1. Accounting Concepts and
Conventions

2. Introduction
 Concepts are essential ideas that permit
the identification and classification of
phenomena or other ideas
 A concept must state all that the given
class includes and all that it excludes
 Formed primarily by observation and
established through agreement

3. • The American Institute of Certified Public
Accountants have defined the accounting
principle as, “a general law or rule adopted or
professed as a guide to action; a settled
ground or basis of conduct or practice”.
• It may be noted that the definition describes
the accounting principle as a general law or
rule that is to be used as a guide to action.

4. • “Rules governing the foundation of accounting
actions and the principles derived from them have
arisen from common experiences, historical
precedent, statements by individuals and
professional
bodies
and
regulation
of
governmental agencies”.
• Accounting principles, rules of conduct and action are
described by various terms such as concepts,
conventions, doctrines, tenets, assumptions, axioms,
postulates, etc

5. • The term “concept” is used to connote
accounting
postulates
i.e.
necessary
assumptions or conditions upon which
accounting is based.
• The term convention is used to signify customs
or traditions as a guide to the preparation of
accounting statements.

6. ACCOUNTING CONCEPTS
 Business Entity
 the entity is separate and distinct from the owners and the entity
is liable to the owner
 Hence, in a limited liability company, the enterprise is liable to
the owner (shareholder) based on the proportion of the capital
investment (share capital) made by the latter
 Going Concern
 entities have a life of infinite duration, unless facts are known
that indicate otherwise
 the basis of valuation of resources is influenced more by their
future utility to the business entity than by their current market
valuation

7. • Money Measurement Concept
– Accounting records only those transactions
which can be expressed in monetary terms.
– The importance of this concept is that money
provides a common denomination by means
of which heterogeneous facts about a business
enterprise can be expressed and measured in a
much better way.

8.  Matching
– Determining the profits after charging the
expenses of a period with the revenues
earned in the same period
 Realization
– Determines the point of time when revenue
and hence returns (or profits) can be
recognized objectively, unbiased, and with
certainty.

9. • Cost Concept
– All transactions are expressed in terms of
money, i.e. money is considered the
common unit of measurement. The
common economic value of assets and
liabilities is expressed in monetary terms
rather than in terms of any other physical
dimension.

10. • Dual Aspect
– This is the basic concept of accounting.
According to this concept every business
transaction has a dual effect. For example, if A
starts a business with a capital of Rs 1 lakh,
there are two aspects of the transactions.
• On the one hand, the business has an asset of Rs
1 lakh.
• On the Other hand, business has to pay Rs 1 lakh
to the owner.

11. • The properties owned by a business enterprise are referred to as
assets and the rights or claims to the various parties against the
assets are referred to as equities.
• The relationship between the two may be expressed in the form of
an equation as follows:Liabilities = Assets
Liabilities may be subdivided into two principal types: the rights of
creditors and the rights of owners. The rights of creditors
represent debts of the business and are called liabilities. The
rights of the owners are called capital. Expansion of the equation to
give recognition to the two types of equities results in the following
which is known as the accounting equation:
Liabilities + Capital = Assets

12. • It is customary to place `liabilities’ before `capital’
because creditors have priority in the repayment of their
claims as compared to that of owners.
• Sometimes greater emphasis is given to the residual
claim of the owners by transferring liabilities to the other
side of the equation as:
Capital = Assets – Liabilities
All business transactions, however simple or
complex they are, result in a change in the three
basic elements of the equation.

13. • This is well explained with the help of the
following series of examples
(i) Mr. A commenced business with a capital of Rs.3,000:
The result of this transaction is that the business, being
a separate entity, gets cash-asset of Rs.30,000 and
has to pay to Mr. Rs.30,000 his capital. This
transaction can be expressed in the form of the
equation as follows:
Capital =
Assets
(A )
(Cash)
30,000
30,000

14. (ii) Purchased furniture for Rs.5,000:
• The effect of this transaction is that cash is reduced by
Rs.5,000 and a new asset viz. furniture worth Rs.5,000
comes in thereby rendering no change in the total assets
of the business.
• The equation after this transaction will be:
Capital =
Assets
A
Cash + Furniture
30,000
25,000+ 5,000

15. (iii)
Borrowed Rs.20,000 from Mr. G
• As a result of this transaction both the sides of the
equation increase by Rs.20,000; cash balance is
increased and a liability to Mr.G is created.
• The equation will appear as follows:
Liabilities + Capital
=
Assets
Creditors (G) + A
Cash + Furniture
20,000 +30,000
45,000 + 5,000

16. (iv) Purchased goods for cash Rs.30,000.
This transaction does not affect the liabilities side
total nor the asset side total. Only the composition of
the total assets changes i.e. cash is reduced by
Rs.30,000 and a new asset viz. stock worth Rs.30,000
comes in.
The equation after this transaction will be as
follows:Liabilities + Capital
=
Asset
Creditors(G) + A
Cash + Stock + Furniture
20,000+ 30,000
15,000 +30,000+ 5,000

17. • Accounting Period Concept
– According to this concept, the life of business
is divided into appropriate segments for
studying the results shown by the business
after each segment.
– This is because the life of business is
considered indefinite and it is necessary to
know the business situation after a
appropriates interval.

18. Accounting Conventions
•
•
•
•
Conservatism
Full disclosure
Consistency
Materiality

19. Basis of Preparing Accounting
• Cash Basis of Accounting
• Accrual Basis of Accounting

20. Steps in The Accounting Cycle
Analyze
source
documents.
Journalize
transactions in
the general
journal.
Post entries to
the accounts in
the general
ledger.
Prepare a trial
balance.
Prepare financial
statements.

21. THE ACCOUNTING PROCESS
• During the accounting period the accountant
records transactions as and when they occur.
• At the end of each accounting period the
accountant
summarises
the
information
recorded and prepares the Trial Balance to
ensure that the double entry system has been
maintained.

22. Thus the accounting process consists of
three major parts:
(i) the recording of business transactions
during that period;
(ii) the summarizing of information at the
end of the period, and
(iii) the reporting and interpreting of the
summary information

23. • The transactions that takes place in a business
enterprise during a specific period may effect
increases and decreases in assets, liabilities,
capital, revenue and expense items.
• To make upto-date information available when
needed and to be able to prepare timely periodic
financial statements, it is necessary to maintain
a separate record for each item.

24. • An account is a statement wherein information
relating to an item or a group of similar items are
accumulated. The simplest form of an account
has three parts:
– a title which gives the name of the item recorded in
the account
– a space for recording increases in the amount of the
item, and
– a space for recording decreases in the amount of the
item. This form of an account is known as a `T’
account because of its similarity to letter T.

25. DEBIT CREDIT
• The left-hand side of any account is called the
debit side and the right-hand side is called the
credit side.
• Amounts entered on the left hand side of an
account, regardless of the title of the account are
called debits and the amounts entered on the
right hand side of an account are called credits.
• To debit (Dr) an account means to make an
entry on the left-hand side of an account and to
credit (Cr) an account means to make an entry
on the right-hand side.

26. • The words debit and credit have no other
meaning in accounting, though in common
parlance, debit has a negative connotation,
while credit has a positive connotation.
• Double entry system of recording business
transactions is universally followed. In this
system for each transaction the debit amount
must equal the credit amount.

27. Ledger Account
T-Account Format
Account Name
Debit
Credit

28. The T-Account
Increases to the
T-account are
recorded on one
side of the Taccount, and
decreases are
recorded on the
other side.
Account Name
Debit
Credit

29. The T-Account
The side which
increases and
the side which
decreases is
determined by
the type of
account.
Account Name
Debit
Credit

30. What Are Debits and Credits?
• Tools used for recording transactions
– Debit (DR)
– Credit (CR)
• Debit refers to the LEFT and Credit to the
RIGHT side of the T-Account
Account Name
LEFT
DEBIT
SIDE
RIGHT
CREDIT
SIDE

31. Rules of Debit and Credit
• Transactions in accounts are recorded on the
basis of rules of debit and credit. For this purpose
business transactions can be classified into three
categories:– Transactions relating to persons
– Transactions relating to properties and assets
– Transactions relating to income and expenses
On this basis, it becomes necessary for business to keep
account of:
 Each person with whom it deals – PERSONAL ACCOUNTS
 Each property or asset which the business owns- REAL
ACCOUNTS
 Each item of income or expense- NOMINAL ACCOUNTS

32. PERSONAL ACCOUNTS
• Natural Personal Accounts
• Artificial Personal Accounts
• Representative Personal Accounts
Rule:
DEBIT THE RECIVER
CREDIT THE GIVER

33. Example
• Cash paid to Ramesh
– Since rule of Personal Account is DEBIT THE
RECEIVER. In this example, Ramesh is Receiver, so
his account will be debited.
• Cash Received from Mr. G
– Since rule of personal account is CREDIT THE
GIVER, Mr. G account will be credited.

34. REAL ACCOUNTS
• Accounts that belongs to assets, property
ad equipments are called Real accounts.
– Tangible Real Account
– Intangible Real Account
• Rule
DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT

35. Example
• Machine purchased for cash
– In this transaction, there are two accounts
Machine and Cash both are assets .
– By applying rule of Real account “ Debit What
comes in”, Credit What goes out”
– In this transaction Machine is coming in the
Business, so Machine account will be debited and
Cash is going out of business, thus Cash Account
will be credit with the rule that Credit What Goes
Out.

36. Nominal Accounts
• Nominal account include accounts of all
expenses, losses, income and gains.
• Rent, lighting, insurance, dividend, salary are
example of nominal Account.
Rule
– DEBIT ALL EXPENSES AND LOSSES
– CREDIT ALL INCOME AND GAINS
• Important point to note here is that both Real and
Nominal Accounts come in the category of Impersonal
Account accounts. When any prefix or suffix is added to
a Nominal Account, it becomes a Personal Account

37. Few examples
NOMINAL ACCOUNT
PERSONAL ACCOUNT
Rent Account
Rent Prepaid account, Outstanding rent account
Interest Account
Outstanding interest account, Interest received in
advance account, Prepaid interest account
Salary Account
Outstanding salaries account, Prepaid salaries account
Insurance account
Outstanding insurance account, Prepared insurance
account
Commission account
Outstanding commission account, prepaid commission
account

38. Class Exercise
•
•
•
•
•
•
•
•
•
•
From the following transactions identify the nature of account and
also state which account should be debited and which should be
credited:Rent paid
Interest Received
Paid to Suresh
Lighting
Dividend received
Telephone charges paid
Machinery sold
Furniture purchased
Goods purchased
Goods Sold

39. Balance Sheet Model
A = L + C

40. Balance Sheet Model
Debits and credits affect the Balance Sheet
Model as follows:
A = L + C
ASSETS
Debit for
Increase
Credit for
Decrease
LIABILITIES
Debit
for Credit for
Decrease
Increase
Capital
Debit
for Credit for
Decrease
Increase

41. “A L O R E” Acronym
Particular
Debit
Credit
A (ssets)
+
-
L (iabilities)
-
+
O (wners' equity)
-
+
R (evenues)
-
+
E (xpenses)
+
-

42. 2-42
Recording Transactions

Initially, all transactions are recorded in
the General Journal.

Each transaction always affects at least
two different accounts.
 One
account has a debit effect.
 The second account has a credit effect.

This methodology was named “double
entry” accounting by whom?
F.L. Pacioli

43. 2-43
General Journal Page
GENERAL JOURNAL
Page:
Date
Description
PR
Debit
Credit

44. 2-44
Journal Entries
Example 1
On January 1, 2013, ABC Company
started business with a cash of Rs
INR1,00,000.
Prepare the appropriate general journal
entry for the above transaction.

45. 2-45
Journal Entries
Solution 1

Two accounts are affected:
 Cash
is increased by Rs 1,00,000.
 ABC owe Rs 1,00,00 to owner and this
become capital.

46. 2-46
Journal Entries
Solution 1

Two accounts are affected:
 Cash
is increased by Rs 1,00,000.
 Capital is created by Rs 1,00,000.
Description
PR
Debit

47. 2-47
Journal Entries
Example 2
On January 15, 2013, ABC Company
purchases a motor vehicle for Rs19,500
cash.
Prepare the appropriate journal entry
for the above transaction.

48. 2-48
Journal Entries
Solution 2

Two accounts are affected:
 Vehicle
is increased by Rs19,500.
 Cash is decreased by Rs19,500.

49. 2-49
Journal Entries
Solution 2

Two accounts are affected:
 Trucks
is increased by Rs19,500.
 Cash is decreased by Rs19,500.
GENERAL JOURNAL
1
Page:
Date
Description
15-Jan Motor Car
Cash
(Being purchase of truck)
PR
Debit
150
100
Credit
19,500
19,500