Accounting Concepts, Conventions

1
Accounting Concepts, Conventions Principles
(including Balance Sheet)

• Dr. Jatin Pancholi
• Website http//www.jatinpancholi.com

Dr. Jatin Pancholi has compiled and prepared this
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 via website http//www.jatinpanchol
i.com. Those wishing to co-author next edition of
this handout are requested to contact via the
website.
2
Accounting Information System
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MEANINGS

• Concepts
• Conventions
• Principles

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CONCEPTS

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

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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

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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.

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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

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CONVENTIONS

• Historical Costs
• Monetary measurement
• Separate Entity
• Realisation
• Materiality

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PRINCIPLES

• Understandability
• Relevance
• Consistency
• Comparability
• Reliability
• Objectivity

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ACCOUNTING EQUIVALENCE
Assets Owners Equity Outside
LiabilitiesA OE OL
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BALANCE SHEET

• BS is a position statement.
• BS describes
• the financial position of assets liabilities
• of the firm
• as on a particular date

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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.

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HORIZONTAL FORM OF BS
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VERTICAL FORM OF BS
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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 owners 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
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A OE OL
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PROOF A OE OL
Owners of Scox Company contributed 20,000 cash
to start the business.

• The accounts involved are
• (1) Cash (asset)
• (2) Owners Equity (equity)

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

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Transaction Analysis
Purchased Supplies of 200 and Equipment of
1,000 on account.
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Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now lets look at transactions involving revenues
and expenses.
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Transaction Analysis
Rendered consulting services receiving 3,000
cash.

• The accounts involved are
• (1) Cash (asset)
• (2) Revenues (equity)

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Transaction Analysis
Rendered consulting services receiving 3,000
cash.
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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.
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Transaction Analysis
Borrowed 4,000 from SBI

• The accounts involved are
• (1) Cash (asset)
• (2) Notes payable (liability)

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Transaction Analysis
Borrowed 4,000 from SBI
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Financial Statements

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

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Income Statement
Scoxs net income is the difference between
Revenues and Expenses.
The net income of 2,200 increases Scoxs equity
by 2,200.
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Balance Sheet
The balance sheet reflects Scoxs financial
position at March 31 2001
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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.
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ACCOUNTANTS LIFE
A OE OL
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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, PL A/c, Cash Flow Statement

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ACCOUNTANTS ROUTINE
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ACCOUNTANTS 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) Owners Equity (equity)

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TRANSACTION-1

• Chirag started business with cash 30,000.
• The accounts involved are
• (1) Cash (asset)
• (2) Owners Equity (equity)

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TRANSACTION-1 - LEDGER
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Thank You
Dr. Jatin Pancholi Website http//www.jatinpanch
oli.com
Dr. Jatin Pancholi has compiled and prepared this
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 via website http//www.jatinpanchol
i.com. Those wishing to co-author next edition of
this handout are requested to contact via the
website.