Golden Rules of Accounting ( Traditional)

Head Debit Credit

Personal The Receiver The Giver
Real What comes in What goes Out
Nominal All Expenses and Losses All Income and Gains

Golden Rules of Accounting (Modern)

For recording changes in Assets/Expenses/Losses

Increase in Asset is debited and decrease in Asset is credited.

Increase in Expenses/Losses is debited and decrease in Expenses/ Losses is credited.

For recording changes in Liabilities, Capital and Revenue/Gains

Increase in Liabilities is credited and decrease in Liabilities is debited.

Increase in Capital is credited and decrease in Capital is debited.

Accounting Concepts

Meaning of Going Concern Concept

The Going Concern Concept assumes that a business will continue its operations indefinitely and will neither be
liquidated nor partially sold in the foreseeable future. Based on this principle, fixed assets are recorded at their original
cost, adjusted for estimated depreciation over their useful life.

Significance of Going Concern Concept

(i) In the absence of this concept, the cost of fixed assets will be treated as an expense in the year of its buy.

(ii) This concept facilitates Preparation of Financial Statement (Profit and Loss Balance Sheet).

(iii) Because of this concept, business can be judged for its capacity to earn profit in future.

(iv) It is of great help to the investors because it assures them that they will continue to get income on their
investments.

(v) On the basis of this concept, depreciation is charged on the fixed assets.

(vi) According to this concept, every year same amount will be shown as expense and the balance amount as an asset.

(vii) Division of assets into current and fixed assets is made on this basis.

Meaning of Business Entity Concept

The Business Entity Concept assumes that, for accounting purposes, the business enterprise and its owners are treated
as separate entities. Consequently, the business's transactions are recorded independently of the personal transactions
of its owner.
Significance of Business Entity Concept

(i) This concept restraints accountants from recording of owner private/personal transactions.

(ii) This concept helps in ascertaining the profit of the business as only the business expenses and revenues are
recorded, and all the private and personal expenses are ignored.

(iii) It also facilitates the recording and reporting of business transactions from the business point of view.

(iv) It is the very basis of accounting concepts, conventions and principles.

Meaning of Money Measurement Concept

The Money Measurement Concept assumes that all business transactions must be recorded in monetary terms, using
the currency of the respective country. In our case, transactions are recorded in terms of rupees. As per this concept,
only transactions that can be expressed in monetary terms are documented in the books of accounts.

Significance of Money Measurement Concept

(i) This concept guides accountants what to record and what not to record.

(ii) It helps in recording business transactions uniformly.

(iii) If all the business transactions are expressed in monetary terms it will be easy to understand the accounts prepared
by the business enterprise.

(iv) It facilitates comparison of business performance of two different periods of the same firm or of the two different
firms of the same period.

(v) Loyalty and honesty of employees are not recorded in books of accounts.

Meaning of Dual Aspect Concept

The Dual Aspect Concept is the fundamental principle of accounting, forming the basis for recording business
transactions in the books of accounts. This concept assumes that every transaction has a dual effect, impacting two
accounts on opposite sides. Consequently, each transaction must be recorded in two places to reflect both aspects in
the accounts accurately.

Significance of Dual Aspect Concept

(i) This concept helps the accountant in detecting errors.

(ii) It encourages the accountant to post each entry in opposite sides of two affected accounts.

(iii) It helps in preparing the Financial Position Statement/ Balance Sheet on a particular date.
 Accounting Convention
Meaning of Convention of consistency

The principle of consistency dictates that the same accounting principles, policies, and methodologies should be
consistently applied in the preparation of financial statements year after year.

Significance of Convention of consistency

(i) Ensures that financial statements are prepared using consistent accounting methods, facilitating meaningful
comparisons across different accounting periods.

(ii) Promotes uniformity in accounting practices, thereby enhancing stakeholders' trust in the reliability of the financial
data presented.

(iii) Assists investors, managers, and other stakeholders in analysing trends and making informed decisions through
consistent and reliable financial reporting.

(iv) Maintains consistency in key methods such as depreciation or inventory valuation, ensuring an accurate
representation of assets over time.

(v) Guarantees that any changes to accounting methods are clearly disclosed in financial statements, promoting
transparency and fostering stakeholder confidence.

Meaning of Convention of Materiality

According to this convention, business facts and events should be reorganized based on their importance to ensure
efficient communication and decision-making. From a business perspective, it is essential to focus on critical details
and exclude less important or irrelevant statements that do not contribute to the overall objectives.

Significance of Convention of Materiality

(i) This Convention plays a crucial role in enabling meaningful comparisons of results across accounting periods.
(ii) Future policies are established, and significant decisions are made by owner-managers based on consistent and
reliable financial data.
(iii) If changes in accounting practices become necessary, these are appropriately disclosed through footnotes in the
balance sheet, along with their impact on profit, ensuring transparency.
(iv) It ensures uniformity in key practices, including the depreciation of fixed assets, valuation of closing stock, and
the write-off of fictitious assets, reserves, and provisions, thereby maintaining accuracy and reliability in financial
reporting.

Meaning of Convention of Conservatism

This convention is founded on the principle of "anticipating no profit but providing for all possible losses." It offers
guidance for recording transactions in the book of accounts, emphasizing a prudent approach to financial reporting.
The underlying policy ensures caution in presenting profits, with the primary objective of minimizing the risk of
overstating profits and maintaining conservative financial estimates.
 Significance of Convention of Conservatism

(i) It is established as a fundamental component of the security policy.

(ii) Misapplication may result in the creation of undisclosed reserves.
(iii) It facilitates the reduction of calculation errors.
(iv) It enhances the clarity and relevance of financial statements.
(v) It contributes to the efficient use of time and resources.

The Difference between Accounting Concepts and Conventions

Basis of Distinction Accounting Concepts Accounting Conventions

1. Legal Position Accounting concepts are legally recognized Accounting conventions are general
and widely accepted. guidelines based on established practices and
agreements.
2. Recording vs Accounting concepts provide the Accounting conventions guide the
Financial Statement foundational principles for recording preparation of profit and loss statements and
transactions and maintaining financial balance sheets.
accounts.
3. Significance Accounting concepts are essential rules that Accounting conventions are less critical
ensure uniformity in recording financial compared to accounting concepts.
transactions.
4. Role of Personal Accounting concepts minimize personal Accounting conventions often rely on
judgment or individual bias in financial personal judgment and discretion.
reporting.
5. Uniform adoption Accounting concepts are consistently applied Accounting conventions may vary across
across various enterprises. organizations based on specific
circumstances or practices.

Assets = Capital + Liabilities or A = C + L

Liabilities = Assets - Capital or L = A – C

Capital = Assets - Liabilities or C = A – L

 Accounting Terms
Capital: Capital is the amount invested by the owners in the business. It is also called as owner's equity. Owner’s
equity is the owner’s stake in the business. It shows how much is his investment in the assets of the business.

Drawings: is the amount of cash or goods drawn by the proprietor from the business for his personal or domestic use.

Assets: Assets are things owned by an individual or business and which can be valued in terms of money is called an
asset. In other words, anything which will enable the firm to get cash or a benefit in future is an asset.

Classification of Assets

Fixed Assets: Fixed assets which are acquired not for resale but with the purpose to increase the earning capacity of
the business by employing them.

For example: and, building, machinery, computer, furniture, vehicles, livestock etc.

Current Assets: Current Assets are those assets which are retained in the business with the purpose to convert them
into cash within a short period of time say one year.

For example: Cash in hand, Bills receivables, Debtors, Goods etc.

Tangible Assets: Tangible Assets which can be seen and touched or have physical existence.

For example: building, machinery, furniture, computer etc.

Intangible Assets: Intangible Assets which cannot be seen and touched, or which do not have physical existence.

For example: Computer software, Goodwill, trademark, Patents, Copyrights etc.

Wasting Assets: Wasting Assets are assets which are natural resources extracted and consumed as a raw material or
otherwise.

For example: Mines, Quarries, Oil wells etc.

Liability: Liability refers to the amount which the firm owes to outsiders and to proprietors.

Classification of Liabilities

External Liabilities: External Liabilities are those liabilities which the business owes to the outsiders

For example: Goods purchased on credit, outstanding expenses, loans.

Internal Liabilities: Internal Liabilities Internal liabilities are those liabilities which the business owe to the owners

For example: Capital, Undisturbed profits, Reserves, Interest on Capital etc.

Revenue: Revenue refers to the inflow of money or other assets that results from the sale of goods or services or from
the use of money. It is the amount realized or receivable from the sale of goods.

Expense: Expense is the cost incurred in producing and selling the goods and services.

Expenditure: Expenditure is generally the amount spent for the purchase of assets. It increases the profit earning
capacity of the business.

Purchases: Purchases always refer to purchases of merchandise. Purchases means the purchases of such goods and
services in which a firm deals.

Sales: Sales means exchange of such goods and services for money in which the firm deals in.

Debtor: Debtor is a person who owes money.

Creditor: Creditor is a person whom money is owning.

 Journal
Meaning of Journal

A journal is a book of accounts where daily business transactions are recorded chronologically. Transactions when
recorded in a journal are known as entries. It is the book in which transactions are recorded for the first time. Journal
is also known as ‘Book of Original Record’ or ‘Book of Primary Entry’.

Format of Journal

Date Particulars LF Dr. Cr.

2024 Cash a/c Dr. 20,000
Apr 01 To Capital a/c 20,000
(Owner’s Capital)

Date:

The Date should be written here.

First the Year will come.

Then the month and date. Example

2024
Jan 1

After the month has started we can write the number of day only.

Particulars:

The Main Contents will be written here.

This column should be as large as possible.

The Debit should be written as close to the Date-Particulars line.

The Credit should be written little away from the Date-particulars line.

LF:

This is the Ledger Folio.

Dr.:

Here the Debit Amount will be written.

This column should be as large as necessary.

We can write the title in two ways 1. Debit and 2. Dr.

Cr.:

Here the Credit Amount will be written.

This column should be as large as necessary.

We can write the title in two ways 1. Credit and 2. Cr.

Narration:

Narration is the explanation of the journal entry.

Narration is compulsory.

Leave a line after the narration then the next entry.

Capital:

If the owner brings money into the business or starts a business, then the journal will have capital a/c in the credit.

Drawings

If the owner takes money out of the business, then the journal will have drawing a/c in the debit.