In any organisation where there is involvement of money or economic resources, accounting is essential to ascertain their utility, ensure transparency, prevent misuse, and support effective decision-making.
Accounting becomes essential due to the following reasons:
- Complete Recording of Transactions: It helps in maintaining a systematic and complete record of all financial transactions, whether it is sales and purchases in a business or fees, donations, and grants in schools, temples, or hospitals.
- Ascertaining Profit/Loss and Financial Position: It supplies meaningful information about profit or loss (in business) and surplus/deficit (in non-business organisations) and shows the true financial position.
- Useful Information for Decision Making: It provides relevant information to owners, managers, and other users for making economic decisions, planning, and controlling resources.
- Comparative Study and Performance Evaluation: It facilitates comparison of current yearโs performance (profit, sales, expenses, etc.) with previous years and helps in judging how effectively the management have utilised the available resources.
- Legal Compliance and Taxation: It helps in complying with legal formalities such as filing income tax.ย
- Decision Making for Loans and Safeguarding Resources: It is helpful in making decisions regarding taking or giving loans and ensures proper utilisation and safeguarding of funds and assets.
- Evidence in Legal Matters: Accounting records can be presented as evidence in court whenever required.
Compound Journal Entry
- A compound journal entry is used when a transaction involves multiple accounts or when several transactions of similar nature occur on the same date.ย
- Instead of recording separate entries, all are recorded together in one entry to save time and space.ย
- In a compound entry, more than one account may be debited or more than one account may be credited.ย
- Thus, three or more accounts are connected in a compound journal entry.
- Example: Cash A/c Dr. โน2,000
Mohan A/c Dr. โน8,000
โTo Sales A/c โน10,000
Contra Entry
- A contra entry refers to a transaction involving transfer between cash and bank accounts of the same business.ย
- Both debit and credit aspects of the transaction are recorded within the cash book itself and are not posted to separate ledger accounts.ย
- These entries are marked with the letter โCโ in the Ledger Folio (L.F.) column of the cash book to indicate that no separate ledger posting is required.
Deferred revenue expenditure
- Those expenses which provide benefits for more than one accounting year. Therefore, the entire expense is not charged to the Profit and Loss Account in one year; instead, it is written off gradually over several years.ย
- For example, if โน5 lakh is spent on advertisement in 2025โ26 and its benefit is expected for the next four years, then โน1.25 lakh is written off every year, while the remaining amount is shown as Deferred Revenue Expenditure on the assets side of the Balance Sheet.
| Type of Account | Debit (Dr) Effect | Credit (Cr) Effect | Example |
| Assets | Increase in Asset | Decrease in Asset | Bought furniture for โน50,000 cashย Dr Furniture A/c โน50,000ย Cr Cash A/c โน50,000 |
| Liabilities | Decrease in Liability | Increase in Liability | Took bank loan of โน1,00,000ย Dr Cash A/c โน1,00,000ย Cr Bank Loan A/c โน1,00,000 |
| Capital | Decrease in Capital | Increase in Capital | Owner introduced โน2,00,000 capitalย Dr Cash A/c โน2,00,000ย Cr Capital A/c โน2,00,000 |
| Revenues / Gains | Decrease in Revenue | Increase in Revenue | Sold goods for โน80,000 cashย Dr Cash A/c โน80,000ย Cr Sales A/c โน80,000 |
| Expenses / Losses | Increase in Expense | Decrease in Expense | Paid salary โน30,000ย Dr Salary Expense A/c โน30,000ย Cr Cash A/c โน30,000 |
| Basis of Difference | Accounting Concepts | Accounting Conventions |
| Meaning | Fundamental assumptions, basic principles, and theoretical foundations on which accounting is based. | Customary rules, practices, and traditions followed by accountants in practical accounting work. |
| Nature | Theoretical, rigid, objective, and generally mandatory in nature. | Practical, flexible, subjective, and used as guidelines. |
| Purpose | Provide the foundation and logical base for systematic recording and preparation of accounts. | Guide the practical application of accounting concepts and ensure consistency and comparability. |
| Flexibility | Less flexible and cannot be changed easily. | More flexible and may be modified according to circumstances and requirements. |
| Scope | Broad and fundamental; forms the basis of the entire accounting system. | Narrow and supportive; concerned with methods of applying concepts in practice. |
| Objective | To provide a true and fair basis for preparing accounting records and financial statements. | To make accounting information reliable, understandable, and useful for decision-making. |
| Examples | Business Entity Concept, Going Concern Concept, Money Measurement Concept, Accrual Concept, Dual Aspect Concept, Periodicity Concept. | Convention of Conservatism (Prudence), Convention of Materiality, Convention of Full Disclosure, Convention of Consistency. |
