Accounting

Concepts,
Conventions &
Principles
Dr. Jatin Pancholi
Website: http://www.jatinpancholi.com
Dr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a management situation. The
handling of a management situation requires personal guidance by a professional. To obtain copies, request
permission to reproduce and to send feedback, please contact on website http://www.jatinpancholi.com. Those
wishing to co-author next edition of this handout may also contact. 1
 Accounting Information
System
Information Information Information Information
identification recording analysis reporting
MEANINGS
1. Concepts
2. Conventions
3. Principles

3
CONCEPTS
1. Accrual Basis
2. Going Concern
3. Prudence (Conservatism)
4. Balance Sheet Equation
(Equivalence)
5. Accounting Period

4
CONCEPTS…(2)
♦ (1) Accruals concept : revenue and
expenses are taken account of when they
occur and not when the cash is received or
paid out;

5
CONCEPTS…(3)
♦ (2) Going concern : it is assumed that the business
entity for which accounts are being prepared is
solvent and viable , and will continue to be in
business in the foreseeable future;
♦ (3) Prudence concept : revenue and profits are
included in the balance sheet only when they are
realized (or there is reasonable 'certainty ' of
realizing them) but liabilities are included when
there is a reasonable 'possibility' of incurring
them. Also called conservation concept.

6
CONCEPTS… (4)
♦ (4) Accounting equation : total assets of an
entity equal total liabilities plus owners'
equity ;
♦ (5) Accounting period : financial records
pertaining only to a specific period are to be
considered in preparing accounts for that
period

7
CONVENTIONS
1. Historical Costs
2. Monetary measurement
3. Separate Entity
4. Realisation
5. Materiality

8
PRINCIPLES
1. Understandability
2. Relevance
3. Consistency
4. Comparability
5. Reliability
6. Objectivity

9
ACCOUNTING EQUIVALENCE
Assets = Owner’s Equity +
Outside Liabilities

A = OE + OL

10
BALANCE SHEET
♦ BS is a ‘position’ statement.
♦ BS describes
– the financial position of assets & liabilities
– of the firm
– as on a particular date

11
DEFINITION: BS

♦Balance Sheet is defined as

– a statement of the financial
position
– of an enterprise
– as at a given date, which exhibits
– assets, liabilities, capital, etc.

12
 HORIZONTAL FORM OF BS
Amount Amount
LIABILITIES ASSETS
(£) (£)
Fixed Assets-Land,
Capital XX XX
Bldg,
Loan taken XX Current Assets
Current Liabilities •Cash / Bank B/s XX

•Accounts Receivable
•Outstanding Expenses XX XX
(Debtors)
•Bank Overdraft XX •Bills Receivable) XX

•Accounts Payable
XX •Inventories (Stock) XX
(Creditors)

XYZ XYZ
13
 VERTICAL FORM OF BS
SOURCES OF FUNDS Amount (£) py Amount (£) cy
Share Capital AA XX
Reserves & Surplus AA
Secured Loans AA XX
Unsecured Loans AA XX

ABC XYZ
APPLICATION OF FUNDS Amount (£) py Amount (£) cy
Fixed Assets Gross Block
AA XX
- Depreciation
Investment AA XX
Current Assets – Current Liabilities AA XX
Loans & Advances AA XX
Miscellaneous Expenditure AA XX

ABC XYZ
14
 A = OE + OL
Assets are properties or economic
Liabilities are
resources owned by a business. They are
obligations of the
expected to provide future benefits to the
business. They
business.
are claims
against the
assets of the
business.

Equity is the
owner’s claim on
the assets of the
business. It is the
residual interest in
the assets after
deducting
liabilities.

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 A = OE + OL

Amount Amount
LIABILITIES ASSETS
Capital XX Fixed Assets-Land, Bldg, XX
Loan taken XX Current Assets
Current Liabilities Cash / Bank B/s XX
Accounts Receivable
Outstanding Expenses XX XX
(Debtors)
Bank Overdraft XX Bills Receivable) XX
Accounts Payable (Creditors) XX Inventories (Stock) XX

XYZ XYZ
16
A = OE + OL
Amount Amount
SOURCES OF FUNDS py cy
Share Capital AA XX
Reserves & Surplus AA
Secured Loans XX
Unsecured Loans XX
XX
Amount Amount
APPLICATION OF FUNDS (£) py (£) cy
Fixed Assets Gross Block
- Depreciation
Investment
Current Assets – Current Liabilities
Loans & Advances
Miscellaneous Expenditure
17
 PROOF: A = OE + OL
Owners of Scox Company contributed
£20,000 cash to start the business.

The accounts involved are:

(1) Cash (asset)
(2) Owner’s Equity (equity)

18
 Transaction Analysis
Owners of Scox Company contributed
£20,000 cash to start the business.

19
Transaction Analysis
Purchased supplies paying £1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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Transaction Analysis
Purchased supplies paying £1,000
cash.

21
Transaction Analysis
Purchased equipment for £15,000
cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

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Transaction Analysis
Purchased equipment for £15,000
cash.

23
Transaction Analysis
Purchased Supplies of £200 and
Equipment of £1,000 on account.

The accounts involved are:

(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

24
Transaction Analysis
Purchased Supplies of £200 and
Equipment of £1,000 on account.

25
 Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.

Now let’s look at transactions

involving revenues and expenses.
26
Transaction Analysis
Rendered consulting services
receiving £3,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

27
Transaction Analysis
Rendered consulting services
receiving £3,000 cash.

28
Transaction Analysis
Paid salaries to employees, £800
cash.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)

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Transaction Analysis
Paid salaries to employees, £800
cash.

30
Transaction Analysis
Borrowed £4,000 from SBI

The accounts involved are:

(1) Cash (asset)
(2) Notes payable (liability)

31
Transaction Analysis
Borrowed £4,000 from SBI

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Financial Statements
Prepare the Financial Statements reflecting
the transactions we have recorded.

33
Income Statement
TheScox’s net
net income
income is the
of £2,200
difference
increases
between
Scox’s
Revenues equity
and
by £2,200.
Expenses.

34
 Balance Sheet
The balance sheet
reflects Scox’s
financial position at
March 31 2001

35
 DOUBLE ENTRY SYSTEM

A = OE + OL
Debit = Credit
In the double-entry accounting system,
every transaction is recorded by equal
amounts of debits and credits.
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 ACCOUNTANT’S LIFE
A = OE + OL
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - + 37
ACCOUNTING CYCLE
1. Business Transaction
2. Transaction is recorded in document
(Voucher / Receipt)
3. Analyze the transaction – location ?
4. Journal Entry
5. Ledger Accounts (or ‘T’ account)
6. Trial Balance
7. Balance Sheet, P&L A/c, Cash Flow
Statement 38
 ACCOUNTANT’S ROUTINE

Source
Transaction documents Analyze

Balance Sheet
Prepare a trial Post to the Journal Entry
P & L A/c ledger
balance
Cash Flow
39
 ACCOUNTANT’S ROUTINE

Source
Transaction documents Analyze

Balance Sheet
Prepare a trial Post to the Journal Entry
P & L A/c ledger
balance
Cash Flow
40
TRANSACTION-1
Chirag started business with cash £
30,000.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s Equity (equity)

41
TRANSACTION-1
Chirag started
ASSETS business with cash £
EQUITIES

30,000.
The accounts involved are:
Debit
(1) Cash (Credit
asset) Debit Credit
-
(2)+Owner’s Equity (equity)- +

42
TRANSACTION-1 - LEDGER

43
Thank You Now, was that debits to
the left or credits to the
left?
I sure wish I had paid
more attention in class!

Dr. Jatin Pancholi

Website: http://www.jatinpancholi.com
Dr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a management situation. The
handling of a management situation requires personal guidance by a professional. To obtain copies, request
permission to reproduce and to send feedback, please contact on website http://www.jatinpancholi.com. Those
wishing to co-author next edition of this handout may also contact. 44