Accounting Principle

2011-05-07T23:52:00.003-07:00

Book Keeping:

The word book or books mean books of accounts and keeping implies maintaining in proper form and order. Thus book-keeping may be defined as the art of recording business transactions in books in a regular and systematic manner. It has been defined by different experts as :
1- The science and art of correctly recording in books of account all those business transactions that result in the transfer of money's worth.
2-The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of sch record.
3-The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof.

Some Important Terms.

Transaction:
Any dealing between two persons or things is a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of service by one party to another.
Transaction when cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. when the payment or receipt of cash is postponed for a future date, this transaction is said to be credit - transaction.

Business:
It includes any activity undertaken for the purpose of earning profit e.g. banking business, an insurance business. a merchandise business etc.

Proprietor:
He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.

Capital:
The amount with which the trader starts his business or the amount
which is actually invested in the business at any given time is known as capital.
This is the owner's financial interest or holding in the business and is represented
by the value of net assets.

Drawings:
The cash or goods taken away by the proprietor from the business for his personal use
are called his drawings.

Purchases:
Goods purchased are called purchases, when the goods are purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.

Purchases Returns:If goods purchased are found defective or unsatisfactory, they are sometimes
returned to the persons from whom they whom they were purchased or to suppliers are called purchases returns or returns outwards.

Sales: Goods sold are called sales. when goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.

Sales Returns: If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them are called sales returns or returns inwards.

Trade Discount:
it is a rebate or allowance from the scheduled price granted by the seller to the byer . Trade discount is usually granted in the following circumstances.

1-When selling to a fellow trader.
2-When the buyer is an old customer.
3-When sales are made in bulk
4-As a custom of trade.

Cash Discount:
It is deduction or allowance allowed by a creditor to a debtor , if a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount.

Commission: It is a form of remuneration for services rendered by one person to another.

Expenditure: An expenditure takes place when assets or service is acquired.

Expense: It means an expenditure whose benefit is finished or enjoyed immediately sch as salaries, rent etc.
Distinction between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.

Account:
A summarized record of transactions relating to a person or thing is called and account.

Debor ( Account Receivable ):

A person who owes money to another is a debtor when we say that we owe Mr. X $20.00 we mean that we have received from Mr. X. $20.00 which we have to repay. We stand as debtor to Mr. X for $20.00 it is also termed as Account Receivable.

Creditor ( Account Payable ):
A person who pays out something or to whom money is owing is a creditor. It is also termed as Account Payable.

Asset:
These are the things of value possessed by a trader such as building, land, machinery and furniture etc.

Liabilities:
They are the debts due by a business to its proprietor and others.

Liabilities:
Any written evidence in support of a business transactions is called a voucher.

Voucher:
Any written evidence in support of a business transaction is called a voucher. when a ream of paper is bough from a stationer. he gives a cash memo. The cash memo is a voucher for the payment. when wages for the month are paid to the peon. a receipt is taken from him. The receipt serves as a voucher for the payment.

Goods( Merchandise ):
It includes all merchandise commodities which are purchased by the business for selling.

Principle of Accounting

Accounting Principle