PRINCIPLES OF ACCOUNTANCY

Introduction
Accounting Accounting

is the language of business. information has to be suitably classified, summarized and

recorded,

presented.

Accounting Concepts
Accounting adopts the following concepts in recording of accounts,
Business Entity Concept Going Concern Concept Money Measurement Concept Accounting Period Concept

Important Terms
Capital

It means the amount which the proprietor has invested in the firm

In a running business the excess of the assets over the liabilities is known as capital

It is a liability to its proprietor

Assets
It It

is what the business owns is amount spent in acquiring of some property or

benefit of a lasting nature or something that can be converted into cash

Assets

can be classified as Fixed assets and

Current assets Liabilities

Denotes

any amount which a business concern

has to pay legally

Expenses
It

means amount spent on any item by the trader

to acquire benefit out of it.

The expense is classifies into,
Capital

expenditure- spent to increase the earning

capacity of business or acquisition of assets

Revenue

expenditure- spent on the maintenance

of the earning capacity

Goods

The things which a trader sells are called goods

Drawings

It refers to withdrawal of money (cash) or moneys worth (goods) by the proprietor of the business for his personal use.

Debtor

A person who receives a benefit without giving money or

moneys worth immediately, but liable to pay in future

course or in the in due course of time.

A person can be a individual or firm

Creditor

A person who gives a benefit without receiving

money or moneys worth immediately but to claim in

the future is a creditor.

Transaction

It denotes the business transactions

A business transaction is the occurrence of an event or of a condition that must be recorded. It involves two activities between two businessmen

Account
It

is a clear and concise record of the transaction

relating to a person of a firm or a property or a

liability or an enterprise or an income or expense

Narration
It

is a written under each journal entry for a

precise explanation of the transaction.

Dual Aspect Concept

Each transaction has two aspects, Debit aspect & Credit aspect If a business has acquired an asset it must have resulted in one of the following,
1. 2.

Some other asset has been given up There has been a profit, leading to an increase in the amount that the business owes to the proprietor The proprietor has contributed money for the acquisition of the asset
Any time,

3.

ASSETS = LIABILITIES + CAPITAL CAPITAL = ASSETS - LIABILITIES

Book Keeping
A

systematic record of daily activities of a

business is to present a complete financial picture is known as accounting.

In
1. 2.

its elementary stages as Book-Keeping

SINGLE ENTRY SYSTEM OF BOOK KEEPING DOUBLE ENTRY SYSTEM OF BOOK KEEPING

Types of Accounts
Personal Account Real or Asset Account Nominal Account Related to expenses and

Individual account
Company account Capital account Withdrawal a/c Bank account

Cash account
Purchase a/c Furniture a/c Land account Sales account

losses & income and

gains Rent account

Commission a/c
Salary account Insurance premium account

Golden Rules
Debit Personal a/c Real a/c The receiver What comes in Credit The giver What goes out

Nominal a/c

All expenses and loses

All incomes and gains

Rule for Personal Account

If, Mahendra gives Rs.2000 to the business
Then

it is said that Mahendra has some honor

or reputation in the eyes of business.

His

account will therefore will be credited.

Credit Credere (latin)- means believe

Then Debit Debere- means to owe

Rule for Real Account

If

the storekeeper of the business received

goods or furniture.
Storekeeper

is acting on behalf of the business

and does not owe any amount to business.

Thus

the account representing the thing is

debited.

Rule of expenses
Supposing

cashier pays cash for rent.

Then

as per the second rule the cashier is not

the giver of cash and instead of his account,

cash account will be credited.

DEBIT......NATURE OF A/Cs.......CREDIT Increase.........ASSETS........Decrease Decrease......LIABILITIES......Increase Decrease.........REVENUE.......Increase Decrease.........EQUITY........Increase Increase........EXPENSES.......Decrease Two entries are made in each balanced transaction, a debit and a credit.

This allows the accounts to be balanced to check

for entry or transaction recording errors.

 Generalize

the following transaction and post them to various ledger a/c and prepare trial balance,(for 2002)
Apr1
Apr2 Apr5 Apr8 Apr10 Apr15 Apr18

Commenced business with cash

Purchased m/c from X Purchased furniture from Y Cash paid to Y Cash paid to X Cash Sales Sold goods to S

2,00,000
1,50,000 30,000 29,000 30,000 50,000 7000

Apr28
Apr30

Paid salaries
Paid rent

5000
4000

Solution :LEDGER A/C

CAPITAL A/C Date Particulars L Amount F 2,00,000 Date Apr 1 May 1 Particulars By Cash a/c By balance b/d L Amount F 2,00,000 2,00,000

Apr 30 To balance c/d

MACHINE A/C Date Apr 2 May 1 Particulars To Xs A/C To balance c/d L Amount F 1,50,000 1,50,000 Date Particulars L Amount F 1,50,000

Apr 30 By balance c/d

FURNITURE A/C
Date Apr 5 May 1 Particulars To Ys A/C To balance b/d Particulars To cash A/C L Amount F 30,000 30,000 Date Particulars L Amount F 30,000

Apr 30 By balance c/d

Ys A/C
Date Apr 8 L Amount F 29,000 Date Apr 5 Particulars By furniture a/c L Amount F 30,000

Apr 30 To balance c/d

1,000
May 1 By balance b/d 1000

Xs A/C
Date Particulars L Amount F Date Particulars L Amount F

Apr 10 To cash A/C

Apr 30 To balance c/d

30,000
1,20,000

Apr 2

By machine a/c

1,50,000

May 1 By balance b/d

L Amount F Date Particulars

1,20,000

SALES A/C
Date Particulars L Amount F 50,000 7000 57,000

Apr 15 By cash a/c Apr 30 To balance c/d 57,000 Apr 18 By Ss a/c May 1 By balance b/d

Ss A/C
Date Particulars L Amount F 7000 7,000 Date Particulars L Amount F 7,000

Apr 18 To Sales a/c May 1 To balance b/d

Apr 30 By balance c/d

SALARY A/C Date Particulars L Amount F 5000 Date Particulars L Amount F 5,000

Apr 28 To Cash a/c

May 1

To balance b/d

5,000

Apr 30 By balance c/d

RENT A/C Date Particulars L Amount F

4000 4,000

Date

Particulars

L Amount F
4,000

Apr 30 To Cash a/c May 1 To balance b/d Particulars

Apr 30 By balance c/d

CASH A/C Date Apr 1 L Amount F 2,00,000 50,000 2,50,000 1,82,000 Date Apr 8 Apr 10 Apr 28 Apr 30 Particulars By Y a/c By X a/c By salary a/c By Rent a/c L Amount F 29,000 30,000 5,000 4,000 68000 1,82,000

To Capital a/c Apr 15 To Sales a/c

May 1

To balance b/d

Apr 30 By balance c/d

TRIAL BALANCE
Sl.No. Particulars 1 2 3 4 Capital a/c Machine a/c Furniture a/c Ys a/c Debit balance ---1,50,000 30,000 --Credit balance 2,00,000 ------1000

5
6 7 8 9 10

Xs a/c
Sales a/c Ss a/c Salary a/c Rent a/c Cash a/c

----7000 5000 4000 182000 3,78,000

1,20,000
57000

3,78000