Twelve Accounting Principles

• Money measurement • Provisions

• Business entity • Time period
• Going concern • Realisation
• Value equals costs • Conservatism
(Prudence)
• Dual aspect • Consistency
• ‘Accruals’ or • Materiality
‘matching’ concept
 The dual aspect of
accounting transactions
Sum of assets = Sum of liabilities
Total assets = Current assets + Fixed assets +
+ Investments + Patents and other deferred
revenue expenditure
Total liabilities = Capital + Reserves + Loans
+ Expenses not paid for or provisions +
Creditors for materials/goods/services
 Dual aspect of accounts (contd.)
What is the dual aspect of accounting
transaction?
Any accounting transaction affects not one
accounting head but two accounting heads.
Example - Creditor outstanding is paid by
means of cheque drawn on current account
with a bank. The level of creditors comes
down due to this payment (liabilities) while
the level of bank balance also comes down
(assets)
 Dual effect of accounting
transaction- examples (contd.)
You introduce capital and pay off bank
liability with that amount
Effect - The capital that has been introduced
increases the liability to the owners while
the reduction in bank liability reduces bank
borrowing to the same extent.
 Dual effect of accounting
transaction (contd.) - examples
Income already received, but a part of it or whole of
it pertains to the next accounting period - income
received in advance
You have an outstanding debtor to the extent of Rs. 1
lac. The outstanding bill gets paid and you deposit
the cheque in your current account.
Effect - The outstanding debtors reduce to nil (asset)
and the current account balance gets increased by
Rs.1lac (another asset)
 Dual effect of accounting
transaction - examples (contd.)
You make payment of a car repairs bill in
cash.
Effect - Expenditure for the year increases -
Expense account is affected
Cash account is affected as cash has been
given out.
 Dual effect of accounting
transaction- examples (contd.)
Rent income is received in cash.
Effect - Income level goes up for the
accounting period
Since cash has been received the cash balance
also goes up.
Thus in all the examples that we have seen, two
account heads invariably get affected. That is
why it is called double entry book-keeping.
 Accrual system of accounting
• Accounting period is of importance for
recognising an expense or income. Whether cash
has been spent or come in is of no consequence
• As a result of this, we have four important
account heads in the balance sheet of the
company at the end of the accounting period
 Accrual system of accounting
The important account heads in the balance
sheet arising out of the accrual system of
accounting are:
• Expense already met, but a part of it or
whole of it pertains to the next accounting
period - pre-paid expense
 Accrual system of accounting
• An expense pertaining to the current accounting
period but not yet met - it has to be booked as
an expense during this period. Called by
different names, provision, accrued expenses
etc.
• An income pertaining to the current accounting
period but not yet received - it has to be booked
as an income during this period. Called accrued
income.