ACCOUNTING

AT A GLANCE
Niyaz Ahamed
The Accounts at a Glance has been prepared to provide a
summarized view of the Accounting Terminology This pocket
guide provides a brief summary of financial accounting

Ph: 939 9339 939

E Mail: niy.az@outlook.com
ACCOUNTING TERMS AND DEFINITIONS

1. Accounting
A systematic way of recording and reporting financial transactions. Accounting allows a company to analyze
the financial performance of the business, and look at statistics such as net profit.

2. Account
A record in the general ledger that is used to collect, classify and store similar information.

3. Debits And Credits

In double entry bookkeeping, debits and credits (abbreviated Dr and Cr, respectively) are entries made in
account ledgers to record changes in value resulting from business transactions.

Debit (debere (to owe) "From/By" for the debtor )- an entry recording a sum owed, listed on the left-hand side
or column of an account.
Credit ( credere (to entrust) "To" for the creditor)- an entry recording a sum received, listed on the right-hand
side or column of an account.

Total debits must equal total credits for each transaction

The difference between the total debits and total credits in a single account is the account's balance. If debits
exceed credits, the account has a debit balance; if credits exceed debits, the account has a credit balance

To determine whether one must debit or credit a specific account we use either the accounting
equation approach which consists of five accounting rules(for Asset, Liability, Income/Revenue, Expense, and
Equity/Capital) or the traditional approach based on three rules (for Real accounts, Personal accounts, and
Nominal accounts) to determine whether to debit or to credit an account.
Whether a debit increases or decreases an account depends on what kind of account it is

Traditional Approach

Personal accounts relate to individuals, companies, creditors, banks etc.

Real accounts are the assets of a firm, which may be tangible (machinery, buildings etc.)
or intangible (goodwill, patents etc.)
Nominal accounts relate to expenses, losses, incomes or gains.

Rules of Debit and Credit at a Glance

Types of Account Account to be Debited Account to be credited
Personal account Receiver Giver
Real account What comes in What goes out
Nominal account Expense and loss Income and gain

Types of Account Debit Credit

Real (assets) Increase Decrease
Personal (liability) Decrease Increase
Personal (owner's equity) Decrease Increase
Nominal (revenue) Decrease Increase
Nominal (expenses) Increase Decrease
Nominal (gain) Decrease Increase
Nominal (loss) Increase Decrease

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 Accounting Equation Approach

Rules of Debit and Credit at a Glance

Kind of account DEBIT CREDIT
Asset Increase + Decrease
Liability Decrease Increase +
Income/Revenue Decrease Increase +
Expense Increase + Decrease
Equity/Capital Decrease Increase +

4. Accounting Period
In bookkeeping, is the period with reference to which accounting books of any entity are prepared. Generally,
the accounting period consists of 12 months. However the beginning of the accounting period differs according
to the jurisdiction. For example, one entity may follow the regular calendar year, i.e. January to December as
the accounting year, while another entity may follow April to March as the accounting period.

5. Reporting Date
Reporting date means the date of the last day of the reporting period to which the financial statements relate.

6. Accounting Equation
Debits and credits occur simultaneously in every financial transaction in double-entry bookkeeping
DEBITS = CREDITS
Assets = Liabilities + Equity

if an asset account increases (a debit), then either another asset account must decrease (a credit), or a liability
or equity account must increase (a credit).

Basic form of an equation --> Left side = Right side

Balance Sheet Version

Assets = Liabilities + Owners Equity/Capital

Income Statement Version

Net Income = Revenue Expenses

Combined Version
Assets = Liabilities + Owners Equity/Capital
---> Owners Equity/Capital = Beginning Equity + Net Income

Assets = Liabilities + Beginning Equity + Net Income

---> Net Income = Revenue Expenses

Assets = Liabilities + Beginning Equity + Revenue Expenses

7. Asset
An asset is a resource or property having a monetary/economic value possessed by an individual or entity,
which is capable of producing some future economic benefit.

Classification of Assets
Assets are generally classified in the following three ways depending upon nature and type:

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 1. Convertibility: convertibility into cash.
Current Assets: Assets which are easily convertible into cash like stock, inventory, marketable securities,
short-term investments, fixed deposits, accrued incomes, bank balances, debtors, prepaid expenses etc.
Current assets are generally of a shorter life span as compared to fixed assets which last for a longer
period. Current assets can also be termed as liquid assets.
Fixed Assets: Fixed assets are of a fixed nature in the context that they are not readily convertible into
cash. They require elaborate procedure and time for their sale and converted into cash. Land, building,
plant, machinery, equipment and furniture are some examples of fixed assets. Other names used for fixed
assets are non-current assets, long-term assets or hard assets. Generally, the value of fixed assets
generally reduces over a period of time (known as depreciation).
2. Physical Existence: based on their physical existence

Tangible Assets: Tangible assets are those assets which we can touch, see and feel. All fixed assets are
tangible. Moreover, some current assets like inventory and cash fall under the category of tangible assets
too.
Intangible Assets: Intangible assets cannot be seen, felt or touched physically by us. Some examples of
intangible assets are goodwill, franchise agreements, patents, copyrights, brands, trademarks etc.

3. Usage: based on usage of the asset for business operation.

Operating Assets: All assets required for the current day-to-day transaction of business are known as
operating assets. In simple words, the assets that a company uses for producing a product or service are
operating assets. These include cash, bank balance, inventory, plant, equipment etc.
Non-operating Assets: All assets which are of no use for daily business operations but are essential for
the establishment of business and for its future needs are termed as non-operational. This could include
some real estate purchased to earn from its appreciation or excess cash in business, which is not used in
an operation.

Current Fixed Asset Tangible Asset Intangible Operating Non-

Asset Asset Asset operating
Asset
Cash Land Land Goodwill Cash Goodwill
Bank Road Road Patents Bank Patents
Balance Balance
Investments Building Building Brand Inventory
Inventory Furniture Furniture Trademark Stocks
Stock Plant Plant Copyright Prepaid Exp.
Receivables Machinery Machinery Receivables
Prepaid Exp. Equipments Equipment Plant
Cash Machinery
Inventory/Stock

8. Liability
An obligation that legally binds a company to settle a debt. Liability is an obligation of the entity to transfer
cash or other resources to another party.
Liabilities may be classified into Current and Non-Current. The distinction is made on the basis of time period
within which the liability is expected to be settled by the entity.

Current Liability : Current Liability is one which the entity expects to pay off within one year from the
reporting date. For firms with operating cycles that last longer than one year, current liabilities are defined
as those liabilities which must be paid during that longer operating cycle. A better definition, however, is
that current liabilities are liabilities that will be settled either by current assets or by the creation of other
current liabilities.

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 Long-term Liabilities : Long-term liabilities/ Non-Current Liability are reasonably expected not to be
liquidated or paid off within the span of a single year (to settle after one year from the reporting date).
These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and
long-term product warranties.
Contingent Liabilities : Contingent liabilities can be current or long-term. They typically deal with legal
actions or litigation claims against the entity or claims (such as penalties or fees) an organization
encounters throughout the course of business. Contingent items are accrued if the claims and their
likelihood of occurring are probable, and if the relevant amount of the liability can be reasonably
estimated.

9. Equity/Owner's Equity/Capital
When starting a business, the owners fund the business to finance various operations. the term capital refers
to any financial resources or assets owned by a business that are useful in furthering development and
generating income.
The claims of the owners of the business/entity to the assets of that business/entity.
Capital, retained earnings, drawings, common stock, accumulated funds, etc.
In accounting, equity (or owner's equity) is the difference between the value of the assets and the value of the
liabilities i.e, net assets of an entity.
Equity = Assets Liabilities

10. Income/Revenue
All increases in Equity other than that contributed by the owner/s of the business/entity. Services rendered,
sales, interest income, membership fees, rent income, interest from investment, recurring receivables,
donation etc.
Revenue
Proceeds from the sales of products and services to customers, as well as other activities like investment
during a specific period
Income
Net profit, or money that remains after expenses are subtracted from revenue.

11. Expense
All decreases in the owners' equity which occur from using the assets or increasing liabilities in delivering
goods or services to a customer - the costs of doing business. Telephone, water, electricity, repairs, salaries,
wages, depreciation, bad debts, stationery, entertainment, honorarium, rent, fuel, utility, interest etc.
Types of Expenses
Direct Expenses/Cost of Goods Sold (COGS)
Expenses directly related to generating sales revenues form a part of COGS. A manufacturing firm may
include the cost of raw materials and wages to workers in the cost of goods sold. A retailer may include
the cost of merchandise under this head. The deducting cost of goods sold from sales/revenue, one
can arrive at gross profits.
Indirect Expenses
Indirect expenses (also termed synonymously with operating expenses) are also called selling, general
and administration expenses. Common indirect expenses include utility bills, selling expenses like
advertising expenses and commissions paid to salesmen, salary for supervisors, etc. Deducting
operating expenses from gross profit, one can arrive at Profit before Taxes (PBT) or Income from
Operations.
Non-Operating Expenses
While the former two types of expenses fall in operating expenses non-operating expenses refer to
those expenses which are not related to revenue generation for the core business activity. Some

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 examples include- the cost of borrowing, commission on share transactions, donation or charity
expenses etc. Deducting Non-Operating Expenses
From Income from Operations, one can arrive at Net profits.

12. Debtor/Creditor
Debtor A debtor is a person/entity owing money to the business, for example a customer for goods delivered.
Creditor A creditor is a person/entity to whom the business owes money, for example a supplier, landlord, or
utility organization.
Comparison Chart

BASIS FOR DEBTORS CREDITORS

COMPARISON
Meaning Debtors are the parties who owes Creditors are the parties to
debt towards the company. whom the company owes a
debt.
What is it? It is an account receivable. It is an account payable.
Status Assets Liabilities
Discount Allowed to debtors. Received from creditors.
Derived from Term 'debere' of Latin language which Term 'creditum' of Latin
means 'to owe'. language which means 'to loan'.

The following are the division of debtors:

Accounts Receivables: Amounts that customers owe the company for normal credit purchases.
(Amounts billed by a business to its customers when it delivers goods or services to them in the
ordinary course of business. These billings are typically documented on formal invoices)
Notes Receivable : Amounts owed to the company by customers or others who have signed formal
instruments of credit as evidence of debt, such as a promissory note.
Other receivables: Accounts receivable and notes receivable that result from company sales are called
trade receivables, but there are other types of receivables as well (Nontrade receivables). For example,
interest revenue from notes or other interest-bearing assets is accrued at the end of each accounting
period and placed in an account named interest receivable. Wage advances, formal loans to
employees, or loans to other companies create other types of receivables.

The following are the division of creditors:

Secured Creditors: The creditors who provide debt after pledging the asset as security. They are paid
first.
Unsecured Creditors: The creditors whose debt is not backed by any security.
Preferential Creditors: They are the creditors who get priority over unsecured creditors for repayment of
debt. They are tax authorities, employees, etc.

13. Inventories
Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the
production process for sale in the ordinary course of business (work in process), and materials and supplies
that are consumed in production (raw materials).

14. Investment Property

Investment Property is property (land or a building or part of a building or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for capital appreciation or both. A property interest that is
held by a lessee under an operating lease may also be classified and accounted for as investment property
under certain conditions.

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 15. Liquidity
The availability of cash in the near future to cover currently maturing obligations (e.g., payroll liabilities,
trade payables and short-term loan amortizations).

16. Solvency
The availability of cash over a long term to meet financial commitments when they fall due.

17. Operating Cycle

For trading enterprise, it is the average period of time that it takes for an enterprise to acquire the
merchandise inventory, sell the inventory to customers and collect cash from the sale. For manufacturing
firm, it is the period of time between acquisition of materials and their final conversion into cash.

18. Depreciation
Depreciation is a permanent, gradual and continuous reduction in the book value of the fixed asset. Except
Land all the fixed assets e.g. Car, Machinery, Furniture etc depreciates in value making the asset useless
after the end of a certain period.
Following are the causes of Depreciation:
-Wear and Tear due to regular use of the asset
-Deterioration occurs with the passage of time, whether the asset is in use or not
-Damages done to the assets due to an accident like fire, mishandling etc.
-Depletion of Asset
-Obsolescence i.e. due to new technology in use, new inventions, innovations etc.

Depreciation is a cost. It is a historical cost, which is charged against profits of the organisation reducing
the profitability. It is a non-cash cost as it is never paid or incurred in cash.
What is the need of depreciation account?

According to the matching principle of accounting, the costs incurred in the accounting year should be
matched with the revenue or income earned during the same accounting year. Thus, it is necessary to
spread the cost of fixed asset less scrap or realizable value after the useful life of the fixed asset is over
and this process of ascertain the same is called depreciation accounting.

Thus, depreciation account is needed for mainly two purposes:

To ascertain due profits
To represent the value of the fixed asset at its unexpired cost i.e book value of the asset less
depreciation.

Methods for calculating depreciation

Straight Line Method
The components used to calculate Straight Line Method are:
-Cost of Asset
-Estimated Scrap vale-is the value of the asset at the end of life of the asset
-Estimated life of Asset

Formula to calculate:
Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years

The main advantage of this method is that an equal amount of depreciation is charged every year
throughout the life of the Asset which makes the calculation of depreciation easy.

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 But the limitation of this method is that the amount of depreciation charged on the asset in the
later years is high due to the reduced value of the asset.

Written Down Value Method of Depreciation:

Reducing Balance or Reducing Installment Method or Diminishing Balance Method. Under this
method, the depreciation is calculated at a certain fixed percentage each year on the decreasing
book value commonly known as WDV of the asset (book value less depreciation).

The use of book value (the balance brought forward from the previous year) and fixed rate of
depreciation result in decreasing depreciation charges over the life span of the asset.

While applying the depreciation rate both salvage or scrap value and removal costs are ignored. It
is not possible to reduce the book value to zero; but it can be reduced close to its salvage value at
the end of its useful life.
The rate of depreciation may be determined using the following formula:

The main advantage of this method is that ,

since under this method higher depreciation is charged in early years it takes into account that
asset is more efficient in early years and therefore it is more realistic way of depreciation.
Since in early years machines requires less repairs and as the year passes by repair cost began
to rise, therefore this method by charging more depreciation in early years and less in later years
make sure that total cost of repairs and depreciation is same every year.
The main limitations of this method are that,
Since the rate of depreciation is fixed by not following formula chances of subjectivity in fixing
rate of depreciation becomes high.
The value of asset will never be zero in books of account under this even if asset is of no use to
company.

19. Bank Reconciliation Statement

Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained
by the concern and pass book maintained by the bank at periodical intervals. At the end of every month
entries in the cash book are compared with the entries in the pass book. The causes of differences in
balances of both the books are scrutinized and then reconciliation statement is prepared. This statement is
prepared for a special purpose and once in a month. It is prepared with a view to indicate items which
cause difference between the balances as per the bank columns of the cash book and the bank pass book
at a particular date.

What are the reasons which cause pass book of the bank and your bank book not tally?
* Cheques deposited into the bank but not yet collected
* Cheques issued but not yet presented for payment
* Bank charges
* Amount collected by bank on standing instructions of the concern.
* Amount paid by the bank on standing instructions of the concern.

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 * Interest debited by the bank
* Interest credited by the bank
* Direct payment by customers into the bank account
* Dishonour of cheques
* Clerical errors

20. Journal
A journal is a record of financial transactions (taken usually from a journal voucher) in order by date and is
recorded using double-entry bookkeeping system. Journals are also called 'books of first entry' or 'books of
original entry.'
journalizing involves recording of five aspects of a transaction:
(1) its date,
(2) ledger account to be debited and amount,
(3) ledger account to be credited and amount,
(4) brief description of the transaction, and its
(5) cross-reference to the general ledger.

Debit and credit changes caused by each transaction in individual ledger-accounts are subsequently
entered in (posted to) the firm's general ledger. Depending on the nature of its operations and number of
daily transactions, a firm may keep several types of specialized journals such as cash journal (cash book),
purchases journal, and sales journal etc,.

21. General Ledger

Also called book of final entry or principal book, Ledger is the book where the transactions of similar
nature pertaining to a person, asset, liability, income or expenditure are drawn from the journal or
subsidiary books and posted account wise in the Ledger account. Ledger maintains all types of accounts
i.e. Personal, Real and Nominal Account.

The collection of all accounts is known as the general ledger. Each account is known as a ledger
account.Each account is a unique record summarizing each type of accounts
Balance sheet accounts (assets, liabilities, equity)
Income statement accounts (revenues, expenses, gains, losses)

All the business transactions are first recorded in Journal or Subsidiary books in a chronological order when
they actually take place and from there the transactions of similar nature are transferred to Ledger as
debits and credits, and this process of transferring is called as Ledger Posting.

To know the net effect of all the business transactions recorded in the ledger account, the accounts need
to be balanced. Thus, Balancing of Ledger Account means the balances of Debit and Credit side should be
equal and this involves following steps:
-First total of both the sides are taken.
-Secondly difference between the totals of both the sides is calculated.
-If the debit side is in excess to the credit side then place the difference on the credit side by writing By
Balance c/fd.
- If the total of credit side is in excess to the debit side, place the difference on the debit side by writing To
Balance c/fd.
-After placing the difference on the appropriate side, make sure the totals of both the sides are equal.

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 22. Adjustment Entries
Adjustment entries are the entries which are passed at the end of each accounting period to adjust the
nominal and other accounts so that correct net profit or net loss is indicated in profit and loss account and
balance sheet may also represent the true and fair view of the financial condition of the business.

It is essential to pass these adjustment entries before preparing final statements. Otherwise in the
absence of these entries the profit and loss statement will be misleading and balance sheet will not show
the true financial condition of the business.

a.) Closing Stock

Closing stock account Debit
Trading account Credit
b.) Depreciation
Depreciation account Debit
Fixed asset account Credit
c.) Outstanding Expenses
Expenses account Debit
Outstanding account Credit
d.) Prepaid Expenses
Prepaid expenses account Debit
Expenses account Credit
e.) Accrued Income
Accrued Income account Debit
Income account Credit
f.) Income received in advance
Income account Debit
Income received in advance account Credit
g.) Bad debts
Bad Debts account Debit
Sundry Debtors account Credit
h.) Provision for doubtful debts
Provision for Doubtful Debts account Debit
Sundry Debtors account Credit
i.) Provision for discount on Debtors
Provision for Discount for Debtors account Debit
Sundry Debtors account Credit
j.) Interest on Capital
Interest on capital account Debit
Capital account Credit
k.) Drawings
Drawing account Debit
Sales account Credit
l.) Deferred revenue expenditure written off
Deferred revenue expenditure written off account Debit
Deferred revenue expenditure account Credit
m.) Abnormal Loss
Abnormal Loss account Debit
Stock destroyed account Credit
If the organization has insured the stock with the insurance company then the insurance company settles
the claim, either in full or part. In that case the

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 Insurance company account Debit
Abnormal loss account Debit
Stock destroyed Credit
n.) Goods distributed as free samples
Advertisement account Debit
Sales account Credit
o.) Goods sent on approval basis:
Goods sent on approval basis should not be treated as sales till the goods are finally approved by the
customer because property in goods is not transferred until the said period is over. If the goods sent on
approval basis are treated as sales then closing stock will be increased by the cost of such goods sent on
approval basis.
p.) Commission payable to the manager:
Commission account Debit
Commission payable account Credit

23. Trail Balance

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards
the preparation of financial statements. It is usually prepared at the end of an accounting period to assist
in the drafting of financial statements. Ledger balances are segregated into debit balances and credit
balances. Asset and expense accounts appear on the debit side of the trial balance whereas liabilities,
capital and income accounts appear on the credit side. If all accounting entries are recorded correctly and
all the ledger balances are accurately extracted, the total of all debit balances appearing in the trial
balance must equal to the sum of all credit balances
Purpose
Trial Balance acts as the first step in the preparation of financial statements. It is a working paper that
accountants use as a basis while preparing financial statements.
Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in
the books in accordance with the double entry concept of accounting. If the totals of the trial balance do
not agree, the differences may be investigated and resolved before financial statements are prepared.
Trial balance ensures that the account balances are accurately extracted from accounting ledgers.
Trail balance assists in the identification and rectification of errors.
Limitations
A trial balance only checks the sum of debits against the sum of credits. That is why it does not guarantee
that there are no errors. The following are the main classes of errors that are not detected by the trial
balance.

An error of omission is when a transaction is completely omitted from the accounting records. As the
debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A
variation of this error is omitting one of the ledger account totals from the trial balance (but in this case
the trial balance will not balance).
An error of commission is when the entries are made at the correct amount, and the appropriate side
(debit or credit), but one or more entries are made to the wrong account of the correct type. For example,
if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect
the totals.
An error of principle is when the entries are made to the correct amount, and the appropriate side (debit
or credit), as with an error of commission, but the wrong type of account is used. For example, if fuel
costs (an expense account), are debited to stock (an asset account). This will not affect the totals.
Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but
together cancel each other out.

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 24. Income Statement
Income Statement is a period statement which is prepared to show the profit or loss incurred by the
Organization in the year for which it is prepared. It is prepared to disclose the result of operations of all the
business transactions during a given period of time. It is also known as profitability statement .It is the final
result of all business transactions of the organization. Income Statement has three components namely
Manufacturing and Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account.

Manufacturing and Trading Account

Statement used in accounting process of a manufacturing organization.
The account which is prepared to determine the gross profit or gross loss of a business concern is called
trading account.

Name of Business
Trading Account for the year ended .....

Particulars Rs. Particulars Rs.

Stock (Opening) Sales -----
Purchases ----- Less returns ----- -----
Less returns ----- -----
Stock (closing) -----
Gross loss (Transferred
Carriage inward ----- -----
to P&l A/C)
Wages -----
Insurance in transit -----
Custom duty -----
Clearing charges -----
Freight inward -----
Transportation inward -----
Excise duty on goods -----
Royalty -----
Dock charges -----
Coal, Coke, Gas, fuel -----
Motive power -----
Oil, water -----
Gross profit
(Transferred to P&l -----
A/C)

Profit and Loss Account.

Gross profit or Gross loss so calculated in trading account is taken to the profit and loss account.
All expenses, losses, incomes and gains are the components of Profit and Loss Account:
Expenses and losses are shown on the debit side of Profit & Loss Account.

Administrative Expenses:
* Office Salaries
* Postage & Telephone
* Traveling & Conveyance
* Legal Charges
* Office Rent
* Depreciation
* Audit Fees
* Insurance

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 * Repairs & Renewals
Selling and Distribution Expenses:
* Advertisement
* Carriage Outward
* Free Samples
* Bad Debts
* Sales Commission

Incomes and Gains are shown on the credit side of the Profit & Loss Account.

Gross Profit (balance forwarded from the Trading account)

Other Income:
* Discount received
* Commission received
* Non-Trading Income
* Interest received
* Bad Debts recovered
* Rent received
* Profit on the sale of assets
Note;
Gross profit = Total sales - All direct expenses or cost of goods sold
Net profit = Gross profit - All indirect expenses

25. Balance Sheet

Balance Sheet is a Statement showing financial position of the business on a particular date. It has two
side one source of funds i.e Liabilities, the left side of the balance sheet and application of funds i.e assets,
the right side of the balance sheet. It is prepared after preparing trading and profit and loss account and
has balances of real and personal accounts grouped and arranged in a proper way as assets and liabilities.
It is prepared to know the exact financial position of the business on the last date of the financial year.

26. Accounting Concepts

Accounting concepts are those basis assumptions upon which basic process of accounting is based. Following
are the basic accounting concepts:
a) Business Entity Concept:
According to this concept, the business has a separate legal identity than the person who owns the business.
The accounting process is carried out for the business and not for the person who is carrying out the business.
This concept is applicable to both, corporate and non corporate organizations.
b) Dual Aspect Concept:
According to this concept, every transaction has two affects. This basic relationship between assets and
liabilities which means that the assets are equal to the liabilities remains the same.
c) Going Concern Concept:
According to this concept, the organization is going to be in existence for an indefinite period of time and is not
likely to close down the business in the shorter period of time. This affects the valuation of assets and
liabilities.
d) Accounting Period Concept:
According to this concept, the indefinite period of time is divided into shorter time periods, each one being in
the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis.

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 Selection of accounting period depends on characteristics like business organization, statutory requirements
etc.
e) Cost Concept:
According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current
market prices of various assets.
f) Money Measurement Concept:
According to this concept, only those transactions find place in the accounting records, which can be expressed
in terms of money. This is the major drawback of financial accounting and financial statements.
g) Matching Concept:
According to this concept, while calculating the profits during the accounting period in a correct manner, all the
expenses and costs incurred during the period, whether paid or not, should be matched with the income
generated during the period.

27. Accounting Conventions

a)Convention of Conservation
This accounting convention is generally expressed as to anticipate all the future losses and expenses, without
considering the future incomes and profits unless they are actually realized. This concept emphasizes that
profits should never be overstated or anticipated. This convention generally applies to the valuation of current
assets as they are valued at cost or market price whichever is lower.
b)Convention of Materiality
This accounting convention proposed that while accounting only those transactions will be considered which
have material impact on financial status of the organization and other transactions which have insignificant
effect will be ignored.. It gives relative importance to an item or event.
c) Convention of Consistency
This accounting convention proposes that the same accounting principles, procedures and policies should be
used consistently on a period to period basis for preparing financial statements to facilitate comparison of
financial statements on period to period basis. If any changes are made in the accounting procedures or
policies, then it should be disclosed explicitly while preparing the financial statements.

28. Systems Of Accounting

1) Cash System of Accounting: This system records only cash receipts and payments. This system assumes
that there are no credit transactions. In this system of accounting, expenses are considered only when they are
paid and incomes are considered when they are actually received. This system is used by the organizations
which are established for non profit purpose. But this system is considered to be defective in nature as it does
not show the actual profits earned and the current state of affairs of the organization.

2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during
that period to which they pertain. This system of accounting is considered to be ideal but it may result into
unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes
too. All the company forms of organization are legally required to follow Mercantile or Accrual System of
Accounting.

ACCOUNTING AT A GLANCE Page 13