Topic 2 basic terminologies, accounting principles, concepts and conventions

1. TOPIC: 2. BASIC TERMINOLOGIES,
ACCOUNTING PRINCIPLES, CONCEPTS
AND CONVENTIONS
By Srinivas Methuku.

2. TOPIC OBJECTIVES:
After completion of this topic student should be
conversant with the following:
1. Basic terminologies of accounting
2. Basis of Accounting
3. Accounting principles
4. Accounting concepts and conventions

3. BASIC TERMINOLOGIES OF ACCOUNTING:
 Business Transaction: Any exchange of money or
money’s worth as goods and services between two
parties is called a business transaction
 Cash transactions: A transaction that is settled
with cash on the same day as the trade.
 Credit transaction: Where payment of receipt of
money is postponed to a future date.
 Non-monetary: The transaction does not involve
an exchange of money or money’s worth directly or
indirectly

4.  Goods: The commodities or articles in which the
trader deals with.
 Profit: Income over expenditure during a particular
period
 Operating profit: it is the excess of gross profit
over operating expenses.
 Non-operating profit: The excess of non-operating
revenues over non-operating expenses.
 Normal gain
 Abnormal gain
 Income: It is a revenue arising as result of
business transactions.

5.  Assets: Property or any kind owned by a business.
 Fixed assets / Tangible assets
 Current assets
 Fictitious assets / Intangible assets
 Liabilities: The amount payable by the business to
others.
 Fixed liabilities / Long term liabilities
 Current liabilities
 Contingent Liabilities:

6.  Net worth: excess of assets over liabilities
 Capital: The total amount invested by the owner
into the business.
Capital = Assets - Liabilities
 Drawings: If the owner withdraws any money or
goods or assets from the business for personal use.
 Debtor: A person who owes money.
 Creditor: A person to whom money is owning or
payable.

7.  Expenditure: An amount paid for any consideration
received by business is called expenditure.
 Capital expenditure
 Revenue expenditure
 Deferred revenue expenditure
 Discount: discount is basically a concession is
given by a seller to the buyer.
 Cash discount
 Trade discount

8.  Solvent: A person who is in a position to pay off all
his debts.
 Insolvent: A person who is not in a position to pay
off
 Accounting year
 Trading concern
 Not for profit concern
 Good will

9. BASIS OF ACCOUNTING:
 Cash basis
 Accrual basis
 Mixed

10. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
 GAAPs are common set of accounting principles,
standards and procedures that companies use
while preparing their financial statements.
 Sources of Indian GAAPs:
i. Company Law
ii. Accounting standards and related documents of ICAI
iii. SEBI requirements
iv. Established conventions

11. ACCOUNTING PRINCIPLES
 The term ‘Principle’ refers to fundamental belief or a
general truth which once established doesn’t
change.
 AICPA defines the term ‘Principle’ “as a guide to
action, a settled ground or basis of conduct or
practice.”
 Accounting principles are the guidelines to establish
standards for sound accounting practices and
procedures in reporting the financial status and
periodic performance of a business.
 Accounting principles are categorized as
accounting concepts and conventions

12. ACCOUNTING CONCEPTS AND CONVENTIONS
 Accounting concepts: it may be consider as
postulates i.e., basic assumptions or conditions
upon which the science of accounting is based.
 Accounting conventions: The term ‘convention’
denotes circumstances or traditions which guide the
accountants

13. ACCOUNTING PRINCIPLES
Accounting Concepts
• Business entity
• Money measurement
• Going concern
• Cost
• Dual aspect
• Accounting period
• Matching
• Realization
• Objective of evidence
• Accrual
Accounting
Conventions
• Consistency
• Full disclosure
• conservatism
• Materiality

14. WHAT DO YOU KNOW ABOUT ACCOUNTING
EQUATION?
Assets = Liabilities
Assets = Liabilities + Capital

15.  You are required to complete the gaps in the
following table.
Assets Liabilities Capital
1 25,000 3,600 ?
2 56,000 9,800 ?
3 33,600 ? 25,000
4 39,200 ? 32,900
5 ? 12,600 38,400
6 ? 23,300 79,500

16. ACCOUNTING EQUATION EXERCISE:
 Krishna started business with cash 1,00,000
 Borrowed from Anil 50,000
 Paid salary 20,000
 Purchased goods on credit 40,000
 Received interest of 25,000

17. ACCOUNTING EQUATION EXERCISE:
 Show the accounting equation on the basis of the
following transaction:
i. Mohan commenced business with 70,000
ii. Withdrew for private use 1,700
iii. Purchased goods on credit 14,000
iv. Purchased goods for cash 10,000
v. Paid wages 300
vi. Paid to creditors 10,000
vii. Sold goods on credit for 15,000
viii. Sold goods for cash (cost price is 3,000) 4000
ix. Purchased furniture 500

18. ACCOUNTING EQUATION EXERCISE:
 Show the accounting equation for the following
transactions of Hitesh for the year 2013:
a) Hitesh started business with cash 2,50,000
b) Purchased goods on credit 24,000
c) Purchased goods for cash 4,000
d) Purchased furniture for cash 1,500
e) Withdrew for private use 1,000
f) Paid rent 3,000
g) Received interest 1,000
h) Sold goods on credit (cost 1,500) 1,700
i) Paid to creditors 4,000
j) Paid salaries 2,000

19. THANKS FOR LISTENING!!!