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Basic Accounting Principles

Rajesh P
21/07/2017 0 0

Basic Accounting Principles:

Introduction:

We have studied economic activities which have been converted into business activities. In business activity a lot of “give & take” exist which is known as transaction.

Transaction involves transfer of money or money’s worth. Thus exchange of money, goods & services between the parties is known to have resulted in a transaction. It is necessary to record all these transactions very systematically & scientifically so that the financial relationship of a business with other persons may be properly understood, profit & loss and financial position of the business may be worked out at a particular date.

The procedure to record all these transactions is known as “Book-keeping”. In other words the book keeping may be defined as an activity concerned with the recording of financial data relating to business operations in an orderly manner.Book keeping is the recording phase of accounting.

Accounting is based on an efficient system of book keeping. Accounting is the analysis & interpretation of book keeping records. It includes not only the maintenance of accounting records but also the preparation of financial & economic information which involves the measurement of transactions & other events relating to entry.

There are various terminology used in the Accounting which are being explained as under: 

1) Assets: An asset may be defined as anything of use in the future operations of the enterprise. E.g., land, building, machinery, cash etc.

2) Equity: In broader sense, the term equity refers to total claims against the enterprise. It is further divided into two categories:

  • Owner Claim: Capital.

Capital: The excess of assets over liabilities of the enterprise. It is the difference between the total assets & the total liabilities of the enterprise. Eg: If on a particular date the assets of the business amount to Rs. 1.00 lakhs & liabilities to Rs. 30,000 then the capital on that date would be Rs.70,000.

  • Outsider’s Claim: Liability.

Liability: Amount owed by the enterprise to the outsiders i.e. to all others except the owner. E.g: trade creditor, bank overdraft, loan. etc.

3) Revenue: It is a monetary value of the products or services sold to the customers during the period. It results from sales, services & sources like interest, dividend & commission.

4) Expense/Cost: Expenditure incurred by the enterprise to earn revenue is termed as expense or cost. The difference between expense & asset is that the benefit of the former is consumed by the business in the present whereas in the latter case benefit will be available for future activities of the business. E.g., Raw material, consumables & salaries etc.

5) Drawings: Money or value of goods belonging to business used by the proprietor for his personal use.

6) Owner: The person who invests his money or money’s worth & bears the risk of the business.

7) Sundry Debtors: A person from whom amounts are due for goods sold or services rendered or in respect of a contractual obligation. It is also known as debtor, trade debtor, accounts receivable.

8) Sundry Creditors: It is an amount owed by the enterprise on account of goods purchased or services rendered or in respect of contractual obligations. E.g., trade creditor, accounts payable.

At the end of this lesson you will be able to maintain the books of accounts to prepare the annual accounts. After taking decisions such as selecting a business, selecting the form of organisation of business, making decision about the amount of capital to be invested, selectingsuitable site, acquiring equipment & supplies, selecting staff, getting customers & selling the goods etc. a business man finally resorts to record keeping.

For all types of business organisations, transactions such as purchases, sales, manufacturing & selling expenses, collection from customers & payments to suppliers do take place. These business transactions are recorded in a set of ruled books such as journal, ledger, cash book etc.Unless these transactions are recorded properly he will not be in a position to know where exactly he stands.

The following is the complete cycle of Accounting:

a) The opening balances of accounts from the balance sheet & day to day business transaction of the accounting year are first recorded in a book known as journal.

b) Periodically these transactions are transferred to concerned accounts known as ledger accounts.

c) At the end of every accounting year these accounts are balanced & the trial balance is prepared.

d) Then the final accounts such as trading & profit & loss accounts are prepared.

e) Finally, a balance sheet is made which gives the financial position of the business at the end of the period.

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