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Category: Accounts & Finance

What is Trial Balance?

What is Trial Balance?

The Trial Balance is the summary of all the ledger accounts at one place to give the overall view of the business activities indicating the business health of the organization or the statement which takes all the ledger balances at one place to summarize the business activities to indicate the financial health of the business is called as the Trial Balance. Explanation In General, the accounts consists of the various ledgers indicating the different heads of accounts. When all the…

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Bank Reconciliation Statement (BRS)

Bank Reconciliation Statement (BRS)

Bank reconciliation is a summarized statement that reconciles the difference between bank balance as per the company’s accounts and the bank balance as per bank statements of the company in order to ensure that the company’s cash records are correct and are free from fraud and errors. Explanation: A bank reconciliation statement is prepared to find out the difference between the bank column of the cash book and the bank statement (passbook). The cash book is prepared by the bank…

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Methods of Preparing Trial Balance

Methods of Preparing Trial Balance

A trial balance is defined as the accounting report or the bookkeeping that contains the list of all general ledgers of the organization in the form of debits and the credits in the way that all the debit balances are listed under the heading “Debit balances” and all the credit balances are listed under the heading “Credit balances” and the total of all debits equals to the total of all the credits. Purpose of Trial balance There are basically two…

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What is Ledger?

What is Ledger?

Ledger is the systematic accounting of transactions summarized from journals and is posted as debit or credit to determine the actual status of transactions i.e. whether the transaction is representing asset or income for the organization or it is a liability or expense for the organization. Through ledgers, each transaction is recorded that takes place during the life of an operating organization. Explanation Ledgers contain information that is used for the preparation of the financial statement. Journal is the record…

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What is Journal?

What is Journal?

Journal, also known as the subsidiary book, is the book that initially records the business transactions with the help of the vouchers that are prepared using various source documents in chronological order. Journal records each account separately and shows which account is debited and which one is credited based on the concept of double-entry system of accounting. Explanation After all the transactions that are needed to be recorded are identified, are firstly recorded in the basic book of original entry…

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Owner’s Capital/Equity

Owner’s Capital/Equity

The owner’s capital is the amount invested by the owner in the business whether it is a proprietary concern, partnership firm, or Company. It reflects how much assets are financed by the owner’s fund. In the company we use the owner’s equity instead of the owner’s capital which represents the amount invested by the shareholders in the company or the sum of money that belongs to the shareholders of the company.   Explanation The owner’s capital is the total sum invested…

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What is income?

What is income?

Income refers to the sum of money earned by the business during an accounting period usually through the sale of goods & services, commonly known as revenue, or by earning through capital investment etc. In case of individual, income is earned in the form of salary or wages. Explanation – Income: Income is the money earned on sale of goods & rendering of service in the usual course of business and also the inflow of cash from the use of…

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What are Expenses?

What are Expenses?

Expenses refer to the sum of money spent on the day to day activities of the business in its routine course of operations to generate income in the business such as the cost incurred on the purchase of goods and services so that the final sale of good & rendering of service can be done to generate revenue for the business and the benefits of such expenses are enjoyed in the same accounting year in which they are incurred. Explanation…

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What are Liabilities?

What are Liabilities?

Liabilities refer to the amount that remains unpaid by the business on the given date or in other words we can say liability is the amount that is owed by the business to an outsider where an outsider can be the creditor, lenders, employees etc.  Liabilities arise from any past transactions such as transaction of goods purchased on credit, borrowing of money etc. Explanation with Example Basically, Liability the financial obligations of the business entity.  The amount that reflects as…

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What are Assets?

What are Assets?

Assets are the economic resources that are owned by a business entity and help to generate income of the business. The asset can be tangible or intangible in nature and are expressed in monetary terms. For example Property, Plant & Machinery, Building Inventory, Cash in hand, Cash at the bank, Trade receivable, etc. Explanation with Example Assets are the resources that a business owns. These assets are used for the furtherance of business. For example, plant & machinery used for…

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Modern approach of accounting

Modern approach of accounting

Real accounts, personal accounts & nominal accounts are the traditional approach of recording transactions but there is another approach of classification of accounts which involves recording of transactions on the basis of increase/decrease in the assets, liabilities, capital, expenses and revenues and that approach is known as the modern approach of accounting. Explanation: There are two approaches that define the rules of debit and credit. The first approach is the traditional approach of accounting and the second one is the…

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Traditional approach of accounting

Traditional approach of accounting

The debit and credit are the terms that denote whether the entry is to be made on the left hand side of the T account or the right hand side of the account where the left entry indicate the debit in the account while the left side indicate credit in the account. So the rules of debit and credit are framed to state the criteria which explain when the account is debited or credited. Under the traditional approach of accounting,…

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Source Documents Types

Source Documents Types

Source documents are the documents that act as an evidence of a business transaction. It is a document on the basis of which the accounts are debited or credited. The verification and the objectivity principle focus on the importance of source documents. There are various different types of source documents. Commonly used source documents Cash Memo Cash Memo is the document that is prepared at the time of selling of goods for cash. The details that are included in cash…

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Branches of Accounting

Branches of Accounting

With the emergence of various corporations, industries and technological developments, the business operations have resulted in large scale operations of businesses which have resulted in the vast scope of accounting. Therefore, there is a requirement of various kinds of accounting information for which different sub fields or the branches of accounting prevail these days. The different branches of accounting are as follows: 1. Financial Accounting: Financial Accounting covers identifying, recording, classifying & summarizing of the financial transaction. It also includes…

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Source Document

Source Document

The transactions of the business are recorded in the books of accounts of the business on the basis of some evidences, usually written, which contains the key information about the name of the parties involved, amount of the transaction, date, Tax registration number (if any) etc. Such written evidences are known as source documents. Explanation with example Source documents are the written documents that capture the complete details of any business transaction including the details about the parties, amount involved,…

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Capital Investment

Capital Investment

Capital investment refers to the amount of funds, generally involves huge investments, that a business owner spends on the purchase of long term capital asset such as fixed assets that includes Plant & Machinery, building, furniture etc. that will provide economic benefits to the business for a long period but does not include expenses that is done by the business while conducting routine operations. Explanation with Example The capital investment requires huge amount of funds as the capital assets are…

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Users of Financial Statements

Users of Financial Statements

Every organization has to prepare financial statements that include Income statement & Balance Sheet to know the profitability and the financial position of the business respectively over a period of time. These statements are used by various individuals & entities to evaluate the financial performance of the business and take the decisions based on these evaluations where the users can be internal users or external users. Explanation The users of accounting information require the necessary financial information related to the…

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T- Account

T- Account

T account is the visual representation of the accounting entries made in journal in an account which is T shaped and it have the left side and the right side for recording of the financial transactions of the business where the entry on the left side denotes debiting the account and the entry on the right side denotes crediting the account Explanation- T Account In the double entry system of accounting every financial business transaction is recorded in atleast two…

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Double entry accounting system

Double entry accounting system

The double entry system of accounting is the only scientific accounting system which states that every business transaction has two fold aspects where the first aspect is debit and the other one is credit. In other words every business transaction affects at least two different accounts and the total amount debited is always equals to the total amount credited for every financial transaction. Explanation with Example: The first book, Summa de Arthimetica, Geometria, Proportioni, et proportionlita, describing double entry system…

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Accounting Equation

Accounting Equation

Accounting Equation signifies that the total assets of the company are always equal to the sum of total liabilities and the owner’s capital (in case of company, owner’s Equity). The accounting equation looks like below: Where, Assets of the business refer to the economic resources owned by the company that will result in the inflow of cash. Liabilities are the amount that the organization owes to the outsider. And capital is the amount invested by the owners into the business….

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Cash Basis of Accounting

Cash Basis of Accounting

Cash Basis of accounting is the method of accounting which involves recording the accounting entries in the books of accounts when the cash is actually received and paid against the revenues & expenses and asset & liabilities and not at the time when the revenues and expenses are incurred and becomes due for receipt/payment. Explanation with Example: Cash basis of accounting is the accounting method in which the revenues and expenses are recognized as and when the cash is received…

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Basis of Accounting

Basis of Accounting

Basis of accounting refers to different methods or approaches followed by the business entities while reporting & recording the financial transactions into their books of accounts over an accounting period where the approaches are based on the timing of recognition of revenues & expenses and are categorized as cash basis and accrual basis. Explanation & Difference: Every business has to record their transaction to know their financial performances over a period of time. This has to be followed by the…

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Accounting Process

Accounting Process

Accounting process is the procedure that is followed by entity for recording the business transactions in the books of accounts so that the position of each account balances can be known and the profitability and financial position of a business can be measured. The steps include identifying, classifying, recording and summarizing of the financial business transactions.  Explanation The Accounting process of a business includes steps to record every financial transaction of the business and at the end, preparing the financial…

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Consistency Concept in Accounting

Consistency Concept in Accounting

The consistency concept states that the methods, practices or policies of accounting once followed must be followed consistently from one year to another but can be changed in the exceptional circumstances like changes in the government laws & regulations, changes in issued accounting standards or any other situation where it is felt that the change in accounting practice may result in more accurate picture of financial statements. Explanation with example: The financial statements of the companies are required to draw…

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Accrual Concept in Accounting

Accrual Concept in Accounting

Accrual Concept or accrual basis of accounting is the method of accounting which involves recording the accounting entries in the books of accounts when the revenues & expenses becomes accrue /due and not when the money against such revenues & expenses are received & paid respectively. Explanation with Example: Accrual basis of accounting is the accounting method is also known as the mercantile method of accounting and this method require the revenues to be recorded at the time it is…

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Revenue Recognition Concept in Accounting

Revenue Recognition Concept in Accounting

The concept of revenue recognition states that the revenue should be recorded in the books of accounts of business when the revenue is earned/realized no matter the actual cash is received or not against such revenue or in other words the revenue is considered to be earned at the point of time when the goods and services are sold and the associated risk & rewards are transferred to the buyer. Explanation with Example: Revenue refers to the inflow of cash…

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Objectivity Concept in Accounting

Objectivity Concept in Accounting

The concept of objectivity states that the financial statements of the business should be independent and free from any biasness which means that the financial statements need to be based on the solid evidences, facts & figures so that the records are not based on the biased management’s opinions.  Explanation with example: The objectivity concept defines that the financial record of the business should be prepared on the basis of solid evidences and figures and are not influenced by the…

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Full Disclosure Principle in Accounting

Full Disclosure Principle in Accounting

Full disclosure principle require the management of the company to disclose the information and figures that are relevant for the users (includes investors, lenders, shareholders etc.) but doesn’t means that each and every information about the business is needed to be disclosed as it directs the business to mention the material information that the user should know before investing in that company.  Explanation with example:  The full disclosure principle directs the company to disclose the relevant facts and material information…

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Materiality Concept in Accounting

Materiality Concept in Accounting

Materiality concept states that those items or transactions that are significant and can have impact on the decisions of the users of financial statements should be disclosed in the financial records of the business but not the transactions that only increase the work of accountant and are not relevant for the users.  Explanation with example:  According to the concept of materiality, all the financial information that is significant and can have major impact on the business and on the related…

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Dual Aspect in Accounting

Dual Aspect in Accounting

The concept of dual aspect states the basis of recording the financial business transactions into the books of accounts of the entity where it mentions that every financial transaction shall impact two different accounts of the business i.e. every financial transaction shall be recorded in two accounts.  Explanation with example:  According to the dual aspect concept of accounting at least two accounts are affected when any financial transaction take place. So for every debit there is an equal and opposite…

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Going Concern Concept in Accounting

Going Concern Concept in Accounting

According the going concern concept, every business should assume that their business will continue to work for an indefinite period i.e., there is no intention of closing the business in the coming future and because of this concept of going concern many revenues and the expenses are deferred for the future periods. Explanation and Example: The concept of going concern provides the basis for the preparation of balance sheet as it assumes that the business will continue for an indefinite…

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Conservatism Concept in Accounting

Conservatism Concept in Accounting

The concept of conservatism also known as prudence concept states that the business should report all the possible losses even if the chances are remote of its occurrence but the gains should only be accounted if they are realized i.e., the assets and the revenue should be recorded in the books of accounts when it becomes certain that they will be received but the expenses and liabilities have to be reported even in the case of uncertainty. Explanation with example:…

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Cost Concept in Accounting

Cost Concept in Accounting

The cost concept states that all the transactions of the business should be recorded at their historical cost in the books of accounts of the business where the cost includes acquisition cost, transportation cost, installation cost and other costs that is incurred while making the asset usable. Explanation with Example: The cost concept clarifies that any asset, liability, purchase of goods or any other business transaction shall be initially recorded at the original cost price rather than the market value…

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Accounting Period Concept in Accounting

Accounting Period Concept in Accounting

Accounting period is the time duration for which the financial statements of the business are prepared to measure the performance of the business done during that period of time, so that the useful information about the business position can be made available to the users after regular interval and generally a period of 1 year/12 months is considered to be an accounting period. Explanation and Example: The accounting period concept helps the business to divide the whole tenure of business…

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Matching Concept in Accounting

Matching Concept in Accounting

Matching concept refers to the concept in accountancy which states that the related expenses of the organization should be booked in the same period when the revenue earned by incurring such expenses is recorded i.e., it focuses on matching revenues earned in an accounting year with the expenses incurred in same accounting year. The purpose of such matching principle is to avoid misstatement of earnings of any accounting period. Explanation: The matching concept directs that the all the related expenses…

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Money Measurement Concept

Money Measurement Concept

The money measurement concept is the concept that says that only those business transactions that can be expressed in terms of money should be recorded in the books of accounts and not the ones that are non-monetary in nature such as sale and purchase of goods, purchase of fixed assets etc. Explanation with example: The money measurement concept provides the clarity to the business entities about the fact that only those transactions that can be measured and estimated in terms…

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Business Entity Concept

Business Entity Concept

The business entity concept states that the business entity has a separate legal identity from its owners that means that the business entity and the owner of the business are not considered same person in the eyes of law and the accounting for the business entity is done separately from those of its owners. Explanation with Examples: As per the business entity concept, the business owners and the business owned by them are two different persons in the eyes of…

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Generally accepted Accounting principles (GAAP)

Generally accepted Accounting principles (GAAP)

To maintain the consistency and uniformity while preparing and presenting the financial statements of the entity, certain principles have been developed which are called as concepts, conventions, principles, assumptions, postulates etc. and these all are considered to be the theory base of accounting.  The term ‘principle’ has been defined by AICPA as ‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conductor practice.’  Advantages of Generally accepted accounting principles:  These…

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Accounting Standards

Accounting Standards

Accounting standards are the written guidelines or policies prescribed by the government with the help of regulatory bodies like Ministry of corporate affairs(MCA) in consultation with National Financial Reporting Authority (NFRA) covering the aspects related to the accounting of transaction in the financial statements of business namely recognition, measurement, presentation & disclosure of accounting transaction. Explanation: The accounting standards are the written documents that cover following aspects: 1. Recognition of the transaction & events 2. Measurement of the recognized transactions…

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Basic Accounting Terms

Basic Accounting Terms

Some of the basic accounting terms are as follows:  1. Business: Business is defined as any activity that is started for earning profits/ income. These activities mainly involve the supply of goods or service by the owners of the business in exchange of money. For example nearby stores of groceries, supermarkets, stationery shops etc.  2. Event:  Event refers to any activity that happens in the business while doing day to day operations. These activities may or may not involve money. For example…

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