strictly, the system of recording transactions in books of account is called Double Entry System of Book Keeping money measurement Concept. Accounting records only those transactions which can be recorded in monetary terms . Cost concept. As per this concept transactions are recorded at the amount involved while assets are always recorded at cost. For eg one book of Rs50/ is bought for Rs100/ by mistake then also the entry in the books of the books of account is to be made at the cost price ie Rs100/ Objective evidence concept. According to this concept all transactions recorded in the books of accounts should be evidenced and supported by objective documentary evidence. Historic record concept. Transactions are recorded in the books of account as and when they take place. Ie in chronological manner date wise.

b)

c) d)

e)

f)

2) Concept at reporting stage These are concepts to be observed at the reporting stage ie the time of preparation of final accounts from the transactions recorded in the books of account. They are a) Matching cost against Revenue concept. Accounting records at the same time and at the same period not only the income but all the expenses incurred to earn the income. Thus it matches the income with the cost incurred to earn it before showing any profit or loss of that activity.

b) Accrual concept. Accounting is normally done on accrual basis. Ie income and expenses are recorded as and when they become due and not as and when they are actually paid and received. However this concept is not followed by Banks to day. Bans recognize interest income on loans only when cash is received from the borrower. c) Going concern concept. Accounting presumes that the business will exist for a long time and its o wners are not desirous of closing it. d) Accounting period concept. When accounts are prepared generally for a period of 12 months in India, this period is normally 1st April to 31st March of the next colander year. This concept is important as it provides a cut off for measurement of profits in the otherwise continues business process. 3) Accounting conventions. This is an accepted accounting principle. The following are the Accounting conventions. a) Consistency, Accounting systems should be consistent Let us say a company is adopting straight line method of depreciation then it should follow the same method consistently all the years. b) Disclosure. Significant accounting systems should be disclosed while preparing accounts. c) Conservatism. All future losses should be accounted in the year itself. But all the expected income are not accounted for till realization. d) Materiality A good accounting practice should disclose all the material events, policies etc used in the preparation of financial statement.

Common Accounting system for Primary Agricultural Credit Society (PACS) PACS is a business entity undertaking credit and non credit business. Non Credit business of PACS are divided into five broad groups depending up on the nature of activities and materials the PACS deal in. These groups are for trading in i) ii) iii) iv) v) Agricultural inputs. PDS commodities Non PDS consumer items Food grains and other commodities under procurement schemes Socially relevant schemes like Mid Day Meal Scheme. Double entry system.

Every business transactions involves transfer of money from one account to another and thus the transfer necessarily involves two accounts in opposite directions. The Double entry systems of Book Keeping records both aspects of every transaction and therefore follows the rule that every debit must have a corresponding credit and vice versa. This rule helps to check the arithmetical accuracy of records by preparing the Trial Balance statement. Accounts maintained under the single entry system record only one aspect of the transaction and the record is therefore incomplete . Certain rules must be observed in recording transactions under double entry system. The two elements of every transaction must be grouped under three types of accounts and each type of account has its ru8le for recording the debit and credit aspect of the transaction. The two principal type of accounts are one personal accounts and other Impersonal accounts. Personal accounts are subdivided into a) Real or asset accounts and b) nominal accounts. Personal account contains record of transaction with a person that could be an individual group or society banks etc. Real accounts are accounts of properties or assets and contain a record of purchases and sales of the properties or assets like land building goods cash etc. Nominal accounts are accounts of expenditure and income and record gains and losses. The accounting rules to be followed for the three types of accounts are.

Type of Accounts Personal Real Nominal

Rules of entry. Debit Credit. Receiver Giver What comes in What goes out Expenses and losses Incomes and gains.

The following are the most important aspects in any double entry accounting system, Trial Balance, Trading Account and Profit and Loss Account, General Ledger Capital, Assets, Liabilities, Creditors, Debtors, Sales,

Purchases, Drawings, Purchase Returns, Sales Returns, Stock, Income, Expenses etc., Various Assumptions viz Accounting Entry, Money Measurement, Accounting period, Going concern. Basic concepts like Double Entry, Revenue Realization concept, Historical cost concept, Period matching concept, Full disclosure concept, Evidence concept etc., Modifying principles like Cost benefit, consistency, materiality, etc., Double entry concept like Debit Aspect, Credit Aspect

Golden rules of Accountancy viz Type of Accounts Personal Real Nominal Rules of entry. Debit Credit. Receiver Giver What comes in What goes out Expenses and losses Incomes and gains.

Some questions with answers on Accountancy Write down Journal entries. 1) Mr Rama gives a cheque to LIC for Rs 1000/- in his SB account. The cheque is presented by LIC who are also having a current account with your branch. DEBIT- SB Account of Rama-------Rs1000 CREDIT- Current account of LICRs1000 2) Mr.Naren deposits Rs 2000 in his RD account

Debit Credit

--------- cash a/c Rs2000 ----------RD a/c Rs2000

3) M/s Varma &co remit cash Rs 10000 into their current a/c. Debit------------------cash a/c Rs10000 Credit----------------- Current a/c of Varma & co Rs10000 4) John gives a cheque for Rs 500 in his SB account and wants cash Debit-----SB a/c of John Rs 500 Credit-----cash a/c Rs500 1) VOC College maintain SB a/c. issues a cheque for RsTwo Lakhs with instructions to credit SB accounts of ten Lecturers a/c with Rs20000 each. Here we have to debit VOC College a/c with Rs 2 Lakhs and credit the SB a/c of 10 Lecturers with Rs20000/ each. In this one transaction gives rise to 11 changes. 1) A company may give instruction to debit their current a/c and credit salary for 1000 employees. Here one debit may give rise to 1000 credits under Double Entry. 2) Mr .Navin remits Rs 1025 for buying a Demand Draft payable at Chennaii. Debit Cash Rs1025/ Credit NBO Rs1000/ Credit Commission (Exchange) on DDS issued Rs 25/ 3) The Bank want to buy a Tube light for your branch at a cost of Rs 150/ Debit- Charges Expenditure A/c-Rs150/ Credit cash a/c Rs 150/(The bills from the shop should be attached to the Debit voucher. Later on all entries may undergo Inspection or Audit. This is Evidence). In all the above one transaction have given rise to many changes in different accounts also. The following learning points may be discussed during Group presentation on the case study. Case study on preparation of a Balance sheet. From the following particulars extracted from the books of accounts of M/s XYZ PAC at the close of the year ended 31.3.2010 prepare a Balance Sheet as on that date in order of liquidity. Particulars Savings Deposit Amount in Rs 50000

Business Premises Furniture and Fixtures Sundry Debtors Sundry Creditors Current Deposit Bills purchased Investments Cash on Hand Balance with SBI Term Deposit Cash Credit Term Loan

25000 8000 1200 1500 15800 9700 10,000 250 1500 11050 6000 16700

Solution of Balance sheet case study Balance Sheet of XYZ PAC as on 31.3.2010.

Liability Savings Bank account

Amount Asset in Rs 50000 Cash in Hand

Amount Rs

in 250

Balance with SBI Current Deposit Account. Term Deposit Sundry Creditors 15800 Investment 11050 Loans and advances 1500 Cash Credit Bills purchased Sundry Debtors Business premises Furniture and Fixtures 78350 Total

1,500 10,000 16,700 6,000 9,700 1,200 25,000 8,000 78350

Total

Questions with Answers for few questions. 1) Dual aspect concept means recording of ------------ effect5 of a transaction (Ans Double) 2) In Business transactions are --------- is the common unit of measurement (Ans Money) 3) Single entry system of recording transactions in Books is not a scientific one. True or false (Ans True. ) 4) Account in the name of Shri Mukesh is ----- Account (Ans Personal) 5) Motor car account is --------- (Ans Real ) 6) debit what comes in is the rule for real accounts as per Golden Rule of Accountancy True or false ( Ans True) 7) In respect of personal; accounts the rule is debit the receiver and credit the giver. True or false (ans True) 8) In Double entry accounting system all transactions are recorded in cash book. True or false (Ans True) . 9) Bank account is a personal account True or false (Ans True) 10) Journal is Book of original entry. True or false (Ans True) 11) Accounting refers to the art of recording the business transactions in an analytical form. True or false Ans True 12) Accountancy and book keeping are the same True or false Ans False. 13) In -------- method of accounting profit represents excess of receipts over expenditure. Ans Cash Questions Book keeping means Accounting Answers. System of maintaining book of accounts. Includes Book keeping balancing of books /accounts , preparation of final accounts and drawing conclusion. Process of accounting for cost

Cost accounting

Management Accounting

Concerned with supply of useful information to the Management to enable to take useful decision. Business entity Business is treated as a separate entity from the owners/ proprietor. Money measurement All business transactions are measured in terms of money. Objective evidence Bills , Cash memo Cheque book , vouchers etc are objective evidence for recording an entry. Dual aspect Each transactions have two effect. Going concern Business entity has indefinite life of existence. Journal Book of original entry. Journalising The process of recording transactions in a journal. Capital account is ---- Account Personal Account Amount invested in business by its Capital. owner is known as A book which contains all accounts Ledger A process of transferring transactions Posting from Journal into ledger account A statement as on a particular date Trial Balance showing all the ledger balances.

1) Ledger is the ----- book of accounts. Ans Principal 2) Every entry must be posted into ------ Ans ledger 3) The difference between the two sides ofn account is called --- Ans Balance 4) A person who owes some thing is called ----- Ans Debtor. 5) A person to whom some thing is owed is called --- Ans Creditor. 6) The left hand side of the account is called ---- Ans Debit side 7) The right hand side of the account is called ---- Ans credit side 8) A debit in the nominal account denotes --- Ans Expenses. 9) Balancing of all the accounts must be done at end of ---- Ans Same day. 10) Total of debit side is greater than credit side.This means Ans Debit balance

Question on Trial Balance. On 31st march , the total bebit and Credit sides of various ledger accounts and receipts and payment sides of Cash and Bank column of cash book of Shri Baghavan Das were as under Total of Debit side. 10,000 25,000 15000 1,90,000 Nil 6,000 13,000 12,000 3,05,000 2,00,000 1,00,000 2,81,000 43,000 Name of the account. Bhagavan Das Capital Drawings Stock on 31.3 1996 Purchases Purchase returns Sales Sales returns Expenses Customers Suppliers Car Central Bank Cash Total of Credit side. 1,35,000

4,000 18,000 2,45,000 -nil 2,50,000 2,35,000 2,75,000 38,000

You are asked to prepare a Trial Balance of Shri Baghavan Das as on that date. Solution. Gross Trial Balance as on 31.3.1996 Name of the account Bhagavan Das Capital Drawings Stock on 31.3 1996 Purchases Purchase returns Sales Sales returns Expenses Customers Suppliers Car Central Bank Cash Total LF Debit 10,000 25,000 15000 1,90,000 --6,000 13,000 12,000 3,05,000 2,00,000 1,00,000 2,81,000 43,000 12,00,000 Credit. 1,35,000 --4,000 18,000 2,45,000 ---2,50,000 2,35,000 2,75,000 38,000 12,00,000

Entry level and Exit level Test. 1) Dual aspect concept means recording of ------------ effect5 of a transaction 2) In Business transactions are --------- is the common unit of measurement 3) Single entry system of recording transactions in Books is not a scientific one. True or false 4) Account in the name of Shri Mukesh is ----- Account 5) Motor car account is --------6) debit what comes in is the rule for real accounts as per Golden Rule of Accountancy True or false 7) In respect of personal; accounts the rule is debit the receiver and credit the giver. True or false 8) In Double entry accounting system all transactions are recorded in cash book. True or false . 9) Bank account is a personal account True or false 10) Journal is Book of original entry. True or false

Answers to the Entry level Test questions. 14) Dual aspect Double) concept means recording of ------------ effect5 of a transaction (Ans

15) In Business transactions are --------- is the common unit of measurement (Ans Money) 16) Single entry system of recording transactions in Books is not a scientific one. True or false (Ans True. ) 17) Account in the name of Shri Mukesh is ----- Account (Ans Personal) 18) Motor car account is --------- (Ans Real ) 19) debit what comes in is the rule for real accounts as per Golden Rule of Accountancy True or false ( Ans True) 20) In respect of personal; accounts the rule is debit the receiver and credit the giver. True or false (ans True) 21) In Double entry accounting system all transactions are recorded in cash book. True or false (Ans True) . 22) Bank account is a personal account True or false (Ans True) 23) Journal is Book of original entry. True or false (Ans True)