Principles of Accounting

What is Accounting ?

“Accounting is the art of recording,classfying and summarising in a significant manner and in terms of money,transactions
and events which are, in part at least,of a financial character,and interpreting the results thereof. “

The above definitions bring out the following as attributes of accounting:

1. Financial Transaction:Accounting records only those transactions and events which are of financial character.
2. Recording:Accounting is the art of recording business transcations in a systematic way.Recording is done in books called “JOURNAL”.
3. Classifying:Classifying is the process of grouping of transactions or entires of one nature at one place.This is done by opening accounting in book called “LEDGER”
4. Summarising:Summarising is the art of presenting the classified data.(ledger) in a manner which is understandable and useful to manangment and other intreset parties.
   This involves preparing of final accounts which include Trading and Profit&Loss Accountand Balance Sheet.
5. Analysis and Interpretation:For purpose of analysis,the accounting record must be in such a way as to be able to portray the significance of all transactions
   and events individual and collectively.

Accounting Terminology

It is necessary to understand some basic accounting terms which are daily used in business world.
These terms are called accounting terminology.

CAPITAL:It means the amount (in terms of money or assests having money value) which the Proprietor has invested in
the firm or can claim from the firm.For the business capital is a laibility towards the owner.It is also known as owner’s
equity,proprietorship and net worth.Owner’s equity means owner’s claim against the assests.It will always be equal to
Assests-Liabilities.Capital=Assests-Liabilties

LIABILITY:Lability mean the amount which the firm owens to outsider,that is excepting the proprietor.
Thus, The claim of those who are not owners are called “Liabilities”.

ASSET:Anything which will enable the firm to get a cash or a benefit in future,is an asset.
Money owing by debtors,stocks of goods,cash,furniture,machines,buildings,etc.are a few examples of assets.

EXPENSE:It is the amount spent in order to produce and sell the goods and servies which produce revenue.
Examples are:paymentof salaries,wages,rent etc.

PURCHASE:The term purchases is used only foe the purchaseof goods.Goods are those things which are
purchased for resale or for producing the finished products which also are meants to be sold.

SALE:This terms is used for the sale of goods only.

STOCK:The term stocks includes goods lying unsold on a particular date.To ascertain the
value of the closing stock,it is necessary to make a complete list of all the items in the godown together with quantities.
The stocks valued on the basis of “cost or market price which ever is less”principle.
The stocks may be opening stocks and closing stock,The term “opening stock” means goods lying unsold,
in the begining of the accounting year whereas the term “closing stock”includes goods lying unsold at the end of the accounting period.

DEBTORS:A person who owes money to the firm is called a debtor.

CREDITORS:A person to whom money is owing by the firm is called a c editor.

PROPRIETOR: The person who makes the investment and bears all the risks connected with the business is called the proprietor.

ENTRY:The record made in the books of account in respect of a transaction or an event is called an entry.