Basic Accounting Principles

Basic Accounting Principles

Introduction

·       Accounting is often referred to as the "language of business" because it communicates financial information about an organization.

·       It is a systematic process of recording, classifying, summarizing, analyzing, and interpreting financial transactions to provide useful information for decision-making.

·       The primary purpose of accounting is to ascertain profit or loss for a given period, the financial position of the business, and to provide financial data to stakeholders such as owners, managers, investors, creditors, and regulatory authorities.

·       Accounting works on certain fundamental principles and conventions which ensure accuracy, consistency, and comparability of financial data.

Double Entry System of Accounting

·       The Double Entry System is the universally accepted system of recording financial transactions.

·       It was first introduced by Luca Pacioli (1494), known as the "Father of Accounting".

·       According to this system, every business transaction affects two accounts simultaneously – one account is debited and another account is credited.

·       This is based on the accounting equation:     Assets=Liabilities+Capital

Features of Double Entry System

1. Dual Aspect Concept – Every transaction has two aspects: "giving" (credit) and "receiving" (debit).
2. Systematic Recording – Transactions are recorded in books such as journal, ledger, and trial balance.
3. Complete Information – Provides details of both financial performance (Profit & Loss A/c) and financial position (Balance Sheet).
4. Mathematical Accuracy – Trial Balance ensures arithmetical correctness of books.
5. Universal Application – Adopted worldwide due to accuracy and reliability.

Advantages

• Accurate recording of transactions.
• Helps in preparing financial statements.
• Prevents and detects errors/frauds.
• Provides data for management decision-making.
• Ensures compliance with legal requirements.

Golden Rules of Debit and Credit

The double-entry system is governed by Golden Rules of Accounting which are applied depending on the nature of accounts involved.

Types of Accounts

1. Personal Accounts – Accounts of persons (individuals, firms, companies, etc.).
2. Real Accounts – Accounts of tangible and intangible assets (Cash, Building, Machinery, Patents, etc.).
3. Nominal Accounts – Accounts of expenses, losses, incomes, and gains (Rent, Salary, Commission, Interest, etc.).

Golden Rules with Reference

1. Personal Accounts
• Rule: Debit the Receiver, Credit the Giver
• Meaning: When a person or entity receives something, debit their account; when they give something, credit their account.
• Example: Paid ₹10,000 to Mr. Ram.
• Ram A/c → Debit (Receiver)
• Cash A/c → Credit (Giver of value)

2. Real Accounts
• Rule: Debit what comes in, Credit what goes out
• Meaning: When an asset comes into the business, debit it; when it goes out, credit it.
• Example: Purchased Machinery worth ₹50,000 in cash.
• Machinery A/c → Debit (What comes in)
• Cash A/c → Credit (What goes out)

3. Nominal Accounts
• Rule: Debit all Expenses and Losses, Credit all Incomes and Gains
• Meaning: Expenses and losses reduce capital, so they are debited; incomes and gains increase capital, so they are credited.
• Example: Paid Salary ₹20,000.
• Salary A/c → Debit (Expense)
• Cash A/c → Credit (Payment made)

Quick Reference Table

Type of Account	Golden Rule	Example Transaction	Debit	Credit
Personal	Debit the Receiver, Credit the Giver	Paid ₹10,000 to Ram	Ram A/c	Cash A/c
Real	Debit what comes in, Credit what goes out	Bought Machinery for cash	Machinery A/c	Cash A/c
Nominal	Debit Expenses/Losses, Credit Incomes/Gains	Paid Salary ₹20,000	Salary A/c	Cash A/c

Importance of Basic Accounting Principles

• Ensures uniformity and consistency in recording.
• Provides a true and fair view of financial position.
• Prevents misrepresentation of financial data.
• Helps in audit and compliance with statutory requirements.
• Facilitates better decision-making by management and stakeholders.

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