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

1. 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

2. Basic Assumptions of Accounting
1. 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.

3. Basic Concepts of Accounting
Dual 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

4. Concepts of Accounting- Continued
Matching 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.

5. 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.

7. Double Entry System
There 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.

8. 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.

9. Approaches of Recording
1. 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’.

10. TRIAL BALANCE AND RECTIFICATION OF
ERRORS
Trial 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.

11. Objectives of Trial balance
The 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.

12. Advantages of the Trial Balance
i. 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

13. Methods of Preparing Trial Balance
The 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.

14. 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 Errors
These errors arise because of mistakes committed
in the ordinary course of accounting work.

17. Capital Transactions
The 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.

18. Revenue Transactions
The 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.

20. Final Accounts
The 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

21. Profit and Loss Account
After 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.

22. Format of Profit and Loss Account

23. 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’.

24. Format of Balance Sheet