TOPIC: 2. BASIC TERMINOLOGIES,

ACCOUNTING PRINCIPLES, CONCEPTS AND CONVENTIONS

By Srinivas Methuku.

TOPIC OBJECTIVES:After completion of this topic student should be

conversant with the following:1. Basic terminologies of accounting2. Basis of Accounting3. Accounting principles4. Accounting concepts and conventions

BASIC TERMINOLOGIES OF ACCOUNTING: Business Transaction: Any exchange of

money or money’s worth as goods and services between two parties is called a business transaction

Cash transactions: A transaction that is settled with cash on the same day as the trade.

Credit transaction: Where payment of receipt of money is postponed to a future date.

Non-monetary: The transaction does not involve an exchange of money or money’s worth directly or indirectly

Goods: The commodities or articles in which the trader deals with.

Profit: Income over expenditure during a particular period

Operating profit: it is the excess of gross profit over operating expenses.

Non-operating profit: The excess of non-operating revenues over non-operating expenses.

Normal gain Abnormal gain Income: It is a revenue arising as result of

business transactions.

Assets: Property or any kind owned by a business. Fixed assets / Tangible assets Current assets Fictitious assets / Intangible assets

Liabilities: The amount payable by the business to others. Fixed liabilities / Long term liabilities Current liabilities

Contingent Liabilities:

Net worth: excess of assets over liabilities Capital: The total amount invested by the

owner into the business.Capital = Assets - Liabilities

Drawings: If the owner withdraws any money or goods or assets from the business for personal use.

Debtor: A person who owes money. Creditor: A person to whom money is owning

or payable.

Expenditure: An amount paid for any consideration received by business is called expenditure. Capital expenditure Revenue expenditure Deferred revenue expenditure

Discount: discount is basically a concession is given by a seller to the buyer. Cash discount Trade discount

Solvent: A person who is in a position to pay off all his debts.

Insolvent: A person who is not in a position to pay off

Accounting year Trading concern Not for profit concern Good will

BASIS OF ACCOUNTING: Cash basis Accrual basis Mixed

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAPs are common set of accounting

principles, standards and procedures that companies use while preparing their financial statements.

Sources of Indian GAAPs:i. Company Lawii. Accounting standards and related documents

of ICAIiii. SEBI requirementsiv. Established conventions

ACCOUNTING PRINCIPLES The term ‘Principle’ refers to fundamental

belief or a general truth which once established doesn’t change.

AICPA defines the term ‘Principle’ “as a guide to action, a settled ground or basis of conduct or practice.”

Accounting principles are the guidelines to establish standards for sound accounting practices and procedures in reporting the financial status and periodic performance of a business.

Accounting principles are categorized as accounting concepts and conventions

ACCOUNTING CONCEPTS AND CONVENTIONS Accounting concepts: it may be consider as

postulates i.e., basic assumptions or conditions upon which the science of accounting is based.

Accounting conventions: The term ‘convention’ denotes circumstances or traditions which guide the accountants

ACCOUNTING PRINCIPLES

Accounting Concepts

• Business entity• Money

measurement• Going concern• Cost• Dual aspect• Accounting period• Matching• Realization• Objective of

evidence• Accrual

Accounting Conventions

• Consistency• Full disclosure• conservatism• Materiality

WHAT DO YOU KNOW ABOUT ACCOUNTING EQUATION?

Assets = Liabilities

Assets = Liabilities + Capital

You are required to complete the gaps in the following table.

Assets Liabilities Capital 1 25,000 3,600 ?2 56,000 9,800 ?3 33,600 ? 25,0004 39,200 ? 32,9005 ? 12,600 38,4006 ? 23,300 79,500

ACCOUNTING EQUATION EXERCISE: Krishna started business with cash 1,00,000 Borrowed from Anil 50,000 Paid salary 20,000 Purchased goods on credit 40,000 Received interest of 25,000

ACCOUNTING EQUATION EXERCISE: Show the accounting equation on the basis of

the following transaction:i. Mohan commenced business with 70,000ii. Withdrew for private use 1,700iii. Purchased goods on credit 14,000iv. Purchased goods for cash 10,000v. Paid wages 300vi. Paid to creditors 10,000vii. Sold goods on credit for 15,000viii. Sold goods for cash (cost price is 3,000) 4000ix. Purchased furniture 500

ACCOUNTING EQUATION EXERCISE: Show the accounting equation for the

following transactions of Hitesh for the year 2013:a) Hitesh started business with cash 2,50,000b) Purchased goods on credit 24,000c) Purchased goods for cash 4,000d) Purchased furniture for cash 1,500e) Withdrew for private use 1,000f) Paid rent 3,000g) Received interest 1,000h) Sold goods on credit (cost 1,500) 1,700i) Paid to creditors 4,000j) Paid salaries 2,000

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