Accounting is the language of business. It records business transactions taking place during the accounting period. Accounting communicates the result of the business transactions in the form of final accounts

Basic Assumptions of Accounting1. Accounting Entity Assumption According to this

assumption, business is treated as a unit or entity apart from its owners, creditors and others.

2. Money Measurement Assumption In accounting, only those business transactions and events which are of financial nature are recorded.

3. Accounting Period Assumption The users of financial statements need periodical reports to know the operational result and the financial position of the business concern.

4. Going Concern Assumption As per this assumption, the business will exist for a long period and transactions are recorded from this point of view.

Basic Concepts of AccountingDual Aspect Concept:- Dual aspect principle

is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects - receiving benefit and giving benefit.

Revenue Realization Concept:- According to this concept, revenue is considered as the income earned on the date when it is realized

Historical Cost Concept:- Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis for all subsequent accounting for the asset

Concepts of Accounting- ContinuedMatching Concept:- Matching the revenues

earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept.

Full Disclosure Concept:- Accounting statements should disclose fully and completely all the significant information.

Verifiable and Objective Evidence Concept:- This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it.

Modifying Principles of Accounting Cost Benefit Principle This modifying principle

states that the cost of applying a principle should not be more than the benefit derived from it

Materiality Principle The materiality principle requires all relatively relevant information should be disclosed in the financial statements.

Consistency Principle The aim of consistency principle is to preserve the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously observed and applied year after year.

Prudence (Conservatism) Principle Prudence principle takes into consideration all prospective losses but leaves all prospective profits.

Double Entry SystemThere are numerous transactions in a

business concern. Each transaction, when closely analyzed, reveals two aspects.

One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the “Debit aspect”.

The other aspect will be “giving aspect” or “outgoing aspect” or “income/gain aspect”. This is termed as the “Credit aspect”.

These two aspects namely “Debit aspect” and “Credit aspect” form the basis of Double Entry System. The double entry system is so named since it records both the aspects of a transaction.

Features of Double Entry System 1. Every business transaction affects two

accounts.2. Each transaction has two aspects, i.e., debit

and credit.3. It is based upon accounting assumptions

concepts and principles. 4. Helps in preparing trial balance which is a

test of arithmetical accuracy in accounting.5. Preparation of final accounts with the help of

trial balance.

Approaches of Recording1. Accounting Equation Approach:- This approach is

also called as the American Approach. Under this method transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital

2. Traditional Approach This approach is also called as the British Approach. Recording of business transactions under this method are formed on the basis of the existence of two aspects (debit and credit) in each of the transactions. All the business transactions are recorded in the books of accounts under the ‘Double Entry System’.

TRIAL BALANCE AND RECTIFICATION OF ERRORSTrial balance is a statement which shows

debit balances and credit balances of all accounts in the ledger.

“Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books” – J.R. Batliboi.

Objectives of Trial balanceThe objectives of preparing a trial

balance are: i. To check the arithmetical accuracy of the ledger accounts. ii. To locate the errors. iii. To facilitate the preparation of final accounts.

Advantages of the Trial Balancei. It helps to ascertain the arithmetical

accuracy of the book-keeping work done during the period.

ii. It supplies in one place ready reference of all the balances of the ledger accounts.

iii. If any error is found out by preparing a trial balance, the same can be rectified before preparing final accounts.

iv. It is the basis on which final accounts are prepared

Methods of Preparing Trial BalanceThe Total Method :- According to this method,

the total amount of the debit side of the ledger accounts and the total amount of the credit side of the ledger accounts are recorded.

The Balance Method :- In this method, only the balances of an account either debit or credit, as the case may be, are recorded against their respective accounts. The balance method is more widely used, as it supplies ready figures for preparing the final accounts.

Errors in Accounting i. Errors of Principle

Transactions are recorded as per generally accepted accounting principles. If any of these principles is violated or ignored, errors resulting from such violation are known as errors of principle.

ii. Clerical ErrorsThese errors arise because of mistakes

committed in the ordinary course of accounting work.

Capital TransactionsThe business transactions, which provide

benefits or supply services to the business concern for more than one year or one operating cycle of the business, are known as capital transactions.

Capital expenditure consist of those expenditures, the benefit of which is carried over to several accounting periods. In other words the benefit of which is not consumed within one accounting period. It is non-recurring in nature.

Revenue TransactionsThe business transactions, which provide benefits

or supplies services to a business concern for an accounting period only, are known as revenue transactions. Revenue transactions can be Revenue Expenditure or Revenue Receipt.

Revenue expenditures consist of those expenditures, which are incurred in the normal course of business. They are incurred in order to maintain the existing earning capacity of the business. It helps in the upkeep of fixed assets. Generally it is recurring in nature.

Final AccountsThe final accounts of business concern

generally includes two parts. The first part is Trading and Profit and Loss

Account. This is prepared to find out the net result of the business.

The second part is Balance Sheet which is prepared to know the financial position of the business

Profit and Loss AccountAfter calculating the gross profit or gross loss

the next step is to prepare the profit and loss account. To earn net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of goods. If such expenses are less than gross profit, the result will be net profit. When total of all these expenses are more than gross profit the result will be net loss.

Format of Profit and Loss Account

Balance Sheet This forms the second part of the final

accounts. It is a statement showing the financial position of a business. Balance sheet is prepared by taking up all personal accounts and real accounts (assets and properties) together with the net result obtained from profit and loss account.

Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date’.

Format of Balance Sheet