UNIT 1: INTODUCTION TO ACCOUNTING.

INTRODUCTION
Accounting has rightly been termed as the language of the business.
The basic function of a language is to serve as a means of
communication. Accounting also serves this function. It
communicates the results of business operations to various parties
who have some stake in the business viz., the proprietor, creditors,
investors, Government and other agencies. Though accounting is
generally associated with business but it is not only business which
makes use of accounting. Persons like housewives, Government and
other individuals also make use of a accounting.
Origin and Growth of Accounting
1. Origin of Accounting

The practice of accounting is as old as civilization itself. It developed

out of the need for people to keep records of their possessions and
trade. As business activities increased, the need for a systematic
method to record financial transactions arose — and that led to the
birth of accounting

a) Ancient Period

 The origin of accounting can be traced back to ancient

civilizations such as Babylon, Egypt, Greece, Rome, and
India.
 In those times, traders and farmers used clay tablets, stones, or
palm leaves to record details of goods exchanged or owed.
 In India, ancient texts like the Arthashastra by Kautilya
(Chanakya) also mentioned systems of book-keeping and
financial management.

b) Medieval Period

 During the 13th and 14th centuries, trade expanded rapidly in

Europe, especially in Italy.
  Merchants needed better record-keeping systems to track profits,
losses, and investments.

2. Birth of Modern Accounting (Double Entry System)

 The modern accounting system began in Italy around the 15th

century.
 The Double Entry System was developed by Luca Pacioli, an
Italian mathematician and Franciscan monk.
 In 1494, he published a book titled “Summa de Arithmetica,
Geometria, Proportioniet Proportionalità”, which contained
a section on Double Entry Bookkeeping.
 This system became the foundation of modern accounting —
based on the principle that every transaction affects two
accounts: one debit and one credit.

Definition of Accounting
 The American Institute of Certified Public
Accountants(AICPA) has defined the Financial Accounting as
"the art of recording, classifying and summarizing in as
significant manner and in terms of money transactions and
events which in part, at least of a financial character, and
interpreting the results thereof".
 American Accounting Association defines accounting as "the
process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by
users of the information.

Characteristics of Accounting
The following attributes or characteristics can be drawn from the
definition of Accounting:

1. Identifying financial transactions and events

 Accounting records only those transactions and events which are

of financial nature.
 So, first of all, such transactions and events are identified.
2. Measuring the transactions

 Accounting measures the transactions and events in terms of

money which are considered as a common unit.

3. Recording of transactions

 Accounting involves recording the financial transactions in

appropriate book of accounts such as Journal or Subsidiary
Books.

4. Classifying the transactions

 Transactions recorded in the books of original entry – Journal or

Subsidiary books are classified and grouped according to nature
and posted in separate accounts known as ‘Ledger Accounts’.

5. Summarising the transactions

 It involves presenting the classified data in a manner and in the

form of statements, which are understandable by the users.

 It includes Trial balance, Trading Account, Profit and Loss

Account and Balance Sheet.

6. Analysing and interpreting financial data

 Results of the business are analyzed and interpreted so that users

of financial statements can make a meaningful and sound
judgment.

7. Communicating the financial data or reports to the users

 Communicating the financial data to the users on time is the

final step of Accounting so that they can make appropriate
decisions.
Objectives of Accounting.
The main objectives of accounting are:

1. To maintain a systematic record of business transactions

 Accounting is used to maintain a systematic record of all the

financial transactions in a book of accounts.
 For this, all the transactions are recorded in chronological order
in Journal and then posted to principle book i.e. Ledger.

2. To ascertain profit and loss

 Every businessman is keen to know the net results of business

operations periodically.
 To check whether the business has earned profits or incurred
losses, we prepare a “Profit & Loss Account”.

3. To determine the financial position

 Another important objective is to determine the financial

position of the business to check the value of assets and
liabilities.
 For this purpose, we prepare a “Balance Sheet”.

4. To provide information to various users

 Providing information to the various interested parties or

stakeholders is one of the most important objectives of
accounting.
 It helps them in making good financial decisions.

5. To assist the management

 By analyzing financial data and providing interpretations in the

form of reports, accounting assists management in handling
business operations effectively.
Advantages of Accounting
For Decision-Making

1. Informed Decisions:

 Accounting provides accurate financial data to management,

enabling them to make sound and timely business decisions
regarding scaling, investing, or reducing costs.

2. Performance Evaluation

 Financial statements prepared through accounting allow

businesses to evaluate their performance, track profitability, and
identify areas for improvement.

For Financial Health & Growth

1. Loan And Investment Facilitation: Clear and audited

accounting records show a business's financial health and
profitability, making it easier to secure loans from banks and
attract investors.
2. Business Evaluation: Accounting helps in determining the true
value of a business, which is essential for sale or acquisition
purposes

For Legal & Compliance Purposes

1. Tax Compliance: A good accounting system ensures that a

business files taxes correctly and on time, preventing costly
penalties and legal issues.
2. Statutory Compliance: Accounting helps businesses adhere to
various laws and regulations by accurately recording financial
transactions like sales tax and income tax liabilities.
3. Legal Evidence: Accounting records, supported by
authenticated documents, serve as authenticated evidence in
court proceedings.
 For Internal Management

1. Fraud Detection: Systematic record-keeping and internal

controls help in minimizing the chances of fraud within an
organization.
2. Planning & Budgeting: Accounting data is vital for future
planning, creating detailed budget projections, and allocating
resources effectively.
3. Inter- firm Comparison: Accounting provides the basis for
comparing a business's performance over different periods or
against other companies in the same industry.

Differences between Book

keeping and Accounting
Bookkeeping Accounting

Definition

Bookkeeping deals with identifying and Accounting refers to the process of

recording financial transactions only summarising, interpreting and
communicating the financial data of an
organisation.

Decision making

Data provided by bookkeeping is not Management can take important

sufficient for decision making decisions based on the data obtained
from accounting

Preparation of Financial Statement

Not done in the case of bookkeeping Financial statements are a part of the
accounting process

Analysis
No analysis is required in the bookkeeping Accounting analyses the data and
creates insights for the business

Persons Involved

The person concerned with bookkeeping The person concerned with accounting
is known as a bookkeeper is known as an accountant

Determining Financial Position

Bookkeeping does not show the financial Accounting helps in showing a clear
position of a business picture of the financial position of a
business

Level of Learning

No high-level learning required High-level learning required for

understanding and analysing accounting
concepts

Origin of GAAP
 GAAP, or Generally Accepted Accounting Principles, is a
commonly recognized set of rules and procedures designed to
govern corporate accounting and financial reporting in the
United States (US). The US GAAP is a comprehensive set of
accounting practices that were developed jointly by the
Financial Accounting Standards Board (FASB) and the
Governmental Accounting Standards Board (GASB).
 US securities law requires all publicly-traded companies, as
well as any company that publicly releases financial statements,
to follow the GAAP principles and procedures.
 In addition, or as an alternative, are the International Financial
Reporting Standards (IFRS) established by the International
 Accounting Standards Board (IASB). The IFRS rules govern
accounting standards in the European Union, as well as in a
number of countries in South America and Asia.
What is GAAP?
 GAAP stands for Generally Accepted Accounting
[Link] refers to the set of rules, standards, and
guidelines that accountants must follow while recording and
reporting financial transactions of a business.
 GAAP ensures that financial statements are consistent,
comparable, transparent, and reliable across different
organizations.
The Core GAAP Principles
1. Principle of Consistency
This principle ensures that organizations use the same accounting
methods and procedures from one accounting period to another.
The purpose is to make financial statements comparable over time
so that users can evaluate trends in performance.
Example:
If a company uses the straight-line method for depreciation, it should
continue to use it in the future unless a strong reason exists to change
it. If any change is made, it must be disclosed in the financial
statements.
 Importance:
 Promotes uniformity.
 Enhances reliability of financial data.
 Helps stakeholders compare financial results across years.

2. Principle of Regularity
This principle states that accountants must strictly follow GAAP
rules and regulations when preparing financial statements. It
promotes discipline and professionalism in accounting practices.
Example:
An accountant should not apply personal judgment or shortcuts that
go against GAAP standards.
 Importance:
 Maintains credibility in financial reporting.
 Ensures reports are in line with legal and professional
standards.
3. Principle of Sincerity
This principle requires accountants to present a true and fair view of
the company’s financial condition.
The financial statements should be honest, accurate, and unbiased
—neither overstating nor understating income or assets.
Example:
If a company faces potential losses, the accountant must record or
disclose them truthfully, even if it affects profits.
 Importance:
 Builds trust among investors and stakeholders.
 Prevents manipulation or fraud in reporting.
4. Principle of Permanence of Method
According to this principle, companies should maintain consistent
methods of accounting over time, especially in areas like valuation,
depreciation, and inventory calculation.
The idea is that changes in accounting methods should only be made
for valid reasons and must be disclosed clearly.
Example:
If a firm uses FIFO (First-In, First-Out) for inventory valuation, it
should continue unless it switches to LIFO for justified reasons.
 Importance:
  Ensures comparability of financial data.
 Promotes stability in accounting practices.
5. Principle of Prudence (Conservatism)
This principle emphasizes being cautious when recording financial
transactions.
Accountants should record expenses and liabilities as soon as
possible, but revenues only when they are certain.
In other words, anticipate no profit but provide for all possible
losses.
Example:
If there is doubt about collecting payment from a customer, a
provision for bad debts should be made.
 Importance:
 Prevents overstatement of income or assets.
 Ensures realistic presentation of the company’s financial
position.
6. Principle of Continuity (Going Concern)
This principle assumes that the business will continue its operations
in the foreseeable future and is not likely to liquidate soon.
Based on this assumption, assets are valued at historical cost rather
than liquidation value.
Example:
A company’s machinery is depreciated over its useful life assuming
the business will continue operating.

 Importance:
 Provides stability in valuation.
 Helps in long-term planning and decision-making.
7. Principle of Materiality
This principle focuses on disclosing all significant (material)
information that could influence the decisions of users of financial
statements.
Trivial or insignificant details can be ignored, but all important facts
must be disclosed.
Example:
Pending legal cases or major contingent liabilities must be reported in
the notes to accounts.
 Importance:
 Ensures transparency.
 Helps investors and creditors make informed decisions.
8. Principle of Periodicity
According to this principle, the life of a business is divided into
specific accounting periods—such as monthly, quarterly, half-
yearly, or annually—for reporting financial results.
Example:
Most companies prepare annual financial statements to measure
their performance and profitability.
 Importance:
 Enables regular performance evaluation.
 Helps in taxation and timely decision-making.

9. Principle of Non-Compensation
This principle states that assets and liabilities or income and
expenses should not be offset against each other. Financial
statements must show all items separately without expecting any
form of compensation.
Example:
A company should show total sales and total expenses separately, not
just the net profit or loss.
 Importance:
  Promotes clarity and full disclosure.
 Helps users understand the detailed financial position.
10. Principle of Good Faith
This principle emphasizes that all parties involved in financial
reporting must act honestly and ethically.
Accountants, auditors, and management should report true and fair
transactions without manipulation or bias.
Example:
Management should not hide losses or inflate revenues to attract
investors.
 Importance:
 Builds trust among stakeholders.
 Maintains integrity in financial reporting.
Implications of GAAP on the Accounting
System
The Generally Accepted Accounting Principles (GAAP) have a
significant impact on how an organization’s accounting system is
designed, operated, and reported. These principles ensure that
financial information is accurate, consistent, transparent, and
comparable across different periods and organizations.
1. Standardization of Accounting Practices
GAAP provides uniform rules and procedures for recording
financial transactions.
Because of this, every organization follows a common framework,
ensuring that accounting records and financial statements are prepared
in the same standard format.
Example: All companies record depreciation or revenue using
consistent methods defined under GAAP.
Impact:
 Promotes consistency and comparability.
  Reduces confusion for investors and auditors.
2. Ensures Accuracy and Reliability
GAAP principles ensure that all financial data recorded are accurate,
verifiable, and free from bias.
It mandates proper documentation, evidence, and internal control
systems to ensure the reliability of accounting information.
Example: The principle of sincerity ensures that the financial
statements truly represent the company’s position.
Impact:
 Builds trust among stakeholders.
 Enhances the credibility of financial statements.
3. Promotes Transparency and Full Disclosure
GAAP requires that all relevant information—both positive and
negative—must be fully disclosed in the financial statements or
notes.
Example: Contingent liabilities, pending lawsuits, and accounting
policy changes must be disclosed.
Impact:
 Prevents manipulation or concealment of facts.
 Helps investors and regulators make informed decisions.

4. Facilitates Comparability of Financial Statements

Since GAAP provides a common framework, financial statements of
different organizations can be compared easily.
This is essential for investors, creditors, and analysts to evaluate
company performance.
Example: If two companies use the same method for revenue
recognition, their profit figures can be directly compared.
Impact:
 Enables performance analysis.
 Encourages competition and accountability.
5. Improves Consistency in Accounting Methods
GAAP encourages the use of consistent accounting policies over
time, such as depreciation or inventory valuation methods.
Changes in accounting methods must be disclosed clearly, along with
reasons.
Example: The principle of consistency ensures that results are
comparable from year to year.
Impact:
 Ensures uniformity in accounting reports.
 Enhances long-term performance tracking.
6. Legal and Regulatory Compliance
GAAP serves as a legal framework in many countries (like India, the
U.S., etc.) for financial reporting.
Organizations are legally required to follow GAAP when preparing
statements to avoid penalties or audits.
Example: In India, GAAP aligns with Accounting Standards (AS)
and Ind AS issued by ICAI.

Impact:
 Prevents legal disputes.
 Ensures compliance with corporate governance laws.

7. Enhances Decision-Making
By providing accurate, consistent, and comparable data, GAAP
helps management make informed financial decisions.
Example: Reliable financial statements help in budgeting, investment
planning, and evaluating profitability.
Impact:
 Supports effective internal management control.
 Guides investors and lenders in making financial decisions.
8. Prevents Fraud and Misrepresentation
GAAP establishes strict rules and ethical standards for financial
reporting, reducing opportunities for manipulation.
Example: The principle of prudence prevents overstatement of
profits and understatement of losses.
Impact:
 Strengthens internal audit systems.
 Enhances integrity and transparency.
Conclusion
GAAP plays a vital role in shaping the accounting system by
providing a structured and ethical framework. It ensures that the
financial statements present a true, fair, and comparable picture of
a company’s financial position, which builds confidence among
stakeholders and promotes good governance.

Double Entry System

Meaning of Double Entry System
The Double Entry System is a scientific and systematic method of
recording business transactions.
Under this system, every transaction has two aspects — a debit
and a credit, and both are recorded in equal amounts in the books of
accounts.
Basic Principle:
For every debit, there is a corresponding and equal credit.
This ensures that the Accounting Equation always remains balanced:
Assets=Liabilities+Capital

Debit and Credit aspects:

Debit aspects
The Debit (Dr.) aspect refers to the value or benefit received by a
business or an account.
When something comes into the business or there is an increase in
expenses or assets, that transaction is recorded on the Debit side of
the account.
 Examples of Debit Aspect:
 Purchase of machinery → Machinery comes in → Debit
Machinery Account
 Payment of salary → Expense incurred → Debit Salary
Account
 Cash received from debtor → Cash increases → Debit Cash
Account

Credit Aspect
The Credit (Cr.) aspect refers to the value or benefit given by the
business or an account.
When something goes out of the business or there is an increase in
income, liabilities, or capital, that transaction is recorded on the
Credit side of the account.
  Examples of Credit Aspect:
 Purchase of machinery → Cash goes out → Credit Cash
Account
 Payment of salary → Cash goes out → Credit Cash Account
 Cash received from debtor → Debtor decreases → Credit
Debtor’s Account
Advantages of Double Entry System
 Scientific and Systematic Approach:
Every transaction is recorded with both debit and credit aspects,
making the system logical and complete.
 Accuracy and Completeness:
Since both sides of each transaction are recorded, the chances of
errors are minimized, and records are more accurate.
 Helps in Preparing Financial Statements:
It provides the necessary data for preparing the Trial Balance,
Profit & Loss Account, and Balance Sheet easily.
 Detection of Errors and Frauds:
As total debits must always equal total credits, any mismatch
can help detect errors or frauds.
 Determination of Profit or Loss: By comparing total revenues
and expenses, the business can easily calculate its net profit or
loss.
 Knowledge of Financial Position:
The Balance Sheet prepared under this system shows the true
financial position (assets, liabilities, and capital) of the
business.
 Legal Evidence:
Properly maintained double-entry records can serve as legal
proof in case of disputes or audits.
Disadvantages of Double Entry System
 Complex and Time-Consuming:
The system involves recording every transaction twice, which
can be difficult and time-consuming, especially for small
businesses.
 Costly to Maintain:
It requires skilled accountants and detailed record-keeping,
which increases administrative costs.
 Requires Expert Knowledge:
Understanding and maintaining accounts under this system
requires knowledge of accounting principles and rules.
 Not Suitable for Small Firms:
Small businesses with fewer transactions may find it
unnecessary and complicated to follow this method.
 Possibility of Clerical Errors:
Even though the system is accurate, human errors (like wrong
posting or omission) can still occur.

Recording Business Transactions

Recording business transactions means systematically documenting
all financial activities of a business in the books of accounts. Every
time money comes in or goes out, or any financial event takes place
(like sales, purchases, payments, or receipts), it must be recorded
accurately.
This process is the first step in the accounting cycle, known as
“Bookkeeping.”
Definition:
Recording business transactions refers to the process of entering
financial data of a business into accounting books in chronological
order to ensure that every transaction is properly accounted for and
can be verified later.

Identifying
Transactions

Recording in
Books

Double-Entry
System:

Chronological
order

Supporting
documents

STEPS
 Identifying Transactions:
Only those events that can be measured in terms of money are
recorded (e.g., sales, purchases, rent, salaries, etc.).
 Recording in Books:
Transactions are first recorded in the Journal (Book of

Supporting
Documents
 Original Entry), and later transferred to the Ledger under
appropriate accounts.
 Double-Entry System:
Every transaction is recorded using the double-entry principle
— for every debit, there is a corresponding credit.
 Chronological Order:
Transactions are recorded in the order in which they occur,
ensuring accuracy and completeness.
 Supporting Documents:
Each transaction must be supported by proper evidence such as
bills, receipts, invoices, or vouchers.
Significance of Recording Transactions:
 Provides a permanent record of all business activities.
 Helps in preparing financial statements like the Profit & Loss
Account and Balance Sheet.
 Ensures accuracy and transparency in financial reporting.
 Aids in decision-making and financial control.
 Serves as legal evidence in case of disputes or audits.

What is the Accounting Cycle

The accounting cycle is the holistic process of recording and
processing all financial transactions of a company, from when the
transaction occurs, to its representation on the financial statements, to
closing the accounts. One of the main duties of a bookkeeper is to
keep track of the full accounting cycle from start to finish. The cycle
repeats itself every fiscal year as long as a company remains in
business.
The accounting cycle incorporates all the accounts, journal entries, T
accounts, debits, and credits, adjusting entries over a full cycle.
1. Transactions
Transactions: Financial transactions start the process. If there were no
financial transactions, there would be nothing to keep track of.
Transactions may include a debt payoff, any purchases or acquisition
of assets, sales revenue, or any expenses incurred.
2. Journal Entries
Journal Entries: With the transactions set in place, the next step is to
record these entries in the company’s journal in chronological order.
In debiting one or more accounts and crediting one or more accounts,
the debits and credits must always balance.
3. Posting to the General Ledger (GL)
Posting to the GL: The journal entries are then posted to the general
ledger where a summary of all transactions to individual accounts can
be seen.
4. Trial Balance
Trial Balance: At the end of the accounting period (which may be
quarterly, monthly, or yearly, depending on the company), a total
balance is calculated for the accounts.

5. Worksheet
Worksheet: When the debits and credits on the trial balance don’t
match, the bookkeeper must look for errors and make corrective
adjustments that are tracked on a worksheet.
6. Adjusting Entries
At the end of the company’s accounting period, adjusting entries must
be posted to accounts for accruals and deferrals.
 1. Two Main Types
A. Accruals (things not yet recorded but already earned or
owed)
These are incomes or expenses that have happened but not yet
recorded.
Expense incurred but not yet paid
Revenue earned but not yet received or recorded.
B. Deferrals (things recorded early but not yet earned or
used)
These are prepayments or unearned items that must be adjusted to
reflect the portion used or earned.
Expense paid in advance; adjust the portion used.
Cash received before service provided; adjust for the part earned.
7. Financial Statements
The balance sheet, income statement, and cash flow statement can be
prepared using the correct balances.
8. Closing
The revenue and expense accounts are closed and zeroed out for the
next accounting cycle. This is because revenue and expense accounts
are income statement accounts, which show performance for a
specific period. Balance sheet accounts are not closed because they
show the company’s financial position at a certain point in time.

Accounting concepts and

conventions.
ACCOUNTING CONCEPTS
1. Business entity concept
2. Money measurement concept
3. Going concern concept
 4. Accounting period concept
5. Accounting cost concept
6. Dual aspect concept
7. Matching concept
8. Realisation concept
9. Accrual concept
ACCOUNTING CONCEPTS
 Accounting concepts define the assumptions on the basis of
which financial statements of a business entity are prepared.
 Concepts are those basic assumptions and condition which form
the basis upon which the accountancy has been laid.
1. Business entity concept
This concept assumes that, for accounting purposes, the business
enterprise and its owners are two separate independent entities. Thus,
the business and personal transactions of its owner are separate. For
example, when the owner invests money in the business, it is recorded
as liability of the business to the owner. Similarly, when the owner
takes away from the business cash/goods for his/her personal use, it is
not treated as business expense.
2. Money measurement concept
 This concept assumes that all business transactions must be in
terms of money, that is in the currency of a country. In our
country such transactions are in terms of rupees. Thus, as per the
money measurement concept, transactions which can be
expressed in terms of money are recorded in the books of
accounts. For example, sale of goods worth Rs.200000, Rent
Paid Rs.10000 etc. are expressed in terms of money, and so they
are recorded in the books of accounts. But the transactions
which cannot be expressed in monetary terms are not recorded
in the books of accounts.
 For example, sincerity, loyality are not recorded in books of
accounts because these cannot be measured in terms of money
although they do affect the profits and losses of the business
concern.
3. Going concern concept
This concept states that a business firm will continue to carry on its
activities for an indefinite period of time. Simply stated, it means that
every business entity has continuity of life. Thus, it will not be
dissolved in the near future. This is an important assumption of
accounting, as it provides a basis for showing the value of assets in
the balance sheet.
4. Accounting period concept
All the transactions are recorded in the books of accounts on the
assumption that profits on these transactions are to be ascertained for
a specified period. This is known as accounting period concept. Thus,
this concept requires that a balance sheet and profit and loss
account should be prepared at regular intervals. This is necessary for
different purposes like, calculation of profit, ascertaining financial
position, tax computation etc.
5. Accounting cost concept
It states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and
installation and not at its market price. It means that fixed assets like
building, plant and machinery, furniture, etc are recorded in the books
of accounts at a price paid for them.
6. Dual aspect concept
Dual aspect is the foundation or basic principle of accounting. It
provides the very basis of recording business transactions in the books
of accounts. This concept assumes that every transaction has a
dual effect, i.e. it affects two accounts in their respective opposite
sides. Therefore, the transaction should be recorded at two places. It
means, both the aspects of the transaction must be recorded in the
books of accounts. Thus, the duality concept is commonly expressed
in terms of fundamental accounting equation:
Assets = Liabilities + Capital

7. Matching concept
 The matching concept states that the revenue and the expenses
incurred to earn the revenues must belong to the same
accounting period. So once the revenue is realised, the next step
is to allocate it to the relevant accounting period. This can be
done with the help of accrual concept If the revenue is more
than the expenses, it is called profit. If the expenses are more
 than revenue it is called loss. This is what exactly has been done
by applying the matching concept.
 Therefore, the matching concept implies that all revenues earned
during an accounting year, whether received/not received during
that year and all cost incurred, whether paid/not paid during the
year should be taken into account while ascertaining profit or
loss for that year.
 Significance
 It guides how the expenses should be matched with revenue for
determining exact profit or loss for a particular period.
 It is very helpful for the investors/shareholders to know the
exact amount of profit or loss of the business.
8. Realisation concept
 This concept states that revenue from any business transaction
should be included in the accounting records only when it is
realised. The term realisation means creation of legal right to
receive money. Selling goods is realisation, receiving order is
not. In other words, it can be said that : Revenue is said to have
been realised when cash has been received or right to receive
cash on the sale of goods or services or both has been created.
 The concept of realisation states that revenue is realized at the
time when goods or services are actually delivered.
 Let us study the following examples
 A Jeweller received an order to supply gold ornaments worth
Rs.500000. They supplied ornaments worth Rs.200000 up to the
year ending 31st December 2005 and rest of the ornaments were
supplied in January 2006. The revenue for the year 2005 for a
Jeweller is Rs.200000. Mere getting an order is not considered
as revenue until the goods have been delivered.
 Bansal sold goods for Rs.1,00,000 for cash in 2006 and the
goods have been delivered during the same year The revenue for
Bansal for year 2005 is Rs.1,00,000 as
9. Accrual concept
The meaning of accrual is something that becomes due especially an
amount of money that is yet to be paid or received at the end of the
accounting period. It means that revenues are recognised when they
become receivable. Though cash is received or not received and the
expenses are recognised when they become payable though cash is
paid or not paid. Both transactions will be recorded in the accounting
period to which they relate.
 Contd….
Therefore, the accrual concept makes a distinction between the
accrual receipt of cash and the right to receive cash as regards revenue
and actual payment of cash and obligation to pay cash as regards
expenses. The accrual concept under accounting assumes that revenue
is realised at the time of sale of goods or services
irrespective of the fact when the cash is received.

ACCOUNTING CONVENTIONS
1. Consistency
2. Full Disclosure
3. Materiality
4. Conservatism
ACCOUNTING CONVENTION
An accounting convention refers to common practices which are
universally followed in recording and presenting accounting
information of the business entity. Conventions denote customs or
traditions or usages which are in use since long. To be clear, these are
nothing but unwritten laws. The accountants have to adopt the usage
or customs, which are used as a guide in the preparation of accounting
reports and statements. These conventions are also known as doctrine.

1. Convention of consistency
The convention of consistency means that same accounting principles
should be used for preparing financial statements year after year. A
meaningful conclusion can be drawn from financial statements of the
same enterprise when there is comparison between them over a period
of time. But this can be possible only when accounting policies and
practices followed by the enterprise are uniform and consistent over a
period of time. If different accounting procedures and practices are
used for preparing financial statements of different years, then the
result will not be comparable.
2. 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.
 Contd…..
The business provides financial information to all interested parties
like investors, lenders, creditors, shareholders [Link] shareholder
would like to know profitability of the firm while the creditor would
like to know the solvency of the business. In the same way, other
parties would be interested in the financial information according to
their requirements. This is possible if financial statement discloses all
relevant information in full, fair and adequate manner.
3. Convention of materiality
The convention of materiality states that, to make financial statements
meaningful, only material fact i.e. important and relevant information
should be supplied to the users of accounting information. The
question that arises here is what is a material fact. The materiality of a
fact depends on its nature and the amount involved. Material fact
means the information of which will influence the decision of its user.

4. Convention of conservatism
 This convention is based on the principle that “Anticipate no
profit, but provide for all possible losses”. It provides guidance
for recording transactions in the books of accounts. It is based
on the policy of playing safe in regard to showing profit .
 The main objective of this convention is to show minimum
profit. Profit should not be overstated. If profit shows more than
actual, it may lead to distribution of dividend out of capital. This
 is not a fair policy and it will lead to the reduction in the capital
of the enterprise.
 Contd……
Thus, this convention clearly states that profit should not be recorded
until it is realised. But if the business anticipates any loss in the near
future provision should be made in the books of accounts for the
same.
For example, valuing closing stock at cost or market price whichever
is lower, creating provision for doubtful debts, discount on debtors,
writing off intangible assets like goodwill, patent, etc. The convention
of conservatism is a very useful tool in situation of uncertainty and
doubts.