Accounting Convention & Accounting Process - To Include Accounting Principles

Date: 18.07.2009 Accounting conventions & accounting process: Accounting convention: 1. Double-entry book-keeping – one account is debited and the second account is credited

2. Sum of debits = sum of credits 3. 4. 5. 6.

Based on funds flow principle, any transaction bringing in funds – transaction is credited and the transaction taking funds out is debited A business enterprise has income, expense, assets and liabilities Sum of assets = sum of liabilities Income and expenses are a part of ‘Profit and loss’ account while assets and liabilities form a part of ‘balance sheet’

7. These two are the financial statements arising out of financial accounting, usually prepared at the end of the accounting period Accounting process = sequential steps involved in financial accounting

Accounting Process Financial transaction takes place in the Enterprise – it could be cash or on credit – if it is Cash, it could result in cash inflow or outflow

Decide on which Account to be debited or credited in accordance with ‘Accounting principles’ & the Relevant Rules & Regulations

Verification step – whether the sum of all credits is equal to sum of all debits as it should be in case the business enterprise is following double-entry book-keeping system also known as Accrual Accounting System This is done by extracting all the balances of General Ledger in a statement known as “Trial Balances”. In this statement, the income and liabilities will appear under “Credit” side while assets and expenses will appear under “Debit” side. This statement will however disclose errors of some types like wrong head of accounting, error of omission or commission on both the sides to the same extent. Example customer debited for credit sale by Rs.10,000/- more and sales also credited by Rs.10,000/more.

Process of rectification of errors pointed out by the Trial Balance statement. Further where the errors are not shown by the Trial Balance, the process of reconciliation is initiated especially in the case of creditors, debtors and bank accounts. This is done by asking for statements of our accounts with them so that we can go through entry by entry and verify whether the entries are correct or not. If there is a mistake correction is carried out

Transactions are maintained in ledgers – Creditors’, debtors’ etc. and Registers – Sales, Purchases etc. on individual transaction basis

Transactions are consolidated in a control book of accounts named “General Ledger” – this contains a single consolidated account for each item of income, expense, asset and liability – example, one account for operating income, one debtors account, one creditors account etc.

Closing entries are then made – depreciation on fixed assets, provision for bad and doubtful debts, provision for outstanding expenses, outstanding income, adjustment for pre-paid expenses and income received in advance etc. are made before preparation of final financial statements for the accounting year, namely Profit & Loss statement & Balance Sheet

Step no. 1 – Accounting transaction analysis and deciding which

Profit & Loss statement and Balance sheet are prepared – in the case of Account to be debited and which account to be credited proprietorship firms and partnership firms, the two statements can be Step no. 2 – Entering the various transactions in the basic books of prepared in any format whereas in the Accounts – Registers and ledgers excluding General Ledger case of limited companies, the business Step no. 3 – Posting the consolidated figures each account-wise in the enterprise has to prepare in accordance with the formats provided for in Control book called General Ledger Schedule VI of The Companies’ Act Step no. 4 – Verification of the double-entry bookkeeping process Through Trial Balance Step no. 5 – Rectification of errors pointed out by Trial Balance Step no. 6 – Closing and adjustment entries at the end of the Accounting period Step no. 7 – Preparation of Profit & Loss Statement and Balance Sheet as per prescribed formats in the case of limited companies as per Schedule VI of the Companies’ Act