Basic Accountancy Procedures: JAIIB/DBF Paper 2 (Module B) Unit 2

Dear bankers,

As we all know that  is Basic Accountancy Procedures for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Basic Accountancy Procedures (Unit-2), Principles of Bookkeeping & Accountancy (Module B), Accounting Finance for Bankers-Paper 2.

♦Concepts of Accountancy

Accounting of often called the language of business through which a business house normally communicates with the outside world. In order to make this language intelligible and commonly understand by all, it is necessary that it is based on certain uniform scientifically laid down standards. These standards are termed as accounting principles.

Concepts

There following are the main accounting concepts

Cost Concepts: Every business transactions is recorded in the books of accounts at cost price, e.g, the machinery is recorded in the books by that amount which is paid to the supplier plus the expenses of bringing and installing the machinery which are necessary to put it in working order.

Applications

• Fixed assets are kept at the cost of purchase and not their market value.
• Every transaction is recoded with the present value and not any future value.
• Unrealised gains are ignored.
• An item, that has no cost, is not taken in books

Money measurement concept: Every transaction that is recorded in books of accounts must be measured in terms of money. All the transactions are converted into a common form, which is money. Example, quarterly production, sales, wages, etc, all are converted in terms of money.

Applications

• Health of a proprietor or manager is not taken into the books although it may have a great impact on the overall business.
• We do not include any inflation or deflation or deflation in the value of any asset.

Business entity Concept: This concept separates the entity of the proprietor from the business transactions. The capital contributed by the owner is a liability for the business because business, which is an artificial person, is different from owner.

Applications

• Any money withdrawn by the proprietor is treated separately as drawings.
• Profit is a liability while loss is an asset.

Realisation concept: This concept tells us when is the revenue treated as realized or earned. It is treated as realized or earned on that date when the property in the goods pass to the buyer and he becomes legally liable to pay.

Applications

• No future income is considered.
• Goods sold on approval will not be included in sales but taken at cost only.
• The rules of revenue recognition determines that the earning process should be either complete or near completion.

Historical records Concept: In accounts, The historical cost principle states that businesses must record and account for most assets and liabilities at their purchase or acquisition price. In other words, businesses have to record an asset on their balance sheet for the amount paid for the asset.

Going concern concept: This concept indicates that the business is a going concern and the transactions are recorded accordingly. If an expense is incurred and its utility is consumed during the year, then it is treated as an expense, otherwise it is recorded as an asset.

Applications

• The fixed assets are valued at cost and not at market value.
• Current assets are valued at cost or the market value whichever is less.
• Depreciation is provided based on the total number of years of life of asset. Balances of one year are carried forward to the next year.
• Reserves and provisions are created for any future liability.

Matching concept: This concept explains that we have to match the income of a certain period with expenses of that period only. The term matching refers to the close relationship that exists between certain expired cost and revenues realized as a result of incurring those costs. The justification of the matching concept arises from accounting period concept.

Applications

• All adjustments regarding prepaid expenses, outstanding expenses are made in the final accounts.
• Deferred revenue expenditure concept arises due to this.

Accounting period concept: An accounting period is the span of time covered by a set of financial statements. This period defines the time range over which business transactions are accumulated into financial statements, and is needed by investors so that they can compare the results of successive time periods.

Main Conventions of Accounting

• Accounting of full disclosure: Entries are made in such a way, that they provide honestly all information relating to the activities of the business. The records should not conceal anything from outsider. Secret reserves should not be maintained as per this convention.
• Convention of materially: All material information, must be recorded. What is material depends upon the value of the item involved and circumstances of individual case of business. Exp: Paisa is not recorded.
• Convention of conservatism: While recording transactions, all possible losses must be taken into consideration, while all anticipated profits should be ignored. This is also called the principle of prudence.
• Convention of consistency: If a method is selected for recording purposes, it must be regularly followed in the future also. Whenever it is necessary to change, the impact of such change must be given separately.

♦Going Concern Entity

• The going concern concept of accounting implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason. A company is a going concern if no evidence is available to believe that it will or will have to cease its operations in foreseeable future.
• An example of the application of going concern concept of accounting is the computation of depreciation on the basis of expected economic life of fixed assets rather than their current market value. Companies assume that their business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated. Another example of the going concern assumption is the prepayment and accrual of expenses. Companies prepay and accrue expenses because they believe that they will continue operations in future.

♦System of Keeping Recording

• Single entry system: A single entry system records each accounting transaction with a single entry to the accounting records, rather than the vastly more widespread double entry system. The single entry system is centered on the results of a business that are reported in the income statement.
• Double entry system: The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Principles of Double Entry system

The following are main principles of double entry system:

• For every transaction, two parties must be interested
• Every business transaction has two aspects, one of receiving the benefit and the other of giving it. In simple words, “Double entry” system means “every debit has a corresponding credit”.
• Both the aspects, are recorded in the books of account.
• The two-fold effect of a business transaction is recorded by debiting one account and crediting the other account at the same time.

♦Principle of Conservatism

• The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received. Thus, when given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will impact the value of an asset, recognize the transaction resulting in a lower recorded asset valuation.
• Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain.
• The conservatism principle can also be applied to recognizing estimates. For example, if the collections staff believes that a cluster of receivables will have a 2% bad debt percentage because of historical trend lines, but the sales staff is leaning towards a higher 5% figure because of a sudden drop in industry sales, use the 5% figure when creating an allowance for doubtful accounts, unless there is strong evidence to the contrary.

♦Accrual Concept

The accrual concept makes a distinction the receipt of cash and right to receive, it and the payment of cash and the legal obligation to pay it. In actual business operations, the obligation to pay and the actual movement of cash may not coincide. The accrual recognises this distinction. In connection with the sale of goods, revenue may be received.

• Before the right to receive arise, or
• After the right to receive has been created.

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