Principle of Accounts

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Principles of Accounts – A Handbook is prepared mainly for the purpose of helping the grade 8 students who are new to this subject. In this book we have included all the topics to be covered in grade 8. Each topic is serially numbered. At the end of each topic, a large number of descriptive, multiple choice and gapped questions, which are related to that topic, are given. Gapped questions are included mainly for improving the students' knowledge of theory. The multiple choice and descriptive questions are given for the purpose of improving their efficiency in solving questions in the Cambridge papers. At the end of the year, the students who follow this book strictly, will have a clear idea of the Principles of accounts both theoretically and practically. We express our thanks to the Assistant Principal Mr. Adam Saeed Umar who contributed his valuable ideas for the preparation of this handbook. We hope that, the students in grade 8 will make use of this book for improving their knowledge in the Principles of Accounts course.

Prepared by: B. Sivagurunaathan
K.C. Haridasan.

1.1 Definition of Accounting:
The most widely used definition is that it is "the process of identifying, measuring, and communicating the economic information necessary to make judgments and decisions by the users of the information".

Users of Accounting information:
The possible users of accounting information are:
a)Owners of the business
b)A prospective buyers of the business
c)The bank (if the owner wants to borrow money for use in the business)
d)Tax authorities
e)A prospective partner
f)Investors (The people who wish to invest their money in the business)

Definition of Book-keeping:
The part of accounting that is concerned with recording data is known as
Book-keeping.

1.2Terms used in Accounting
(1) Assets: Assets are resources owned by a business. Assets are classified into:

(a) Fixed assets: Fixed assets are assets kept in the business for a few years at least. Examples: land, premises, furniture, fixtures, buildings fittings, plants, machineries, motor cars, motor vehicles, motor lorries, goodwill, mines, queries, oil wells etc…

(b) Current assets: The assets which change its form from day to day are known as current assets. These are also known as circulating assets.
Examples: cash in hand, cash at bank, stock of goods, debtors, amounts prepaid, income accrued etc.

(2) Liabilities: The amounts of money a business must pay to its outsiders are known as liabilities. The term liability is divided into:

(a) Current liabilities: Those liabilities which are repayable within the near future are known as current liabilities. Examples: creditors, bank overdrafts, expenses owing, incomes received in advance etc.

(b) Long term liabilities: The liabilities which are repayable after a long period are known as long term liabilities. Examples: loan from bank, loan from other institutions and loan from any person.

(3) Account:Part of double entry records, containing details of transactions for a specific item. An account is drawn in ‘T' form with two equal halves called debit side and credit side. The left hand side is called debit side and right hand side is called credit side.

(4) Capital:The amount of resources supplied by the owner is called as Capital. In accounting, capital is the excess of assets over liabilities. It is also known as net worth or owner's equity.

(5) Working Capital: The excess of current assets over current liabilities [current assets minus current liabilities] is known as working capital.

(6) Debtor: The person who owes money to a business for goods or services supplied to him.

(7) Creditor: The person to whom money is owed for goods or services supplied by him.

(8) Drawings: Cash or goods withdrawn by the owner from the business for his personal use are known as drawings....
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