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Accounting and Its Principles | Bank Exam Preparation
Introduction of Accounting and its Principles
Introduction of Accounting
- Accounting is the language of business and mirror of financial transaction.
- Combination of records, reports, ledger and financial documents which are related with legal transaction can be defined as accounting.
- Process of identifying financial transaction, systematic and scientific record keeping, classifying, summarizing and preparation of financial statement in order to provide information to the stakeholder is called accounting.
- Art and science of record keeping and reporting of financial activities is accounting.
- We can introduce accounting by means of following system approach.
· Relevant financial documents
· Accounting standard, policy, principle
· Prevailing rules and regulation
· Trial balance
· Income statement
· Balance sheet
· Cash flow statement
· Change in equity
· Accounting policy and notes to account
Principle /Assumption/Base/Concept of Accounting
Those concept or bases for accounting which are accepted by universally are known as accounting principle. Generally accepted accounting principles are as follows.
- Money measurement concept: Only monetary transactions which are expressed on monetary terms are eligible for accounting, non-monetary transactions are not recorded on accounting process.
- Business entity concept: There must be separation between investor and business while conducting accounting activities. Organization is artificial entity but investor is natural person. Drawing is the example of it.
- Single entry concept: If accounting activities is conducted without application of debit and credit rules, only personal accounting including cash content of real account are recorded in this concept. Due to the lack of worldwide validity, these concepts is abandon on formal organization but household sector still practice or apply this accounting principle.
- Cash basis concept: Accounting of only cash receipt and payment transaction of particular period excluding receivable and payable is cash basis concept. This concept is applicable in banking sector for the record keeping of interest income.
- Accrual basis concept: All financial transactions which are happened on given period of time should be included on accounting process is the fundamental rules of accrual basis concept. Ban applies this concept for the accounting of all transaction excluding interest income.
- Double entry concept: If each and every financial activity is recorded by using rules of debit and credit than such modern, fundamental, systematic and scientific concept of accounting is double entry system. It has two fold effects on accounting process.
- Going concern concept: While performing accounting activities it should be consider that organization never becomes terminate, but it operates forever.
- Matching concept: There must be coordination between income and expenses of the entity. Those expenses which are related with income generation activities within given period of time should be recorded.
- Historical cost concept: Organization records financial transaction on original price or on book value excluding market price.
- Accounting period concept: Every 12 month should be considered as accounting or fiscal year for the record keeping and reporting of financial transaction. It is also called periodicity concept.
2.Double Entry System and its Features
- If each and every financial activity is recorded by using rules of debit and credit than such modern, fundamental, systematic and scientific concept of accounting is double entry system. It has two fold effects on accounting process.
- Double entry system is the modern system of book keeping based on the duality principle propounded by Luca De Paciolio on 1494 A.D. He had at first included he concept of double entry system in the book named Summa De Arithmetica by the content of accounting of Venish.
- It is the modern complete and scientific recording the financial transactions. It is based on dual concept of accounts. In this dual concept, every financial transaction has two aspects which affect two sides of the account with same amount. It is such system of book keeping which follows certain rules and principle while recording transaction in the book of account. Double entry system prevents accounting frauds and errors. We can illustrate double entry system by means of following equation.
Assets = Liabilities + Capital
Capital=Assets – Liabilities
Features of Double Entry System
- Double effects of every financial transaction,
- Equal effect of both sides,
- Complete, scientific and reliable methods of accounting,
- Helpful to prevent frauds and errors,
- Flexible for the correction in the process,
- Useful for internal control system,
- Use of debit and credit concept like debits the receiver credit the giver etc.
- Full recording of economic transactions,
- Helpful to make final accounts,
- Easy to analyze and helpful to make comparable financial statement,
- Complex to understand, time consuming, expensive and not suitable for the small organization.
Principle of Double Entry System
- Principle of debit and credit
- Principle of two fold effects
- Principle of equality
- Principle of preliminary entry
- Principle of accounting posting