XI ACCOUNTANCY THEORY ©David Thomas

[Link] of Accounting . ( financial accounting )

It is the art of recording, classifying and summarising in a significant manner in terms of money ;
transactions and events which are, in part at least , of a financial character, and interpreting the
results thereof.

[Link] or Characteristics of accounting .

1. Identification of financial transactions [Link] 3. Recording 4. Classifying 5. Summarising
6. Analaysing 7 .Communicating

[Link] accounting . It is relating to the cost of the products and services. It ascertains the cost of the
product manufactured and helps the management in decision making for the fixation of price and
control of the price

[Link] accounting . It is concerned with the generating accounting information relating to

funds, profits etc. as it enables the management in decision making . it is meant for the management
.
[Link] between book keeping and accounting.
Basis Book keeping Accounting
[Link] It is concerned with identifying financial It is concerned with summarising
transactions, measuring them in money , recording transactions,
terms, recording and classifying them interpreting them and
communicating results
[Link] It is primary stage. It is a secondary stage
[Link] It is routine nature It is dynamic and analytical
nature
[Link] by Junior staff Senior staff

[Link] of accounting ( Functions )

1. Maintains systematic records 2. Ascertaining profit or loss 3. Ascertaining financial positions
4. Assisting the management 5. Communicating the users.

[Link] . 1. Assisting management 2. Replaces memory 3. Comparative study 4. Facilitates

loans 5. Evidence court

[Link] . 1. It is not fully exact. 2. It ignores the qualitative elements 3. It ignores the price
level changes 4. It may lead to window dressing

[Link] information . it refers to the financial statements ( Income statement and Position
statement ) generated through the process of book keeping .

10 . Users of Accounting information

I .Internal Users

[Link] . 1. Profit or loss 2. Financial position 3. Future prospectus

[Link] . 1. Profit or loss 2. Financial position 3. Cost and Price control 4. Investment in new
projects
[Link] or workers. 1. Bonus 2. Employees provided fund 3 . Employee’s state insurance
II .External users

[Link]. 1. Profit or loss 2. Financial position 3. Performance

[Link]. 1. Earning capacity 2. Safety of the investment
[Link] . 1. Profit or loss 2. Financial position 3. Credit worthiness.
[Link] . 1. Profit or loss 2. Financial position 3. Tax liability
[Link]. 1. Price reduction. 2. Price fixation by the Government
[Link]. 1. Protecting environment 2. Employment opportunities

[Link] characteristics of information

1. Reliable 2. Relevance 3. Understandable 4. Comparable

[Link] between Double entry system and single entry system

Basis Double Entry system Single entry system
1. Meaning This system which recognises It is not recorded as per the double
and records both aspects of entry basis . Accounts are maintained
transactions ( Debit and Credit ) under this is system are incomplete
and unsystematic .It is also known as
Accounts from incomplete records
2. Reliable It is reliable because all the It is not reliable because not all
information’s have been information’s are accounted for
considered
3. Approval It is recognised by the companies It is not recognised by the companies
act 1956 act 1956

I. Accounting Assumptions, Principles and Concepts.

1. Going Concern Assumption. It is assumed that business shall continue for a longer period of
time and there is no intention to close the business. It is because of this concept that a
distinction is made between capital expenditure ( Expenditure will render benefit for a longer
period – Machinery ) and revenue expenditure ( the benefit will exhaust quickly – Salary )
Example . Machinery purchased having life time of 10 years
2. Consistency assumption . Accounting practices once selected and adopted, should be applied
consistently year after year . It eliminates personal bias and helps in achieving results are
comparable .
Example . Two methods of depreciation . a. Straight line method and Written down value
method are acceptable .Under this method one method chosen , it should be applied
consistently year after year .
3. Accrual assumption . A transaction is recorded at the time when it takes place and not when
the settlement takes place .
Example . Goods sold to Kumar for Rs. 30,000 on 1st April on credit of two months . But the
payment will be received on 1stJune . Sale will be recorded on 1st April , because the revenue
has been earned, although the amount has not been received
4. Accounting entity or Business entity principle . Business is considered to be separate and
distinct from its owners . Their account in the business is credited with the capital and debited
by the drawings made .
Example . X the owner invested Rs. 100,000 as capital and Rs . 5000 taken by the owner for his
personal use
5. Money measurement principle . The transactions and events that can be measured in money
terms are recorded in the books of accounts .
Example . 6 trucks purchased at Rs. 300,000 each . Efficiency of marketing manager and
Quarrels between workers can not be recorded in the books of accounts, because they can not
be measured in terms of money.
6. Accounting period principle . The life of an enterprise is broken into smaller periods so that its
performance is measured at regular intervals. Management required this information at
regular intervals to assess the performance .
Example . The accounting year may be January to December or April to March .
7. Full disclosure principle. There should be complete and understandable reporting on the
financial statements of all significant information regarding the economic affairs of the
company . The disclosure of material information will result in better understanding .
Example . The reasons for low turnover or Decrease in production should be disclosed .
8. Materiality principle . It refers to the relative importance of an item or an event. An item
should be regarded as material if there is a reason to believe that knowledge of it would
influence the decision of an informed investor . An item of material of one enterprise may not
be material of another enterprise .
Example . Rs. 250,000 spent on repairs of building will be material for a company having sales
of Rs. 150,000, but it is not material for a company having sales of Rs. 150,00,000.
9. Prudence or Conservatism principle . Do not anticipate a profit, but provide for all possible
losses. In other words, it takes into all the prospective losses but not all the prospective
profits.
Example . Closing stock is valued cost price or market price whichever is less and making
provision for doubtful debts and discount on debtors in anticipation of actual bad debts and
discount
10. Costing concept or Historical cost principle . Asset is recorded at the cost at the time of its
purchase but is systematically reduced in value of charging depreciation . The market value of
an asset may change with the passage of time but for accounting purposes it continues to be
shown in the books of accounts in the book value ( cost – depreciation )
Example . Machinery Rs. 100,000 Depreciation 10 % Value in balance sheet Machinery Rs.
90,000
11. Matching principle . The accounts are usually prepared on accrual basis , the expenses
incurred in an accounting period are matched with recognised in that period .If the revenue
and expense does not belong to the current accounting period , it will be shown in the balance
sheet as asset and liability .
Example . Revenue Rs. 300,000 – Expense 120,000 = Profit Rs. 180,000
12. Dual aspect principle . It reflects the Double entry system , For every debit there is a
corresponding credit . Every transaction recorded once in the debit side and again in the credit
side . Assets = Capital + Liabilities
Example X stated business with Cash Rs. 5,00,000.
Cash 500,000 = Capital Rs. 5,00,000
13. Revenue recognition concept . The revenue is considered to have been realised when a
transaction has been entered into and the obligation to receive the amount has been decided,
not the actual receipt takes place .
Example . A company sells the goods in the February 2011 for Rs. 200,000 and receives the
cash in April 2011, it will be recorded as sale in February 2011.
14. Verifiable objective concept . It means all accounting transactions should be evidenced and
supported by business documents. Verifiable evidence is must for all the transactions .
Example . Bus fare paid Rs. 75 for travel should be verified through Bus ticket
II. Accounting standards .
Generally accepted accounting principles issued by The Chartered Accounts of India , that are
followed for preparation and presentation of financial statements .
Example . AS 3 Cash flow statement AS 6 Depreciation accounting AS 9 Revenue recognition
Nature /Benefits . [Link] provides the norms for Final accounts . [Link] ensure Uniformity 3. It
creates sense of confidence [Link] help auditors and accountants

III. International Financial reporting standards (IFRS ).

IFRS are a set of accounting standards developed by the international accounting standards board
.(IASB). They are referred as principle based accounting standards. New standards issued by IASB are
known as IFRS.
Example . IFRS -3 Business combinations IFRS -4. Insurance contacts .
IFRS - 9. Financial instruments .

IV. Source documents . it is a written document containing details of the transactions prepared at the
time it is entered into .
[Link] memo. It is prepared by the seller when he sells goods against cash . It has details of goods
sold, quantity, rate, date ,terms and conditions and the amount received . it acts as evidence .
2. Invoice or bill . It is prepared by the seller when he sells goods on credit. It has the details of the
person to whom goods are sold and the total amount . The original copy of invoice is given to the
customer and a duplicate copy is retained as evidence for the future reference .
[Link]. When cash is received from a customer ( to whom goods sold on credit ) , a receipt for the
amount received is issued . The original copy is handed over to the customer and the duplicate is kept
for record. It has the details of the date, amount, customer name & mode of payment (Cash /Cheque )
4. Pay in slip . it is a form available from a bank . it is used for depositing cash or cheques into bank . it
has a counter foil which is returned to the depositor with cashier’s signature.
[Link]. it is a document in writing, drawan upon a specified banker and payable on demand . the
bank supplies cheque forms. The name of the party and amount ( figures and words ) . it must be
dated and signed by the drawer.
6. Debit note. It is made out evidencing that a debit has been made to the account of a creditor
named in the debit note. It details the reason for the debit and mainly used for Purchase returns .
Example . X returned the goods to Y Rs. 1,000. X will send the debit note to Y by debiting his account
6. Credit note. It is made out evidencing that a credit has been made to the account of a Debtor
named in the Credit note. It details the reason for the Credit and mainly used for Sales returns .
Example . Goods returned by the A to B Rs.2,000. A will send the credit note to A by crediting his a/c

V. Voucher . it is a document evidencing a business transaction. On the basis of source of documents

a voucher detailing the accounts that are debited and credited is prepared .
A. Source vouchers or Source documents . this is a supporting document which come into
existence when a transaction entered into.
B. Accounting vouchers. It is a written document containing an analysis of business transactions
for accounting purposes, prepared by the accountant and signed by the authorised person
[Link] vouchers .It refers to the voucher prepared at the of receipt or payment of cash and
cheque.
a. Debit voucher .it is prepared when cash payment is made . When cash is paid and some
other is person is debited .Example Rent paid , Creditors paid and asset purchased .
b. Credit voucher . It is prepared when cash is received . when cash is received and some other
person is credited. Example Commission received , Cash received for debtors and Asset sold
2. Non – Cash vouchers. It is prepared for transactions not involving cash . Example Credit
sales , credit purchases and any rectification
VI. Difference between Accrual basis and Cash basis accounting

Basis Accrual basis of accounting Cash basis of accounting

[Link] of Both cash and credit transactions Cash transactions are recorded
transactions are recorded
[Link] or loss Correct profit and loss is ascertained Correct profit and loss is not
Because cash and credit transactions ascertained because only cash
are considered transactions are considered
[Link] It is recognised by the companies act It is not recognised by the
1956 companies act 1956
[Link] It is more reliable It is not reliable

©David Thomas