 The Profit & Loss Account that shows net business result i.e.

profit or loss for a certain periods

 The Balance Sheet that exhibits the financial strength of the
business as on a particular dates
 The Cash Flow Statement that describes the movement of
cash from one date to the other
 Business Entity Concept - This concept explains that the business is
distinct from the proprietor. Thus, the transactions of business only
are to be recorded in the books of business.
 Going Concern Concept - This concept assumes that the business
has a perpetual succession or continued existence.
 Money Measurement Concept - According to this concept only
those transactions which are expressed in money terms are to be
recorded in accounting books.
 The Accounting Period Concept - Businesses are living, continuous organisms.
The splitting of the continuous stream of business events into time periods is thus
somewhat arbitrary. There is no significant change just because one accounting
period ends and a new one begins. This results into the most difficult problem of
accounting of how to measure the net income for an accounting period. One has to
be careful in recognizing revenue and expenses for a particular accounting period.
Subsequent section on accounting procedures will explain how one goes about it in
practice.
 The Accrual Concept - The accrual concept is based on recognition of both cash
and credit transactions. In case of a cash transaction, owner’s equity is instantly
affected as cash either is received or paid. In a credit transaction, however, a mere
obligation towards or by the business is created. When credit transactions exist
(which is generally the case), revenues are not the same as cash receipts and
expenses are not same as cash paid during the period.
 Realization Concept. This concept speaks about recording of only those
transactions which are actually realized. For example Sale or Profit on sales will be
taken into account only when money is realized i.e. either cash is received or legal
ownership is transferred.
 Matching Concept. It is referred to as matching of expenses against incomes. It
means that all incomes and expenses relating to the financial period to which the
accounts relate should be taken in to account without regard to the date of receipts
or payment.
 Full Disclosure Concept. As per this concept, all significant information must be
disclosed. Accounting data should properly be clarified, summarized, aggregated
and explained for the purpose of presenting the financial statements which are
useful for the users of accounting information. Practically, this principle emphasizes
on the materiality, objectivity and consistency of accounting data which should
disclose the true and fair view of the state of affairs of a firm.
 Duality Concept. According to this concept every transaction has
two aspects i.e. the benefit receiving aspect and benefit giving
aspect. These two aspects are to be recorded in the books of
accounts.
 Verifiable Objective Evidence Concept. Under this principle,
accounting data must be verified. In other words, documentary
evidence of transactions must be made which are capable of
verification by an independent respect. In the absence of such
verification, the data which will be available will neither be reliable
nor be dependable, i.e., these should be biased data. Verifiability
and objectivity express dependability, reliability and trustworthiness
that are very useful for the purpose of displaying the accounting data
and information to the users
 Historical Cost Concept. Business transactions are always recorded at the actual
cost at which they are actually undertaken. The basic advantage is that it avoids an
arbitrary value being attached to the transactions. Whenever an asset is bought, it
is recorded at its actual cost and the same is used as the basis for all subsequent
accounting purposes such as charging depreciation on the use of asset, e.g. if a
production equipment is bought for ` 1.50 crores, the asset will be shown at the
same value in all future periods when disclosing the original cost. It will obviously
be reduced by the amount of depreciation, which will be calculated with reference
to the actual cost. The actual value of the equipment may rise or fall subsequent to
the purchase, but that is considered irrelevant for accounting purpose as per the
historical cost concept.
 The limitation of this concept is that the balance sheet does not show the market
value of the assets owned by the business and accordingly the owner’s equity will
not reflect the real value. However, on an ongoing basis, the assets are shown at
their historical costs as reduced by depreciation.
 Balance Sheet Equation Concept. Under this principle, all which has been
received by us must be equal to that has been given by us and needless to say that
receipts are clarified as debits and giving is clarified as credits. The basic
equation, appears as :-

 Debit = Credit
 Naturally every debit must have a corresponding credit and vice-e-versa. So, we
can write the above in the following form –
 Expenses + Losses + Assets = Revenues + Gains + Liabilities
 And if expenses and losses, and incomes and gains are set off, the equation takes
the following form – Asset = Liabilities
 or, Asset = Equity + External Liabilities
 i.e., the Accounting Equation.
 The Concept of Materiality The materiality could be related to information, amount,
procedure and nature. Error in description of an asset or wrong classification between
capital and revenue would lead to materiality of information. Say, If postal stamps of `
500 remain unused at the end of accounting period, the same may not be considered
for recognizing as inventory on account of materiality of amount. Certain accounting
treatments depend upon procedures laid down by accounting standards. Some
transactions are by nature material irrespective of the amount involved. e.g. audit fees,
loan to directors.
 Consistency Concept This Concept says that the Accounting practices should not
change or must remain unchanged over a period of several years.
 Conservatism Concept Conservatism concept states that when alternative valuations
are possible, One should select the alternative which fairly represents economic
substance of transactions but when such choice is not clear select the alternative that is
least likely to overstate net assets and net income. It provides for all known expenses
and losses by best estimates if amount is not known with certainty, but does not
recognizes revenues and gains on the basis of anticipation.
 Timeliness Concept Under this principle, every transaction must be recorded in
proper time. Normally, when the transaction is made, the same must be recorded in
the proper books of accounts. In short, transaction should be recorded date-wise in
the books. Delay in recording such transaction may lead to manipulation,
misplacement of vouchers, misappropriation etc. of cash and goods. This principle
is followed particularly while verifying day to day cash balance. Principle of
timeliness is also followed by banks, i.e. every bank verifies the cash balance with
their cash book and within the day, the same must be completed.
 Industry Practice As that are different types of industries, each industry has its
own characteristics and features. There may be seasonal industries also. Every
industry follows the principles and assumption of accounting to perform their own
activities. Some of them follow the principles, concepts and conventions in a
modified way. The accounting practice which has always prevailed in the industry
is followed by it. e.g Electric supply companies, Insurance companies maintain
their accounts in a specific manner. Insurance companies prepare Revenue
Account just to ascertain the profit/loss of the company and not Profit and Loss
Account. Similarly, non trading organizations prepare Income and Expenditure
Account to find out Surplus or Deficit.
 Transaction: Transaction is exchange of an asset and
discharge of liabilities with consideration of monetary
value.
 Events: While event is anything in general purpose which
occur at specific time and particular place. We can also say
that all transactions are events and but all events are not
transactions. This is because in order events to be called
transaction an event must involve exchange of values.
 It is a written instrument that serves to confirm or witness (vouch) for some fact
such as a transaction.
 A voucher is a document that shows goods have bought or services have been
rendered, authorizes payment, and indicates the ledger account(s) in which these
transactions have to be recorded.
 Receipt Voucher
 Receipt voucher is used to record cash or bank receipt. Receipt vouchers are of two
types. i-e.
 (a) Cash receipt voucher – it denotes receipt of cash
 (b) Bank receipt voucher – it indicates receipt of cheque or demand draft
 Payment Voucher
 Payment voucher is used to record a payment of cash or cheque. Payment vouchers
are of two types. i.e.
 (a) Cash Payment voucher – it denotes payment of cash
 (b) Bank Payment voucher – it indicates payment by cheque or demand draft.
 Non Cash Or Transfer Voucher
 These vouchers are used for non-cash transactions as documentary evidence. e.g.,
Goods sent on credit.
 Supporting Vouchers
 These vouchers are the documentary evidence of transactions that have happened.