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Accounting Rules

Published in: Accountancy | Accounts
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Accounting And Its Golden rules Are Charted Here.

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    Golden Rules of Accounting Type of A/c Personal A/C Real A/c Nominal A/C Explanations A/C of individuals, companies, associations, liabilities Account of properties, possessions, assets, claims Incomes, Expenses, Gains, Losses Examples B & co. ABC co Ltd, Mr Roy a/c, Loan a/c Plant & Machinery a/c, Building a/c, Goods a/c, Cash a/c. Inventory a/c Wages a/c, Rent a/c, Salary a/c, Sales a/c, Purchases a/c Debit A/c Receiver What Comes In Expenses or Losses Credit A/C Giver What Goes Out Incomes or Gains Basic Accounting Equation Total Assets = Total Liabilities Or Total Assets = Liabilities + Capital Or Assets + Expenses + Losses = Capital + Liabilities + Incomes or Gains
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    Rules of Debit or Credit Type of Accounts Assets Liabilities Expenses or Losses Account Incomes or Gains Account Normal Balance Debit Credit Debit Credit Effect of a transaction Increase of Asset Decrease of Asset Increase of Liability Decrease of Liability Increase of Expenses / Losses Decrease of Expenses / Losses Increase of Income / Profit Decrease of Income / Profit Some Typical Accounts Result Asset + Asset - Liability + Liability - Expenses or Losses + Expenses or Losses - Income + Income - Shown in Profit Post a/c to Debit Credit Credit Debit Debit Credit Credit Debit hown in Cash Bank Purchase Sales Furniture Drawings or Withdrawal Any Fixed and Movable Asset (Land, Building, Plant & Machinery, Equipment etc) Normal Balance (always shqygp Debit Debit Debit Credit Debit Debit Debit Debit Credit Effect Effect Debit Purchase + Credit Sales + Loss A/c (P/L) Debit Purchase + Credit Sales + Asset Cash Bank Furniture Fixed Asset Liability Deducted from Owners' Capital
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    Account Name Fictitious Asset (Patent, Copyright, Capital (Personal capital, Share capital etc) Loans & Mortgages taken by company Debtors Creditors Outstanding Expenses Outstanding Income Bank Overdraft Normal Balance (always shown in...) Debit Credit Credit Debit Credit Credit Debit Debit Effect Credit Effect Shown in Trading A/C Na Na Shown in Profit & Loss A/c (P/L) Na Shown in Balance Sheet (B/S) Fictitious Asset Na Debtors Na Listed under Current Assets Unsecured Loans Secured Loan Credit Credit Credit Owners' Capital, Share Capital etc. Loans & Mortgage s Creditors Lister under Current Liabilities Listed under Current Liabilities Listed under Current Liabilities Shown after listing Capital Shown after listing Capital Shown after listing Capital
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    Account Name Sales Return Purchase Return Discount Allowed Discount Received Normal Balance (always shown in...) Debit Credit Debit Credit Debit Effect Credit Effect Shown in Trading A/C Shown in Profit & Loss A/c (P/L) Shown in Balance Sheet (B/S) Debit Credit Debit Credit Asset Liabilities Generally Accepted Accounting Principles (GAAP) The principles developed by accountants across the world to understand the language of money in business transactions is GAAP. It is divided into Accounting Concepts and Accounting Conventions. Accounting Concepts 1. 2. 3. 4. 5. 6. 7. Business Separate Entity Concept Business is a separate entity and it is different from the owner or the proprietor. Going Concern Concept Business entity will continue fairly for a long time to come (eternity). Money Measurement Concept All business transactions should be measured in terms of money in order to be recorded in the books of accounts. Accounting Period Concept The time interval for recording business transactions is usually considered for 1 year which is also called the accounting year. Accrual Concept All business transactions do not occur in cash. It is possible that some transactions are incomes earned but not yet received or expenses incurred but not yet paid during the accounting year. It is ne4cessary and relevant to record them in the same accounting year as advances, prepaid, accruals, etc. related to the accounting period to show the right financial result. Revenue Recognition Concept Revenue of any business transaction should not be recognized if the order has been received only and not yet delivered. Revenue should be treated only from sale of goods or legally rendered services. Matching Concept To find the right profit relevant to that accounting period, it is essential to compare the revenue earned during a period with the expenditure incurred to earn that income whether the expenditure is paid during that period or not.
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    8. 9. Example- sales reported for 2009 is Rs 50 lacs. All expenses incurred to earn that revenue like purchase of raw materials, wages, salaries sales commission etc. amount together to Rs 300 lacs. Some of these costs may be paid later in 2010, but they actually related to 2009 and should be recorded in 2009 accounting period. Historical Cost Concept All assets and purchases should be recorded at the initial price/ cost. Dual Aspect Concept Every business entity is an independent unit and it receives benefits from some and gives benefits to some other. Hence both should be recorded in the books of accounts. Accounting Conventions 1. 2. 3. 4. Full Disclosure The business entity should disclose all relevant information to all parties concerned with the organization. Some of them are owners, shareholders, creditors, employees, loan providers etc. Materiality Consistency Conservatism


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