BSc Finance Sem I Business Accounting and Analysis Prof.

Anil Joshi

Introduction – Meaning, Concepts, Conventions, Principles, Terminologies

1. Book Keeping: It is a daily recording of the transactions in the books of accounts. Only those
transactions which have monetary implication are recorded. All transactions are recorded in
the local currency.
2. Accountancy is a wider concept. It starts where the book keeping ends. Includes classifying,
summarizing & interpreting the transactions.
3. 3 main Branches of Accounting:
a. Financial Accounting – Objective is to know the financial health of the organisation.
Includes Journal, Ledger, TB & Final Accounts
b. Cost Accounting – Objective is to know product-wise costs. Includes Cost Sheet,
Process Costing, Batch Costing, Contract Costing, Operating Costing.
c. Management Accounting – Caters to the decision making of the managers. Facilitates
reporting to the management. Includes Ratio Analysis, BE Analysis, Budgetary Control
& Analysis of Financial Statements.
4. There is need to bring consistency & uniformity in the way the book keeping & accounting is
done by all the accountants. Hence concepts, conventions, principles are developed which are
generally accepted set of rules. Accounting process is applied within the conceptual
framework of GAAP (Generally Accepted Accounting Principles). These are the ground rules.
As per American Institute of CPA (AICPA), the principles which have substantial authoritative
support become a part of the generally accepted accounting principles.
a. Standards issued by regulatory authority are called Accounting Standards. They
standardize the accounting policies.
5. Accounting Concepts, Principles & Conventions: These terms are mostly used interchangeably.
However, they have a subtle difference as follows.
a. Concept means idea or notion. This has universal application. They are the basic
assumptions. They are the foundation based on which principles are formulated.
b. Principles are a body of doctrine as an explanation of current practices which serve as a
guide for selecting a procedure/convention among alternatives.
c. Conventions: They emerge out of the principles. Conventions need not have universal
application. These are adopted over a period of time.

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 i. Entity Concept: Business is a separate entity than its owner. Personal
transactions are not recorded in the books of accounts.
ii. Money measurement concept: Only those transactions which can be measured
in money are recorded. These are recorded in the local currency of the country.
iii. Periodicity Concept: Business life is divided into periodic intervals (usually one
year, quarter or 6 months). Concept of accrual comes because of this concept.
This concept helps in comparisons, matching the revenues & expenses.
iv. Accrual concept: Transactions are recorded as & when they occur. Not when
cash is received or paid. Questions of outstanding, prepaid arise because of this
concept. Alternate is Cash basis (which is followed by the government).
v. Matching concept: Expenses matching with the revenue of that period only
should be considered. Thus periodicity concept also gets followed here.
vi. Going concern concept: Financial statements are prepared assuming that the
business will continue in future. Valuation of asset is dependent on this
concept. They are recorded on historical cost basis & not on liquidation cost
basis.
vii. Cost concept: Value of the asset is determined on the basis of historical cost.
This provides objectivity. Other methods are subjective. Limitations: Assets do
not show the true value as on today (e.g. land purchased 10 years back may be
of a much higher value today). Comparison may become meaningless (machine
purchased 10 years back for Rs. 50,000 giving returns of Rs. 10,000 today &
another identical machine purchased last year for Rs. 4,00,000 giving returns of
Rs. 10,000 today. Does it mean second machine is less efficient than first?)
viii. Realisation concept: One is supposed to show the gain only when it is actually
realised. E.g. i) Asset value has increased in the present scenario may not be
shown at an increased amount since it is not realised. ii) Mere promise given by
customer of buying the goods is not shown as sales since it is not actually
realised.
ix. Dual Aspect Concept: Every transaction has 2 sides. Both the sides are
recorded. That forms the basic accounting equation i.e. Equity + Liabilities =
Assets.
x. Conservatism: Anticipated income should not be recorded but possible losses
should be provided for.

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 xi. Consistency: Accounting policies are to be followed consistently. Those should
be changed only if a) law or accounting standard demands or b) it results in
more appropriate presentation of the financial statements.
xii. Materiality: Important transactions which have material impact should be
disclosed specifically. Hence stationery purchased is expensed out though it is
still in the stock because its value is quite small. Similarly, small value assets
such as calculators, bottles etc. are not depreciated over a period of time.
Materiality is subjective. Anything that can influence the decision making of the
user should be disclosed properly. Example: Companies disclose the
remuneration of their Key Managerial Personnel separately in the annual
report, Receivables pending for more than 6 months are shown separately.
xiii. Some other principles are Disclosure (full & fair disclosure keeping substance
over form in mind), Revenue Recognition (only the revenue that is earned
should be recorded. Collection Agent should not show the amount of
receivables as his revenue), Timeliness (reporting should not be delayed),
6. Out of the above 3 are fundamental accounting assumptions which are Going Concern,
Consistency & Accrual concept.

7. Stakeholders of Accounting information:

8. Accounting Terminologies:
a. Assets: A resource owned by the business that gives future economic benefits.
i. Current Asset: Assets which are going to get converted into cash or consumed in the
short period of time (within 1 year).
ii. Fixed Assets: Assets held over a long period of time (more than 1 year), not held for
resale but for using in the business.
1. Tangible: Which have physical existence. Plant, Machinery, Land, Building etc.
2. Intangible: Assets which do not have physical existence. Goodwill, Patent,
Copyright etc.

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b. Depreciation: Reduction in the value of tangible fixed assets over a period of time. In case of
intangible assets, the word used is Amortisation.
c. Liabilities: Amount owed by the business. These are financial obligations other than owner’s
money.
i. Current Liabilities: To be repaid within 1 year.
ii. Non-current liabilities: to be repaid over a longer period.
d. Capital: Owner’s money in the business. Opposite is called Drawings. Capital plus all retained
earnings is owner’s money. Amount of profit increases owner’s money & loss reduces the
same.
e. Goods: Commodity, the business deals in. Fixed Assets are not goods. For a machinery dealer,
is machine goods? Yes. Raw Material is not goods.
f. Purchases: Goods purchased for resale or material purchased for use in the production of
goods or rendering of services.
g. Expenditure: Cost incurrent by the business.
i. Capital Expenditure: Results in Asset. This goes to Balance Sheet.
ii. Revenue Expenditure (expenses): The benefit is exhausted in the same period. This
goes to P&L Account.
h. Revenue: Includes income for the business. It may be by sale of goods or services or other
income such as interest on deposits, commission/rent received, dividend received etc.
i. Inventory: Stock which is unsold. This can be of Material, WIP, Finished Goods, Consumable
stores.
j. Trade Debtors: Amounts receivable from the customers to whom the goods are sold or
services are rendered on credit earlier.
k. Trade Creditors: Amounts payable to suppliers who supplied materials or goods to us on credit
earlier.
l. Bad Debts: Amount which is irrecoverable from the customers. It has to be reduced from
debtors & is a loss to the organisation.

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