This document provides an overview of bookkeeping and accounting. It defines bookkeeping as the process of systematically recording all business transactions. As business activities grew more complex, the need arose to record transactions to remember dealings and ascertain profits. Accounting builds upon bookkeeping by classifying, summarizing, and interpreting recorded data to assess a business's financial performance and position. Key terms like assets, liabilities, income, and expenses are also defined. Overall, the document outlines the basic concepts and purposes of bookkeeping and accounting systems.

1. Book-keeping
Human wants were limited in the past. Over a period of time, human wants started
increasing and the resources available were utilized for satisfying human wants. In earlier times,
Barter system was followed. Goods were exchanged for goods. Gradually, the need was felt to
have a common medium of exchange for goods and services and thus, the evolution of money
took place.
All the activities performed involved money. Business activities came into existence. It
was very difficult for businessmen to remember each and every transaction of the business and
therefore, recording all the transactions became necessary. This process of recording all the
transactions in a systematic manner is known as Book‐Keeping.
Meaning of Book-Keeping:
Book-keeping is that branch of knowledge which tells us how to keep a record of
business transactions. It is only those transactions related to business which can be expressed in
terms of money are recorded. Book-keeping include recording in the journal, posting to the
ledger and balancing of accounts. All accounting data was kept by being recorded manually in
books, and so the part of accounting that is concerned with recording data is often known as
bookkeeping. Book‐Keeping is a systematic manner of recording transactions related to business
in the books of accounts. In
Book‐Keeping, transactions are recorded in the order of the dates. An Accountant is a
person who records the transactions in the books of the business and is expected to show the
financial results of a business for every financial year. A financial year in India is followed from
1st April to 31st March.
Book‐Keeping is an art as well as a science. It is the art of recording day to day
business transactions in the books of accounts in a scientific and systematic manner.

2. Bookkeeping is the process of recording data relating to accounting transactions in
the accounting books.
Definitions of Book-Keeping:
“Book‐Keeping is an art of recording business dealings in a set of books.”
- J. R. Batliboi
“Book‐Keeping is an art of recording in the books of accounts, all those business transactions
that result in transfer of money’s worth”
- R.N Carter
“Book‐Keeping is a systematic recording of all the transactions in a manner enabling the
relationship of business with other persons to be clearly disclosed and the cumulative effect of
transactions on the financial position of the business itself can be correctly ascertained.”
- Spicer and Pegler
Features of Book‐Keeping:
 Record business transactions.
 Records only monetary transactions.
 Transactions are recorded in a given set of Books of Accounts.
 Transactions recorded for a specific period are presented for future reference.
 Records business transactions in a scientific manner.

3. Objectives of Book‐Keeping:
 To record of all the business transactions Permanent, Date-wise and Account wise.
 To ascertain the Profit / Loss of the business during a specific period.
 To keep a record of the Capital Investment in the business.
 To keeps a record of Total Assets and Liabilities of business.
 To keeps a record of the amount a business owes to others and the amount receivable by
the business from others.
 To facilitates the comparison of the financial performance of a business with previous
year’s performance or with the performance of other businesses in the same line of
business.
 To ascertain the Tax liabilities and meet the Legal Requirements of a business.
Importance of Book‐Keeping:
• Record: Book‐Keeping is recording transactions in a systematic manner. It may not be
realistic for a businessman to remember all the transactions over a period of time. Thus
Book‐Keeping ensures that the record of all the transactions is kept on a permanent basis.
• Financial Information: Book‐Keeping records the financial activities of a business. This
financial record helps in generating financial information of the business regarding the
Assets, Liabilities, Profit, Loss, Stock Investment etc.

4. • Decision Making: All the information provided by Book‐Keeping helps the company,
business or businessman to make decisions for successful business operations.
• Controlling: Management uses the financial records of business to manage and control
the business operations in a smooth manner. Such financial records are available from
Book‐Keeping.
• Evidence: Book‐Keeping records can be used as legal evidence in Courts as all the
recorded transactions of a business are recorded from source documents which act as
evidence in case of any disputes.
• Comparison: Record of transactions in the books of accounts helps businesses to
compare their financial positions year after year and with other business units.
• Tax Liability: Book‐Keeping helps the businessman in ascertaining the amount payable
for Sales Tax, Property Tax, and Income Tax etc.
Utility of Book‐Keeping:

5. • Owner: Book‐Keeping helps to ascertain the financial information and position of the
business at any time. Financial information includes Profits, Losses, Assets, and
Liabilities etc.
• Management: The various Management functions such as Planning, Organizing,
Directing and Controlling can be performed effectively and efficiently by the
management based on the records and reports available through Book‐Keeping.
• Government: The various sources of information available through Book‐Keeping
facilitate the Government and the Tax Authorities to ascertain the tax liabilities of the
business.
• Investors: Investors are interested in the financial statements of a business before
investments are made. It provides them with assurance about the safety of their
investments.
• Customers: Customers are assured about the financial capacity of the business as well as
the quality and quantity of goods supplied by the business, based on the information
available through Book‐ Keeping.
• Lenders: Book‐Keeping provides financial information to the lenders enabling them to
judge the credit worthiness of the business thus, ensuring uninterrupted supply of funds.

6. Accountancy
Meaning of Accountancy:
Accountancy is a broad concept and Book‐Keeping is the recording branch of
Accounting. Accounting includes recording of transactions, classifying them in different books
of accounts, summarizing the transactions in the form of reports and interpreting them in
financial statements. Accountancy helps management in decision making. Accountancy starts
when Book‐Keeping ends.
Accountancy is an act of recording, classifying and summarizing the business
transactions, balancing of accounts, drawing conclusions and interpreting the results
thereof.
Definitions of Accountancy:
“The process of identifying, measuring and communicating economic information to permit
informed judgments and decision by users of the information”
American Accounting Association
“Accountancy refers to the entire body of the theory and process of accounting.”
- Kohler

7. “It is a means of collecting, summarizing, analyzing and reporting in monetary terms information
about the business transactions.” - Prof. Robert N. Anthony
Objectives of Accountancy:
 To ascertain the Profit or Loss of a business for a particular accounting period.
 To establish the financial position of a business during a given accounting period
 To arrive at the Total Capital on any given date.
 To determine the positions of Assets and Liabilities on any given date.
 To identify and keep a check on any frauds and misappropriations of money.
 To spot the various errors and rectify them by passing the necessary entries.
 To verify the arithmetic accuracy of the books of accounts.
 To compute the cost of production.
 To facilitate the management in decision making by providing accounting ratios, reports
and relevant data.
 To facilitate the management in preparing, analyzing and controlling the cash flows of
the business.
 To help the management form policies for controlling cost, preparation of quotation for
competitive supply etc.
Basis of Accounting:
• Cash Basis: All the transactions of business which take place in cash are called Cash
transactions. In Cash basis of accounting, only cash transactions are recorded. This is a
very popular form of Accounting. In this method, an expense is recorded only when it is
actually paid in cash. Similarly, an income is booked only when it is actually received in
cash. The specific reason of the cash inflow or cash outflow is recorded with every
transaction.
• Accrual Basis: Both Cash and Credit transactions are recorded in this system of
accounting. In the Accrual basis of accounting, transactions are recorded as and when
they occur. Incomes are recorded when they are earned, irrespective of whether the cash
has been received or not and Expenses are recorded when they become payable,
irrespective of whether they have been actually paid in cash or not. Accrual Basis of
Accounting is also known as ‘Mercantile Basis of Accounting’
Characteristics of Accountancy:

8. • Reliability: This is a very important characteristic of accounting information.
Accounting information should be recorded on the basis of documentary evidence which
is verifiable and reliable. The accounting facts should be presented in an unbiased
(impartial) manner. As per this characteristic, accounting information should be
verifiable, neutral and faithful.
• Relevance: All the accounting information which is useful and relevant should be
included in the books of accounts. Relevant information is any information which may
change the results of the business if disclosed. Every such information should be included
in the books of accounts. At the same time, any irrelevant or unnecessary information
should be ignored. Accounting information should have timelessness and feedback value
and it should be dedicative.
• Understandability: Accounting information is utilized by various parties such as
Customers, Investors, Government, Workers, Employees, Analysts, Economists, and
Researchers etc. Accounting information should therefore, be recorded, presented and
interpreted in a manner that can be understood easily by all its users. It should be brief,
clear, concise, exact and suitable to all its users.
• Comparability: It is essential to have accuracy in the comparison methods and the
practice of recording and presenting accounting information every year. Accounting
information should be recorded and presented in a consistent manner so that it can be
easily compared year after year. Comparability is an important characteristic of
accounting information as it helps in effective decision making.
Branches of Accounting:
• Financial Accounting: Financial Accounting is the process of identifying, recording,
measuring, classifying, summarizing, interpreting, analyzing and communicating the
accounting transactions of business organizations. It is the original form of accounting.
The main objective of Financial Accounting is to make the financial information of the
business available to outsiders like Creditors, Customers, Banks, Financial Institutions,
and Investors etc. The purpose of Financial Accounting is to maintain systematic records
for the ascertainment of the financial performance and the financial position of a business
and communicate the same to the various interested parties. This information is presented
in the form of Profit and Loss Account and Balance sheet which show the performance of
the business during the specified period.
• Cost Accounting: Cost Accounting is a process to control the cost of product. The
purpose of this branch of accounting is to determine the cost, control the cost and to
communicate the cost related information to the various departments in order to make
decisions and take corrective actions.

9. • Management Accounting: Management Accounting is used by top management to
make business decisions. It is essential for the top management to perform the various
management functions. It covers various areas like Cost Accounting, Budgetary Control,
Inventory Control, Statistical Methods, and Internal Auditing etc. Management
Accounting also facilitates the management in assessing the impact of the business
decisions made and actions taken by them in the past.
Accountancy, Accounting and Book-keeping
Book-keeping is a part of accounting and is concerned with record keeping or maintenance of
books of accounts. It is often routine and clerical in nature.
Accountancy refers to a systematic knowledge of accounting. It explains “why to do” and “how
to do” of various aspects of accounting. It tells us why and how to prepare the books of accounts
and how to summarize the accounting information and communicate it to the interested parties.
Accounting refers to the actual process of preparing and presenting the accounts. In other words,
it is the art of putting the academic knowledge of accountancy into practice.
Important Accounting Terminologies
• Business Transactions: Every transaction of a business, which deals in buying and
selling of goods in exchange of money, is called a Business Transaction. Every
transaction should have a financial impact and it should be measurable in terms of
money. For example, purchase of goods, sale of goods, borrowing from bank, lending of
money, salaries paid, rent paid, commission received and dividend received.
 There are two main types of Transactions:
o Monetary Transactions: The transactions which involve an exchange of money or
money’s worth, directly or indirectly, are called as Monetary Transactions. Only
Monetary transactions are recorded in books of accounts.

10. 1. Cash Transactions: Cash transactions are those transactions where the payment /
receipt of cash occur at the time of transaction only. For example, When Ram buys
goods from Kannan paying the price of goods by cash immediately, it is a cash
transaction.
2. Credit Transactions: Credit Transactions are those transactions where the payment or
receipt of cash takes place after a specified period of time. In the above example, if
Ram, does not pay cash immediately but promises to pay later, it is credit transaction.
o Non‐Monetary Transactions: The transactions carried out without the involvement of
money or money’s worth, directly or indirectly, are called Non-Monetary transactions.
These transactions are not recorded in the books of accounts.
o Barter System: Barter System is when goods and services are exchanged against other
goods and services.
• Entry: Entry is a first record of a business transaction in the books of accounts. To pass
an entry means to record a transaction in a proper form by using the correct technique in
the books of accounts.
• Narration: Narration is a short explanation of the business transaction for an entry. It
starts with the word ‘Being’ and is written in brackets below the entry.
• Goods: Goods are commodities or articles bought or sold by a businessman with the
motive to earn profit. The businessman may manufacture the goods himself or he may
purchase them for the purpose of sale.
• Profit / Loss:
o Profit: The excess of Income over Expenses during an accounting year is known as
‘Profit’.
o Loss: The excess of Expenses over Income during an accounting year is known as
‘Loss’.
• Gross Profit: Gross profit is the excess of the Net Sales over the Cost of Goods Sold.
Net Sales is the revenue (income) received after deduct ing the goods returned by the
customer out of the total goods sold.

11. Cost of Goods Sold includes the direct expenses related to the manufacture or purchase of
goods.
Net Sales = Cash Sales + Credit Sales - Sales Return
Gross Profit = Net Sales - Cost of Goods Sold
• Operating Profit: The excess of Gross Profit over Operating Expenses is known as
Operating Profit. Operating Profit is a result of conducting the Operational Activities of a
business. Operational activities are the activities performed to generate revenue for the
business. Operating Expenses are the expenses incurred for Administration of Office,
Selling and Distribution of goods and the Financial Expenses of a business.
Operating Profit = Gross Profit - Operating Cost
Operating Cost = Administration and Office Expenses + Selling and Distribution
Expenses+ Financial Expenses
• Non-Operating Profit: Non-Operating Profit is generated from activities which do not
involve any production of goods or services. It is the profit arising out of the Non
Operational activities of a business.
Non-Operating Profit = Non-Operating Income - Non-Operating Expenses
• Normal Gain: When goods are manufactured they pass from various processes. Every
process has a defined output. Output of one process becomes input of another process. If
the quantity of output increases during the normal course, it is called ‘Normal Gain’.
Normal Gain is when the actual output is equal to the expected output. It happens under
normal circumstances and does not affect the cost of production.
• Abnormal Gain: During the production process, when the goods are transferred from
one process to another, there is a possibility that the quantity may increase to much more
than what is expected. Such an unexpected increase in the quantity is known as
‘Abnormal Gain’. The actual output in this situation is much higher than the expected
output of production. Abnormal Gain may also arise when there is reduction of wastage.
When the actual wastage is lesser than the normal wastage, it is also termed as Abnormal
Gain. Abnormal Gain is essentially a result of an increase in the efficiency of the
production department.
• Income: The revenue arising from the sale of goods or services is called Income. It also
includes revenues from other sources, common to most businesses such as Interest on
Investments, Dividend, Rent, Commission etc.
• Assets: An Asset is any property owned by a business unit. Cash in hand, plant and
machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of goods,
investments, Goodwill are examples for assets. Assets can be classified in three types:

12. 1. Fixed Assets: Assets which are purchased for the purpose of long term use and are not
usually sold until they are worn out are called Fixed Assets. They provide long term
benefits to the Business.
a. Tangible Assets: These assets are those having physical existence. It can be seen and
touched. For example, plant & machinery
b. Intangible Assets: Intangible assets are those assets having no physical existence but
their possession gives rise to some rights and benefits to the owner. It cannot be seen and
touched. Examples- Goodwill, patents, trademarks.
2. Current Assets: Current Assets are the assets which remain in the business for a short
period of time (usually less than a year) and can be converted into cash easily.
3. Fictitious Assets: Fictitious Assets are intangible in nature. These assets cannot be seen
or touched. They can only be felt. They do not have any physical form of existence but
they can be valued in terms of money. They are imaginary assets and generally do not
have any exchange value.
• Liabilities: The amount payable by business to outsiders is known as Liability. It is the
amount due from the business to various parties for the benefits received by the business
unit. Examples: loans from banks or other persons, creditors for goods supplied, bills
payable, outstanding expenses, bank overdraft etc.
1. Fixed Liabilities: Fixed Liabilities, also known as Long Term Liabilities, are funds
made available to business units from various sources for long term use. They are the
major source of funds for the business.
2. Current Liabilities: Liabilities which are payable in a short period of time (generally
within a year) are called Current Liabilities. These are sources of short term finance for
business units.
3. Net Worth / Owners Equity or Capital: Capital is the money invested by the proprietor
of a firm to start a business. Additionally, the excess of the Assets over Liabilities is also
known as ‘Capital’ or ‘Net Worth’ of a business. As per the business entity concept,
business and its owner are separate entities.
Net worth = Owners Equity = Capital
Owner’s Equity = Total Equity (Assets) - Creditors Equity (Liabilities)
Net Worth = Capital + Reserves
Capital = Total Assets - Total Liabilities
Total Assets = Fixed Assets + Current Assets
4. Contingent Liabilities: Contingent Liability is a liability which may have to be paid at a
future date, depending upon the happening or non-happening of a certain event. It does
not affect the financial position of a business and hence it is not recorded in the books of
accounts till the event actually occurs. A contingent liability is stated as a foot note to the
Balance sheet, simply for information.

13. • Proprietor: A person who owns a business is called its proprietor. He contributes capital
to the business with the intention of earning profit
5. Capital and Drawings:
a. Capital: Total amount of funds invested by proprietor in the business is called capital. In
accounting sense, the excess of Assets over Liabilities is called capital. Capital is a
liability of the business as the amount is repayable to the owner of the business unit.
Given below is the equation for the calculation of
Capital: Capital = Assets – Liabilities
For example, if Mr.Anand starts business with Rs.5, 00,000, his capital would be Rs.5,
00,000.
b. Drawings: Any goods or amount withdrawn by the proprietor from the business for his
personal use is called Drawings.
• Debtors and Creditors:
a. Debtors: A person who pays money to the business for goods and services purchased by
him on credit is called a Debtor. A Debtor is a person who owes money to the business.
For example, Mr.Arul bought goods on credit from Mr.Babu for Rs.10,000. Mr.Arul is a
debtor to Mr.Babu till he pays the value of the goods.
b. Creditors: A person to whom money is payable for goods and services purchased or
received by the business is known as a Creditor. A creditor is a person to whom business
owes money. In the above example Mr.Babu is a creditor to Mr.Arul till he receive the
value of the goods.
• Expenditure: The amount paid by a business to receive any services or purchase goods
is called Expenditure. When a consideration is received against a payment, the amount
paid is known as Expenditure.
a. Capital Expenditure: The amount paid to acquire an Asset or to increase the value of
Fixed Assets is called Capital Expenditure. This type of expenditure is non‐recurring in
nature and the benefits can be availed over a longer period of time. It increases the
earning capacity of a business.
b. Revenue Expenditure: Revenue Expenditure is expenditure from which the benefit is
received immediately or for a short term, generally less than one year. It is expenditure
incurred on operating expenses / day to day expenses of a business which are recurring in
nature. Such expenses do not increase the profit earning capacity of a business. Revenue
expenditures appear on the debit side of the Trading Account or Profit and Loss Account.
c. Deferred Revenue Expenditure: Expenditure incurred which is revenue in nature and
provides benefit for more than one year is called Deferred Revenue Expenditure. This

14. expenditure is written off in Profit and Loss A/c over a period of time. Amount written
off is shown in debit side of Profit and Loss Account and amount which is not written
off yet is shown in the Balance sheet - Asset side.
• Cash Discount and Trade Discount: Discount is a concession on payment given by the
seller to the buyer.
a. Cash Discount: Cash discount is an allowance or concession provided to customers for
prompt payment of debt. It is deducted from the amount receivable or payable at the time
of payment and is given for either spot payment or payment made within a specified time
period. Cash discount is given on the price calculated after the deduction of Trade
Discount. Cash Discount is a loss to seller and gain for the buyer and hence, it is always
recorded in books of accounts.
b. Trade Discount: Trade Discount is an allowance or concession given to the buyer on list
price of goods at the time of sale. Trade discount is not recorded in books of accounts as
it helps the retailer to sell the goods on printed price and yet make profit.
• Solvent and Insolvent:
a. Solvent: A Solvent person is someone who is financially sound and is in a position to
pay off all his debts. The Assets of a Solvent person are equal to or more than his
Liabilities.
b. Insolvent: An Insolvent person is someone who is not in a position to pay off his Total
Debts from his Total Assets and who is not in a financially sound position. The Assets of
an Insolvent person are less than his Liabilities.
• Accounting Year: In order to find out the financial position and performance of the
Business, preparation of financial statements is essential. Financial statements are
prepared for a period of 12 months. In earlier times, businessmen were allowed to prepare
or close the accounts as per their traditional calendars. However, now, in India, as per the
Income Tax rules, an accounting year should be of 12 months starting from 1st
April to
31st
March. A Businessman is required to prepare the Trading Account, Profit and Loss
Account and Balance sheet to ascertain the financial position of the business.
• Trading Concern and Non Trading Concern:
a. Trading Concern: A business or a firm established to perform trading activities, with
the objective of earning profit is called a Trading Concern. A Trading Concern is also
known as a Profit Making Organization or Commercial Organization.
b. Non Trading Concern: An organization which is established for rendering services to
the society and does not operate with the objective of earning profit is known as a Non

15. Trading Concern. A Non Trading Concern may be formed with the objective of
promoting a useful object such as art, science, sports, culture, charity etc.
• Goodwill: Reputation of the business in the market, valued in terms of money, is
called Goodwill. It is an Intangible Asset. An Intangible asset is one which cannot be
seen or touched. It can only be felt. Goodwill is the name established by the business
in the market, measured in monetary terms. It adds value to the business in addition to
the value of the Tangible Assets however; Goodwill does not have any physical
existence. It is recorded on the Asset side of the Balance sheet.
• Purchases: Purchases refers to the amount of goods bought by a business for resale
or for use in the production. Goods purchased for cash are called cash purchases. If
it is purchased on credit, it is called as credit purchases. Total purchases include
both cash and credit purchases
• Purchases Return or Returns Outward: When goods are returned to the suppliers
due to defective quality or not as per the terms of purchase, it is called as purchases
return. To find net purchases, purchases return is deducted from the total purchases.
• Sales: Sales refers to the amount of goods sold that are already bought or
manufactured by the business. When goods are sold for cash, they are cash sales but
if goods are sold and payment is not received at the time of sale, it is credit sales. A
total sale includes both cash and credit sales.
• Sales Return or Returns Inward: When goods are returned from the customers due
to defective quality or not as per the terms of sale, it is called sales return or returns
inward. To find out net sales, sales return is deducted from total sales.
• Stock: Stock includes goods unsold on a particular date. Stock may be opening and
closing stock. The term opening stock means goods unsold in the beginning of the
accounting period. Whereas the term closing stock includes goods unsold at the end
of the accounting period. For example, if 4,000 units purchased @ Rs. 20 per unit
remain unsold; the closing stock is Rs.80, 000. This will be opening stock of the
subsequent year.
• Revenue: Revenue means the amount receivable or realized from sale of goods and
earnings from interest, dividend, commission, etc.
• Expense: It is the amount spent in order to produce and sell the goods and services.
For example, purchase of raw materials, payment of salaries, wages, etc.
• Income: Income is the difference between revenue and expense.

16. • Voucher: It is a written document in support of a transaction. It is a proof that a
particular transaction has taken place for the value stated in the voucher. It may be in
the form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is
necessary to audit the accounts.
• Invoice: Invoice is a business document which is prepared when one sell goods to
another. The statement is prepared by the seller of goods. It contains the information
relating to name and address of the seller and the buyer, the date of sale and the clear
description of goods with quantity and price.
• Receipt: Receipt is an acknowledgement for cash received. It is issued to the party
paying cash. Receipts form the basis for entries in cash book.
• Account: Account is a summary of relevant business transactions at one place
relating to a person, asset, expense or revenue named in the heading. An account is a
brief history of financial transactions of a particular person or item. An account has
two sides called debit side and credit side.

17. Accounting Concepts, Conventions and Principles
Professional Accounting bodies have developed the Generally Accepted Accounting
Principles (GAAP) which confirm the established practices and principles for recording
transactions. All accountants are expected to follow these accounting principles while preparing
accounts as they facilitate ease of comparison of accounts between different organizations. It is
also beneficial for auditors to check accounts of various organizations as the basic concepts
followed while preparing the accounts are standardized.
Meaning of Accounting Concepts:
Accounting concepts are the general rules of accounting to be followed and practiced by
an accountant while preparing the accounts of a firm. Accounting is the language of business and
this language needs to be consistent for all businesses else it would be difficult for the various
interested parties to interpret the accounts of a business. In order to standardize this language,
accounting concepts have been developed over the years. Accounting Concepts are general
guidelines for sound accounting practices.
Importance of Accounting Concepts:
 Reliable Financial Statements.
 Uniformity in presentation.
 Generally acceptable basis of measurement.
 Proper information to all.
 Valid and appropriate assumptions.

18. Important Accounting Concepts
I. Business Entity Concept: The concept of Business Entity states that a Business and
its Owner are two separate entities. As per this concept, a business should record
transactions only related to business. Proprietors’ personal transactions are not to be
recorded in the books of the business. For e.g.: Payment of the Electricity bill for the
residence of the owner will not be recorded as an expense in the books of accounts. It
will simply be deducted from the capital account of the owner.
For example, Mr. A starts a new business in the name and style of M/s Independent
Trading Company and introduced a capital of Rs. 2, 00,000 in cash. It means the cash
balance of M/s Independent Trading Company will increase by a sum of Rs
2,00,000/-. At the same time, the liability of M/s Independent Trading Company in
the form of capital will also increase. It means M/s Independent Trading Company is
liable to pay Rs. 2, 00,000 to Mr. A.
II. Money Measurement Concept: Business transactions need to be recorded in a
common unit of measurement. Money is used as a common measurement unit to
record all the business transactions. As a result of this concept, only monetary
transactions are recorded in the books of accounts. In India, transactions can only be
recorded in Indian currency. i.e. ‘Rupee’ (`).
Example: Determine and book the value of stock of the following items: Shirts Rs
5,000/- Pants Rs 7,500/- Financial Accounting 6 Coats 500 pieces Jackets 1000 pieces
Value of Stock = ?
Here, if we want to book the value of stock in our accounting record, we need the
value of coats and jackets in terms of money. Now if we conclude that the values of
coats and jackets are Rs 2,000 and Rs 15,000 respectively, then we can easily book
the value of stock as Rs 29,500 (as a result of 5000+7500+2000+15000) in our books.
We need to keep quantitative records separately.

19. III. Cost Concept: The Cost concept states that all the assets purchased should be
recorded at cost price and the cost paid will be the base for further accounting. Market
price of an asset keeps fluctuating. Hence, it becomes necessary to record the
transactions at cost price.
IV. Consistency Concept: The consistency concept states that any policies adopted for
accounting should not change frequently unless it is the demand of the changing
circumstances. Policies adopted for accounting should be consistent and continuous.
This concept does not prevent introduction of any new techniques or the improvement
of any existing techniques but any deviations from the existing methods should be
disclosed separately as a note.
V. Conservatism Concept: In accounting, a business should not anticipate future
profits but anticipate future losses and make provisions for all the possible expenses.
This helps create some reserves in the books of accounts which can absorb the
unexpected expenses, if any. The Profit and Loss Account may show lower income
and in Balance sheet may overstate the Liabilities and understate the Assets. This
policy of recording is asking the accountant ‘to play safe’ while recording
transactions in the books of accounts.
VI. Going Concern Concept: Going Concern Concepts states that a business should
function for a long period of time. It should not be closed down in a short period of
time. If a new business suffers losses, it should not be closed but given a chance to
make profits in the long run. This concept builds confidence in Investors, Creditors,
Customers and Employees.
VII. Realization Concept: This concept states that an income is realized only when it is
received or earned. Similarly, revenues are recorded only when goods are sold or
services are provided. Sales revenues are considered as recognized when sales are
effected during the accounting period, irrespective of whether the payment has been
received or not.
VIII. Accrual Concept: Expenses are recorded when they are accrued i.e. when they
become payable. Similarly, Income is also recorded when it is accrued i.e. when it
becomes receivable. Actual payment and receipts are not concerned with recording of
the expenses or incomes. As per the Accrual concept, Incomes and Expenses related
to the specific accounting period should be recorded in the books of accounts,
irrespective of whether they have been paid or not.
IX. Dual Aspect Concept: Every business transaction has two effects and involves
exchange of benefits. Benefit received and benefit given, both the aspects should be
recorded in the books. The system which records such dual aspects in the books of
accounts is known as Double Entry System. This principle is also referred to as the
Debit and Credit concept. The account where the benefit comes in is debited and the
account where the benefit goes out is credited.

20. X. Disclosure Concept: This concept states that the accounts must disclose all the
material information. Accounts should disclose true, fair and complete information to
all the related parties. The Balance sheet and the Profit and Loss Account should
present the true picture of the financial performance and the financial position of the
business. The information disclosed should possess the qualities of relevance,
reliability, comparability and it should be easy to understand for all the concerned
authorities.
XI. Materiality Concept: As per this concept, it would not be very economical for a
business to record all the small details in accounting. This concept states that rather
significant and important monetary matters need to be recorded in the books of
accounts. The utility of the transaction and information should be related to the time,
efforts and the cost involved in accounting of such transactions. Items with
value/weightage on the financial condition of a business need to be recorded and
disclosed. The remaining information can be merged with other items or it may be
shown as foot notes.
XII. Revenue Recognition Concept: Revenue is the gross inflow of cash receivable by
the business. It also includes the other considerations (cash inflows) arising out of the
ordinary activities of the business. This principle states that the revenue earned in a
particular accounting period should be recognized and recorded in the books of
accounts irrespective of whether it has been received during that period or not.
XIII. Matching Concept: Matching principle states that all the income received or earned
in an accounting year should be matched with the expenses incurred in that
accounting year. This concept considers the accrual basis of accounting. Therefore, it
includes all the adjustments related to Prepaid Expenses, Outstanding Income,
Outstanding Expense and Pre-received Income. The matching principle does not
enforce that each expense should be matched with or linked to every revenue.
Expenses incurred may or may not be directly attributable to the revenue. In cases
where relevant, the appropriate expenses should be matched against the appropriate
revenues as per this concept.

21. ACCOUNTING CONVENTIONS
1. Convention of Materiality: Materiality concept states that items of small significance
need not be given strict theoretically correct treatment. In fact, there are many events in
business which are insignificant in nature. The cost of recording and showing in financial
statement such events may not be well justified by the utility derived from that
information. For example, an ordinary calculator costing Rs.100 may last for ten years.
However, the effort involved in allocating its cost over the ten year period is not worth
the benefit that can be derived from this operation. The cost incurred on calculator may
be treated as the expense of the period in which it is purchased. Similarly, when a
statement of outstanding debtors is prepared for sending to top management, figures may
be rounded to the nearest ten or hundred.
2. Convention of Conservatism: This concept requires that the accountants must follow
the policy of ‘’playing safe” while recording business transactions and events. That is
why, the accountant follow the rule anticipate no profit but provide for all possible losses,
while recording the business events. This rule means that an accountant should record
lowest possible value for assets and revenues, and the highest possible value for liabilities
and expenses. According to this concept, revenues or gains should be recognized only
when they are realized in the form of cash or assets (i.e. debts) the ultimate cash
realization of which can be assessed with reasonable certainty. Further, provision must be
made for all known liabilities, expenses and losses, Probable losses regarding all
contingencies should also be provided for. ‘Valuing the stock in trade at market price or
cost price whichever is less’, ‘making the provision for doubtful debts on debtors in
anticipation of actual bad debts’, ‘adopting written down value method of depreciation as
against straight line method’, not providing for discount on creditors but providing for
discount on debtors’, are some of the examples of the application of the convention of
conservatism.

22. 3. Convention of Consistency: The convention of consistency requires that once a firm
decided on certain accounting policies and methods and has used these for some time, it
should continue to follow the same methods or procedures for all subsequent similar
events and transactions unless it has a sound reason to do otherwise. In other worlds,
accounting practices should remain unchanged from one period to another. For example,
if depreciation is charged on fixed assets according to straight line method, this method
should be followed year after year. Analogously, if stock is valued at ‘cost or market
price whichever is less’, this principle should be applied in each subsequent year.
4. Convention of Full Disclosure: Convention of full disclosure requires that all material
and relevant facts concerning financial statements should be fully disclosed. Full
disclosure means that there should be full, fair and adequate disclosure of accounting
information. Adequate means sufficient set of information to be disclosed. Fair indicates
an equitable treatment of users. Full refers to complete and detailed presentation of
information. Thus, the convention of full disclosure suggests that every financial
statement should fully disclose all relevant information. Let us relate it to the business.
The business provides financial information to all interested parties like investors,
lenders, creditors, shareholders etc.
Accounting Standards
To promote world-wide uniformity in published accounts, the International Accounting
Standards Committee (IASC) has been set up in June 1973 with nine nations as founder
members. The purpose of this committee is to formulate and publish in public interest, standards
to be observed in the presentation of audited financial statements and to promote their world-
wide acceptance and observance. IASC exist to reduce the differences between different
countries’ accounting practices. This process of harmonization will make it easier for the users
and preparers of financial statement to operate across international boundaries. In our country,
the Institute of Chartered Accountants of India has constituted Accounting Standard Board
(ASB) in 1977. The ASB has been empowered to formulate and issue accounting standards that
should be followed by all business concerns in India.
Concept:
“Accounting standards are codes of conduct imposed by customs, law or professional bodies for
the benefit of public accountants and accountants generally.” - Kohler
Standards of Accounting are recommended by the Institute of Chartered Accountants of
India (I.C.A.I.) and prescribed by the Central Government in consultation with the National
Advisory Committee of Accounting Standards (N.A.C.A.S.).
Accounting standards are written policy documents issued by the expert accounting body
or by Government or other regulatory body covering following aspects:
 Recognition
 Measurement

23.  Treatment
 Presentation
Objectives: The objective of accounting standards is to standardize the diverse accounting
policies and practices with a view to eliminate the non‐comparability of financial statements and
add reliability to the financial statements.
Important Accounting Standards (AS)
• AS‐1 Disclosure of Accounting Policies: Accounting to this standard, the accounting
policies followed in the preparation and presentation of financial should form a part of
the financial statement and normally be disclosed in one place.
• AS‐2 Valuation of Inventories: According to this standard, inventories in general
should be valued at lower of historical cost and net realizable cost.
• AS‐3 Cash Flow Statements: According to this standard, a cash flow statement is
prepared and presented for the period for which the profit and loss account is prepared.

24. • AS‐6 Depreciation Accounting: According to this standard, the depreciation amount of
an asset should be allocated on a systematic basis for each accounting period during the
useful life of an asset.
• AS‐8 Accounting for Research and Development: According to this standard, the
amount of research and development costs should be charged as an expense of the period
in which they are actually incurred.
• AS‐9 Revenue Recognition: This standard deals with the basis required for recognition
of revenue items in the Profit and Loss Account of an enterprise. It lays down conditions
to recognize revenues that arise from the various transactions of an enterprise.
• AS‐10 Accounting for Fixed Assets: According to this standard, the cost of fixed assets
should comprise of the purchase price and any attributable cost of bringing the asset to its
working conditions for its intended use. The fixed assets should be eliminated from the
financial statement on disposal or when no further benefit is expected from their use.
• AS‐12 Accounting for Government Grants: According to this standard, government
grants should be recognized when there is an assurance that the enterprise will comply
with the conditions attached to them.

25. • AS‐13 Accounting for Investments: According to this standard, an enterprise should
disclose the current and long‐term investments distinction in its financial statements.
Current investments should be carried in the financial statements at the lower cost or fair
value. However, long‐term investments should always be carried in the financial
statement at the cost price.
• AS‐22 Accounting for Taxes on Income: According to this standard, tax expenses for
the period comprising current tax and deferred tax should be included in the
determination of the net profit or loss for the period.
USERS OF ACCOUNTING INFORMATION
I. External Users of Accounting Information: External users are those groups or
persons who are outside the organization for whom accounting function is performed.
Following can be the various external users of accounting information:
• Investors: Those who are interested in investing money in an organization are interested
in knowing the financial health of the organization of know how safe the investment
already made is and how safe their proposed investment will be. To know the financial
health, they need accounting information which will help them in evaluating the past
performance and future prospects of the organization. Thus, investors for their
investment decisions are dependent upon accounting information included in the
financial statements. They can know the profitability and the financial position of the
organization in which they are interested to make that investment by making a study of
the accounting information given in the financial statements of the organization.
• Creditor:. Creditors (i.e. supplier of goods and services on credit, bankers and other
lenders of money) want to know the financial position of a concern before giving loans

26. or granting credit. They want to be sure that the concern will not experience difficulty in
making their payment in time i.e. liquid position of the concern is satisfactory. To know
the liquid position, they need accounting information relating to current assets, quick
assets and current liabilities which is available in the financial statements.
• Members of Non-profit Organizations: Members of non-profit organizations such as
schools, colleges, hospitals, clubs, charitable institutions etc. need accounting
information to know how their contributed funds are being utilized and to ascertain if the
organization deserves continued support or support should be withdrawn keeping in
view the bad performance depicted by the accounting information and diverted to
another organization. In knowing the performance of such organizations, criterion will
not be the profit made but the main criterion will be the service provided to the society.
• Government: Central and State Governments are interested in the accounting
information because they want to know earnings or sales for a particular period for
purposes of taxation. Income tax returns are examples of financial reports which are
prepared with information taken directly from accounting records. Governments also
need accounting information for compiling statistics concerning business which, in turn
helps in compiling national accounts.
• Consumers. Consumers need accounting information for establishing good accounting
control so that cost of production may be reduced with the resultant reduction of the
prices of goods they buy. Sometimes, prices for some goods are fixed by the
Government, so it needs accounting information to fix reasonable prices so that
consumers and manufacturers are not exploited. Prices are fixed keeping in view fair
return to manufacturers on their investments shown in the accounting records.
• Research Scholars: Accounting information, being a mirror of the financial
performance of a business organization, is of immense value to the research scholars
who wants to make a study to the financial operations of a particular firm. To make a
study into the financial operations of a particular firm, the research scholar needs
detailed accounting information relating to purchases, sales, expenses, cost of materials
used, current assets, current liabilities, fixed assets, long term liabilities and shareholders'
funds which is available in the accounting records maintained by the firm.
II. Internal Users of Accounting Information. Internal users of accounting
Information are those persons or groups which are within the organization.
• Owner: The owners provide funds for the operations of a business and they want to
know whether their funds are being properly used or not. They need accounting
information to know the profitability and the financial position of the concern in which
they have invested their funds. The financial statement prepared from time to time from
accounting records depicts them the profitability and the financial position.

27. • Management: Management is the art of getting work done through others; the
management should ensure that the subordinates are doing work properly. Accounting
information is an aid in this respect because it helps a manager in appraising the
performance of the subordinates. Actual performance of the employees can be compared
with the budgeted performance they were expected to achieve and remedial action can be
taken if the actual performance is not up to the mark. Thus, accounting information
provides "the eyes and ears to management".
• Employees: Employees are interested in the financial position of a concern they serve
particularly when payment of bonus depends upon the size of the profits earned. They
seek accounting information to know that the bonus being paid to them is correct.