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 year’s 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.
- 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.
- Instead of recording separate entries, all are recorded together in one entry to save time and space.
- In a compound entry, more than one account may be debited or more than one account may be credited.
- Thus, three or more accounts are connected in a compound journal entry.
- Example: Cash A/c Dr. ₹2,000
Mohan A/c Dr. ₹8,000
To Sales A/c ₹10,000
Contra Entry
- A contra entry refers to a transaction involving transfer between cash and bank accounts of the same business.
- Both debit and credit aspects of the transaction are recorded within the cash book itself and are not posted to separate ledger accounts.
- These entries are marked with the letter “C” 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.
- For example, if ₹5 lakh is spent on advertisement in 2025–26 and its benefit is expected for the next four years, then ₹1.25 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 ₹50,000 cash Dr Furniture A/c ₹50,000 Cr Cash A/c ₹50,000 |
| Liabilities | Decrease in Liability | Increase in Liability | Took bank loan of ₹1,00,000 Dr Cash A/c ₹1,00,000 Cr Bank Loan A/c ₹1,00,000 |
| Capital | Decrease in Capital | Increase in Capital | Owner introduced ₹2,00,000 capital Dr Cash A/c ₹2,00,000 Cr Capital A/c ₹2,00,000 |
| Revenues / Gains | Decrease in Revenue | Increase in Revenue | Sold goods for ₹80,000 cash Dr Cash A/c ₹80,000 Cr Sales A/c ₹80,000 |
| Expenses / Losses | Increase in Expense | Decrease in Expense | Paid salary ₹30,000 Dr Salary Expense A/c ₹30,000 Cr Cash A/c ₹30,000 |
| 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. |
