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Accounting Concepts, Conventions & Principles

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  1. Accounting Concepts, Conventions & Principles Dr. Jatin PancholiWebsite: 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.

  2. Information analysis Information identification Information recording Information reporting Accounting Information System

  3. MEANINGS • Concepts • Conventions • Principles

  4. CONCEPTS • Accrual Basis • Going Concern • Prudence (Conservatism) • Balance Sheet Equation (Equivalence) • Accounting Period

  5. 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;

  6. 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.

  7. 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

  8. CONVENTIONS • Historical Costs • Monetary measurement • Separate Entity • Realisation • Materiality

  9. PRINCIPLES • Understandability • Relevance • Consistency • Comparability • Reliability • Objectivity

  10. ACCOUNTING EQUIVALENCE Assets = Owner’s Equity + Outside LiabilitiesA = OE + OL

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

  12. 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.

  13. HORIZONTAL FORM OF BS

  14. VERTICAL FORM OF BS

  15. A OE+OL A = OE + OL Assets are properties or economic resources owned by a business. They are expected to provide future benefits to the business. Liabilities are obligations of the business. They 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.

  16. A = OE + OL

  17. A = OE + OL

  18. The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity) PROOF: A = OE + OL Owners of Scox Company contributed £20,000 cash to start the business.

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

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

  21. Transaction Analysis Purchased supplies paying £1,000 cash.

  22. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for £15,000 cash.

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

  24. 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)

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

  26. 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.

  27. Transaction Analysis Rendered consulting services receiving £3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

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

  29. Transaction Analysis Paid salaries to employees, £800 cash. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity)

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

  31. Transaction Analysis Borrowed £4,000 from SBI The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)

  32. Transaction Analysis Borrowed £4,000 from SBI

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

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

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

  36. DOUBLE ENTRY SYSTEM A= OE + OL Credit Debit = In the double-entry accounting system, every transaction is recorded by equal amounts of debits and credits.

  37. ASSETS LIABILITIES EQUITIES LIABILITIES ASSETS EQUITIES Debit for Decrease Credit for Increase Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase +- - + - + Debit Credit Debit Credit Debit Credit ACCOUNTANT’S LIFE A = OE + OL

  38. ACCOUNTING CYCLE • Business Transaction • Transaction is recorded in document (Voucher / Receipt) • Analyze the transaction – location ? • Journal Entry • Ledger Accounts (or ‘T’ account) • Trial Balance • Balance Sheet, P&L A/c, Cash Flow Statement

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

  40. Source documents Transaction Analyze A OE+OL Balance Sheet P & L A/c Cash Flow Post to the ledger Prepare a trial balance Journal Entry ACCOUNTANT’S ROUTINE What is Manager's Routine? A = OE + OL

  41. TRANSACTION-1 Chirag started business with cash £ 30,000. The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity)

  42. ASSETS EQUITIES +- - + Debit Credit Debit Credit TRANSACTION-1 Chirag started business with cash £ 30,000. The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity)

  43. TRANSACTION-1 - LEDGER

  44. Now, was that debits to the left or credits to the left? I sure wish I had paid more attention in class! Thank You Dr. Jatin PancholiWebsite: 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.