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Unit 5 Principles of Accountancy (Page no. 1-33) www.apnenotes.co
Downloaded from www.apnenotes.co 1 Principles of Accountancy Introduction  Main objective of any business is making profits. Business either big or small is involved in:  Purchasing and selling different kinds of goods  Production of variety of goods and  Provision of services  Profit is the difference between the price at which the trader purchases or produces (cost of production) and sells them.  Businessmen needs some capital to commence the business.  cash – can borrow cash from friends or relatives or banks with interest  Assets – can construct buildings for offices, buy furniture, machinery and equipment  Expenses and Income – employs paid assistants and have to pay salaries or wages and also other expenses like rents, postage, stationery. • Sometimes receives money from others and at other times lends money to others.  All the dealings of the business involving money or money’s worth are called business transactions.  If the businessman(firm) wishes to find out profits, he/she (it) should be able to remember all the transactions that have taken place in the business. Therefore, all the transactions have to be recorded.  Recorded transactions can be referred when occasion demands and are also required for Planning, Controlling, Evaluation of performance and Decision making.  They have to be recorded according to the well-devised system  The science and art of recording systematically the transactions of any business unit or establishment to know the result i.e., profit or loss is known as Accountancy.  Elementary stage of recording the transactions in the books of accounts is called Book-keeping  Advanced stage of recording, classifying and summarizing business transactions is accountancy.  Accountancy is the science and art of recording, classifying and summarizing business transactions involving money or money’s worth, accurately and systematically, so that the business man will be able to know the profit or loss during specified period and also the financial position on a particular date.  Book-keeping is the science and art of correctly recording the books of accounts of those business transactions that result in the transfer of money or money’s worth to know the result i.e., profit or loss.
Downloaded from www.apnenotes.co 2 Double-entry system of book keeping  Trader has to choose from two popular systems of book-keeping, namely: (i) Single-entry system and (ii) Double-entry system  Double-entry system of book-keeping is the well-devised, most popular system. It is used by big business units and the satisfactory system of recording.  Trader can know his financial position at any time along with financial relationship with everyone who deals with i.e., how much money he has to receive from others and what for.  Double entry system of book-keeping enables the trader to calculate the profit or loss he has made in his business during a given period and how much profit or loss is made up i.e., the various sources of his profit or loss. Meaning of debit and credit  Debit is the money or money’s worth (benefit) which is received by the debtor.  Debtor is the receiver of the benefit  Credit is the money or money’s worth (benefit) which is given by creditor. • Creditor is the giver of the benefit Theory of Double-entry system  Business transactions involve two aspects: ➢ Receiving aspect ➢ Giving aspect • Therefore, it is called two-fold affect. It is the most scientific system of book-keeping. • Basic principles: 1. For every debit there must be equal and corresponding credit. 2. Debit given to one account and credit given to another account 3. Whenever any transaction takes place two accounts are affected and the entry has to be made in two accounts. 4. when a transaction takes place one account will be the giver of the benefit and other account will be receiver of the benefit. 5. The same account can be sometimes the giver and at other times the receiver. 6. Transfer is not between persons but between their accounts. • To indicate the above information every account is divided into two sections: • The left hand side • The right hand side • When an entry is made on the left-hand side with respect to benefits received, the account is said to be debited. • And
Downloaded from www.apnenotes.co 3 • When an entry is made on the right-hand side with respect to benefits given, the account is said to be credited. • The difference between two sides is BALANCE. • If the left-hand side is more, the account has received more benefit than it has given and it is said to show a debit balance. • If the right-hand side is more, the account has given more benefit than it has received and it is said to show a credit balance. • Recording is complete when both of its aspects are recorded. • The recording of the two-fold effect of every transaction has given rise to the name Double-Entry System of Book-Keeping. What is an Account  Summarized record of all transactions relating to a particular person or thing or an item or income or expense is called an Account.  Proforma of Account Dr Cr Date particulars LF Amount Date particulars LF Amount  Left hand side is called Debit side and is indicated as Dr  Right hand side is called credit side and is indicated as Cr  The name of the account is written at the top centre ex., sales a/c, purchase a/c.  In deciding which account has to be debited and which account has to be credited, rules of debit and credit must be followed carefully.  RULES NEVER VARY Rules of debit and credit or Rules of journal entries  All the business transactions must be first recorded in a daily record called JOURNAL.  They are recorded in the chronological order.  Journal is treated as book of original entry or first entry or primary entry. Process of recording a transaction is called Journalising  Proforma of a Journal