FA

1. FINANCIALACCOUNTING
UNIT I
DAY 3
24.08.2020

2. CONTENT
• Double entry accounting
• Basic accounting Concepts and Conventions

3. Double entry accounting
• According to Pacioli, “Double-entry accounting is based
on a simple concept: each party in a business transaction
will receive something and give something in return. In
accounting terms, what is received is a debit and what
is given is a credit. The T account is a representation of a
scale or balance.”
Luca Pacioli
Developer of Double-Entry
Accounting,
1494
Scale or Balance
Receive
DEBIT
Give
CREDIT

4. Debits and Credits
• Two of the most familiar
accounting terms are “debits
and credits.” In the double-
entry system, debits must
always equal credits for the
accounting equation.
• Debit (from the Latin word
debere) means “left.” It is
often abbreviated as “Dr.”
• Credit (from the Latin word
credere) means “right.” It is
often abbreviated as “Cr

5. Accounting concepts
 Business Entity Concept
 Going Concern Concept
 Money Measurement Concept
 Dual Aspect Concept
 Accounting Period Concept or Periodicity Concept
 Cost Concept
 Realization Concept or Revenue Recognition Concept
 Matching Concept
 Accrual Concept
 Objectives Evidence Concept

6. Business Entity Concept
• It represents the association of persons is considered distinct and
separate from the owners.
• It determines what is to be recorded and what is to be excluded from
the books of accounts.
• A separate set of books is to be maintained. The personal transactions
of the owners and manager which are not connected to the business
unit are excluded.
• Eg: If a sole trader withdraws money from the business for personal
use, it is recorded as drawings by the owner. All the financial
transactions are recorded from the point of view of the entity and
not from the point of view of the other parties – customer,
suppliers, partners, owners. All payments are treated as expenses of
the business. It implies that accounting has to maintain financial
records of the business, record incomes and expenses and ascertain
P&L.

7. Going Concern Concept
• This concept assumes that a business entity has
continuity of life. It will continue for an
indefinite period of time. It has no intention to
close down.

8. Money measurement concept
• All business transactions are measured,
expressed and recorded in terms of money. It
excludes all business transactions and events
which cannot be measured in terms of
money.
• Thus, quality of the products, value of skilled
labour force, working conditions, production
policies, disputes etc cannot be recorded in
accounts in spite of their importance to the
business.

9. Dual aspect concept
• Every business transaction recorded in the
books of accounts of a business has two
aspects receiving of benefit and giving of
benefit.
• Both the aspects of each transaction must be
recorded. It is the basis for double entry
system of booking keeping.

10. Accounting period concept or
periodicity concept:
• Accounting period concept helps to measure
the income generated during the specific
accounting period which makes it possible to
distribute it to the owners.
• It makes comparison of the results of one
accounting period with those of another
possible, leading to comparative performance
evaluation.

11. Cost concept
• According to this concept, assets are recorded
at the price paid to acquire them. Assets are
gradually depreciated on the basis of cost and
effective life of the asset.

12. Realization concept or Revenue
recognition concept
• Revenue is the gross inflow of cash,
receivables or other consideration arising in
the course of an enterprise from the sale of
goods, service and from holding of asset.”
According realization concept revenue is
considered as earned on the date when it is
realized.
• Eg: Hire purchase

13. Matching Concept
• Matching of revenues and costs to a specific
period is matching concept.
a. Direct Cost with sales revenue to
ascertains gross profit.
b. Indirect Costs with gross profit and other
incomes to ascertain net profit. All expenses
incurred and outstanding expenses, all
incomes received and accrued income,
depreciation, loss or profit on sale of fixed
assets are considered.

14. Accrual concept
• Accrual concept is the most fundamental
principle of accounting which requires
recording revenues when they are earned
and not when they are received in cash, and
recording expenses when they are incurred and
not when they are paid.

15. Objectives evidence concept
• All the transactions recorded should have an
evidence of recording vouchers, invoices,
counterfoil, cash receipts , so it is reliable
accounts.

16. Accounting conventions
Conventions of full disclosure
Convention of Consistency
Convention of Materiality
Convention of conservatism

17. Convention of Full Disclosure
• Each and every fact of the business should be
disclosed fully and clearly in the financial
statement. Facts means not immaterial but
valuable help to owner, investors, creditors.
Disclosure needs proper classification,
summarization, aggregation and explanation of
all details.

18. Convention of consistency
• According to this convention, the rules,
practices and concepts used in accounting
should be continuously observed and applied
year after year. Comparisons of results among
different accounting periods can be significant
and meaningful only when consistent practices
were followed in ascertaining them.
• They will follow consistent rules, practices and
methods.

19. Convention of Materiality
• Materiality means relative importance. All
important items and facts should be disclosed
in accounting statements. Immaterial facts
need not be recorded.

20. Convention of Conservatism
• According Kotler “conservatism is a guideline
which chooses between acceptable accounting
alternatives for recording events and
transactions so that the least favorable
immediate effect on assets, income and
owner’s equity is reported”.
• Eg: When stock are valued, the usual principle
followed is “cost or market price” whichever is
lower.